6th December, 2024
 

Business and Trade Committee,
House of Commons,
London,
SW1A 0AA

I am writing on behalf of the CBI in response to Committee’s inquiry into the Make Work Pay package of employment reform. 

The CBI speaks on behalf of 170,000 businesses of all sizes and sectors, across every region and nation of the UK. This includes over 1,100 corporate members and nearly 150 trade associations. CBI corporate members alone employ over 2.3 million private sector workers. This submission reflects the views of employers from across the CBI’s membership.

Businesses support the ambitions within the Plan to Make Work Pay to improve labour standards, living standards and drive forward growth. Businesses have been somewhat reassured by the engagement with the government since the election on the question of how to make protection of reasonable probation periods meaningful. Unintended consequences of other aspects of the Employment Rights Bill (ERB) will however push up the labour costs and limit the investment needed to deliver higher living standards and better work if they are not addressed.

It is possible for the government to deliver a package that is compatible with a growing, dynamic economy, but to do so, the CBI recommends the government:

• Require businesses to have a fair process in place for probation dismissals whilst limiting their exposure to tribunal claims.
• Change the right to be offered a guaranteed hours contract to a right to claim one, with a reference period of 52-weeks.
• Ensure the right to notice of shift cancellation applies only when an employer requires that the employee works and does not preclude a firms’ ability to offer multiple members of staff voluntary shifts at late notice.
• Bring forward trade union reforms in a separate Bill. This would follow an independent review of the industrial relations framework, informed by tripartite consultation.
• Retain the ‘at one establishment’ rule.
• Remove provisions on dismissal and re-engagement from the Bill unless situations like P&O Ferries can be clearly separated from routine changes to contracts.
• Retain at least a 1-day waiting period for Statutory Sick Pay.

Faltering productivity growth is limiting firms’ ability to deliver better work…

Productivity growth is what drives sustainable rises in real terms pay, but investment is needed to create it. Between 2003 and 2023 productivity grew by 0.72% per year and business investment by 1.94%, compared with 2.12%[1] and 4.5% per year[2] in the preceding 20 years. This has held back wages, which rose by 0.65% a year in real terms over the 2003-23 period[3].

The flatlining of productivity growth and investment has limited firms’ ability to deliver the range of job opportunities that people need. It is one of the reasons why the country’s skills provision is failing to give workers access to the career paths they want[4]; why the take up of new technologies and automation has been slow[5]; and why tax receipts have not kept pace with the demand for public services. 

…and is being exaggerated by high labour costs

The labour market used to be one the UK’s competitive strengths, but now firms see the it as a drag on their ambitions. 52% of businesses see labour costs as a threat to competitiveness and 62% believe the labour market will become a less attractive place to invest over the next 5-years[6].

The £25bn rise in employer National Insurance Contributions (NICs) and labour shortages over the pandemic have been the most recent drivers of higher employment costs, but they follow a series of other regulatory changes and tax rises over the past two decades. This included the rollout of automatic enrolment to pension schemes, the apprenticeship levy, and the jumps in the National Living Wage (NLW) needed to bring it to 2/3rds of median income.

Whilst on their own merits some of these policies have been a success, the burden of incorporating them has frequently come at the expense of the very investment needed to drive productivity and growth. Some cost pressure can be helpful as an incentive to adapt, but the recent experience is that costs rising too quickly has forced businesses to focus on achieving short-term budgets through reduced investment, to the detriment of long-term growth.

The rising cost of employment has also compromised peoples’ experience of work. Some firms have sought to increase work intensity to justify higher costs where productivity growth is lacking. There are hospitality businesses for example that have found the only way to increase the productivity of waiters to the level compatible with the rising NLW has been to ask that they wait more tables. There are also businesses that tried to reduce their exposure to increasing costs by offering staff reduced hours and less predictability – the very same ‘insecure’ work the government is seeking to address.

Demographics suggest the situation is unlikely to improve. The Learning & Work Institute predict there will be 1.4m more retirees by 2040 than those entering the labour market[7]. The Health Foundation project that there will be 500,000 more working-age people living with major illness by 2030[8]. Whilst the labour market may be softening for now, the squeeze on labour supply is therefore likely to remain a long-term trend.

This is why the Plan to Make Work Pay’s objective to deliver a lasting increase in living standards will be measured by its impact on investment and productivity. Given the labour market’s ongoing role in supressing investment, limiting further rises in labour costs will be critical.

The Plan to Make Work Pay could support growth, but without a re-think, will undermine investment and the enforcement of labour standards further

The positives within the Plan are currently overshadowed by the sum of costs entailed by other aspects of the package, which could be far higher than the government currently expects.

When the CBI surveyed members ahead of the Bill’s publication, 26% said they believed they could afford the higher costs they expect from the package without there being unintended consequences for growth, investment, jobs or discretionary benefits6 – and anecdotal evidence suggests concerns have increased since the Budget.

Reforms to day-one rights, zero-hour contracts, restructuring and industrial relations are causing particular concern. They not only appear to imply significant compliance costs in themselves but threaten placing the enforcement system under more pressure than it is resourced to handle. A day-one right to unfair dismissal alone means an extra 9m more people being within the scope of launching a Tribunal claim[9]. Businesses are sceptical too about claims that many measures will, as drafted, support productivity or improve employee relations.

New probation rules can help to avoid a chill on hiring intentions but only if there is effective protection against weak tribunal claims

It is important to businesses that they treat their people fairly, not least because they are competing to attract workers. It is however the cost of proving that they have done the right thing through the Tribunal that is the big worry that could severely impact hiring intentions. While the median award for unfair dismissal is £6,746, the cost of defending a claim is tens of thousands of pounds.

The government deserves credit for listening to feedback about the importance of protecting probation, and the introduction of a separate legal status for the initial period of employment has potential. To avoid high costs of demonstrating compliance leading to greater caution hiring however, it is critical that new probation rules mean dismissals do not advance through the Tribunal. 

It is also important that these new rules do not force premature decisions on somebody’s capability. Most probation periods are not longer than 6-months, but there are cases where the employer is willing to extend the probation period to give a chance to improve following more support and training.

The right to be offered a guaranteed hours contract will limit firms’ ability to respond to customer demand…

There are two key issues with this reform:

1)      The Bill discourages businesses from offering voluntary overtime by making it more expensive and riskier whenever employees work additional hours. This will impact firms’ ability to meet fluctuating customer demands and to grow, as well as making it harder to offer flexibility to those workers who want it.

The government has attempted to respond to business concerns about overtime by enabling firms to offer just a fixed-term contract where they deem it ‘reasonable’. The multitude of circumstances in which it would be reasonable to make such an offer are however so varied that it will take years to establish a reliable body of case law on its use through the already stretched Tribunal. This is therefore a complicated fix of uncertain value and high familiarisation costs. A 52-week reference period would be a simpler, more effective solution for seasonal work. The Bill also needs to be more careful not to disrupt established good practice for managing flexibility fairly like annualised hours contracts and industries like theatre where norms are already established between employers and unions.

2)      A right to be offered, rather than a right to claim or request means a significantly higher administrative burden on business than is necessary to achieve the policy objective.

This is disproportionate. Businesses believe that the number of workers wanting a new contract will be a small proportion of those they are required to make offers to. One CBI member that already makes new contract offers to staff consistently working above their contracted hours dedicates several months each year to doing so and finds most staff do not want extra hours. This is also reflected in ONS data, which shows 17.3% 17.3% of people on a zero-hour contacts want more hours in their current job[10]. Instead, business would support a right to request a guaranteed hours contract.

…and there are similar concerns about the right to notice of shifts and compensation for cancellation where firms ‘request’ cover

Business supports notice of shift cancelation and an accompanying compensation regime where shifts are cancelled at the last minute where staff are required to work. The Bill however extends notice of a shift to cases where a business requests somebody work.

Not all circumstances can be planned for and in some unforeseen cases – such as where there is short-term sickness absence - it should be possible to offer staff extra hours voluntarily with no notice at all.

Making offers concurrently to multiple members of staff is often necessary so that businesses can find someone willing and available. Making them liable for compensation if multiple workers express an interest in the overtime cannot be the government’s intent but it is what the Bill requires.

Accountability, proportionality and worker choice are missing from reforms to industrial relations

The government has identified collaboration, proportionality and accountability as key principles upon which to base its industrial relations framework, but they are missing from the reforms in the Bill. Autonomy of worker choice and freedom of association are also serious omissions.

This is important, as these principles underpin businesses’ trust that unions are speaking on behalf of their workforce and support employee engagement. They also provide key safeguards against unreasonable behaviour. Like other businesses, most unions have good intentions and conduct themselves well, but not all do. Employment law exists to protect workers in situations where an employer might abuse their power and trade union legislation needs to be calibrated similarly. Achieving an industrial relations reset will require a change in approach by some trade unions as well as by some employers. Only 6% of employers believe that working with a trade union improves productivity6. 92% believe it is important that there are mechanisms that ensure trade unions are accountable to the people they represent6.

The government deserves credit for the pace and quality of its engagement with business to date, but there has not been time to co-design IR reforms with employers, reducing the chance of landing a lasting new settlement that commands the confidence of employers and trade unions. It would be beneficial for this aspect of the Plan to be moved to a separate Bill, which would follow an independent review – informed by tripartite consultation – on what changes are needed to deliver a modern industrial relations framework.

Businesses are especially concerned about changes to statutory recognition and industrial action.

The Bill removes the 40% support threshold for recognition. It also includes a power that allows for the weakening of the threshold of union membership required to trigger a vote from the current 10% to as little as 2% of the workforce – in a business with 50 employees, that is one person.

A support threshold is important to ensuring that recognition is always the result of a positive choice rather than apathy. Without a mandate from staff, unions that receive recognition in this way will also be incapable of providing effective employee engagement.   

The Bill removes the 50% turnout threshold for industrial action ballots that let businesses know their staff genuinely want to strike and care about the issue. Confidence in this is critical to supporting decisions to make new offers that would avert industrial action, and to ensuring staff are not called out on strike by representatives when they do not want to be. Businesses recognise that a turnout threshold creates a perverse disincentive for those opposed to the strike to not participate in the ballot rather than to have their say. This situation would be improved by a lower support threshold replacing the turnout threshold and is an aspect of reform an independent commission could be asked to assess. 

The impact of reducing the notice period for industrial action from 14 to 7 days could also be significant. Companies now rely on countless other businesses at home and abroad in their increasingly complex supply chains. Businesses accept that disruption is the objective of industrial action, but the capacity to cause disruption should be proportionate and leave enough time for the dispute to be resolved. A 7-day timeframe hands some unions veto power in a dispute, and that undermines an effective balancing of interests.

For sectoral bargaining to be legitimate and effective, worker consent is key. The Adult Social Care Negotiating Body will however be established without a vote of the workforce in that sector to say they want to be represented in that way. That means the union imposed on that sector will have no direct link with the workers it represents, and little incentive or ability to account for their views.

The Bill will also have an unintended impact on restructuring

The Bill removes the requirement that thresholds for collective consultation be calculated with reference to the numbers of redundancies being proposed ‘at one establishment’. This change risks losing ‘local voice’ and will also be difficult for employers to comply with given the complex structure of many businesses. It risks forcing large firms into perpetual collective consultation for unrelated redundancies where no collective consultation can be meaningful.

Reforms to dismissal and re-engagement have far broader implications than outlined in Make Work Pay, and could affect the confidence of businesses to invest in the UK. The Bill makes a dismissal for a failure to agree to any variation of contract an automatic unfair dismissal, regardless of how reasonable the nature of the proposed change. This will make it difficult (and in some instances impossible) for employers to make essential changes including everyday changes to terms like those required because of a regulatory change, an office move, or minor role changes.

Businesses make every effort to change employment contracts through consultation and with consent. Most changes receive consent, but the Bill creates a perverse incentive for workers to object to reasonable changes that they would previously have accepted.

The Bill also makes it harder to change contractual terms than to make a worker redundant, so while the intent is that imposing changes to contract should be a step to consider in order to avoid redundancies, the reality may become the opposite, with redundancies becoming the only alternative where employees refuse to agree to a change in contractual terms.

Removing waiting days to Statutory Sick Pay will drive up absence more than productivity

There is great potential for business and government to work together to support the health and wellbeing of an increasingly sick workforce. Health is increasingly an economic issue, with inactivity due to ill health rising considerably.

Businesses have long supported the removal of the Lower Earnings Limit (LEL) for Statutory Sick Pay (SSP). It makes considerably less sense now that SSP is an employment right instead of a contributory benefit. 

Ensuring finite resources can be devoted to those that need them most however means striking a balance between fair minimum standards, firms’ capacity to respond to the specific needs of their workforce, and investment in the future. Removing waiting days for SSP allows for fraudulent abuse to eat into employers already stretched employment budgets, and so does not strike this balance effectively.

CBI members have emphasised the importance of a waiting period of some level, over specifically the existing 3-day period. Some have found that occupational sick pay policies paid from the second day imply lower levels of suspicious absence.

The Committee’s work will be critical to ensuring Make Work Pay a success

The CBI is committed to finding a landing zone for the Employment Rights Bill that supports the government’s milestones for mission-led government and maximises the chance of reaching a lasting reset of the UK’s labour market and industrial relations through tripartite dialogue.

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