Low Pay Britain 2025

The Employment Rights Bill (ERB) currently making its way through parliament is a big deal for low-paid workers, who stand to gain the most from its changes. But it’s also a big deal for the country, with the row between business groups and unions over its impacts being testament to that.  

This year’s Low Pay Britain report – the 15th in an annual series taking stock of low-paid work in the UK –takes on three important questions as the ERB heads towards becoming law. First, we look at the big picture: what does the evidence say about the ERB’s likely economic impacts? Second, with much of the detail missing from the ERB’s provisions relating to hours insecurity, we explore what those details should be. Finally, we look ahead to the Government’s planned reforms to employment status, and ask how progress can be made on ambitions to reduce bogus self-employment.  

The Government took office with a manifesto pledging big action on both the minimum wage and workers’ rights. Since the election, its approach to the adult minimum wage has been to maintain the relative level, a less ambitious stance than recent governments (the adult minimum wage rose faster than average earnings this year due to a data quirk rather than due to policy). This comes after a decade in which the minimum wage rose faster than average earnings, driving down low pay. After hovering above 20 per cent throughout the 2000s and early 2010s, the share of employees earning below two-thirds of median hourly earnings fell to 3.5 per cent in 2024, and stands at just 1 per cent among employees aged 25 and above.  

By contrast, recent governments have done little to tackle problems of workplace insecurity, despite issues like ‘one-sided flexibility’ (associated with zero-hour contracts and gig work) gaining widespread recognition, and despite successive governments agreeing there is a problem. There are more workers on zero-hour contracts today (3.4 per cent) than a decade ago (2.4 per cent), and the negative impacts of these and related forms of work continue.  So the Government deserves credit for seizing this mantle. Strengthening employment rights will have large benefits for lots of (mainly low-paid) workers: 1 million additional workers will become eligible for Statutory Sick Pay for the first time, while the 2.4 million workers who report feeling very anxious about unexpected changes in their shifts will gain new protections. 

The Government now finds itself in a big argument about the impact of employment regulation on economic outcomes. Business groups claim the ERB will have “deeply damaging” economic impacts. The Government and unions, unsurprisingly, claim the opposite: they say it will “solve the UK’s productivity puzzle”. The weight of the evidence suggests neither is correct: the Bill will have big positive benefits for workers affected, but a best guess is that its wider economic effects will be small, either way.  

Our view draws on international evidence. The OECD and researchers at the University of Cambridge have both produced employment regulation indices that quantify the extent and restrictiveness of countries’ employment regulation. Taking a snapshot across countries shows a negative relationship between employment regulation and employment levels, but this disappears when one looks at change within countries over time: countries which have strengthened their level of employment regulation haven’t tended to see employment fall (or vice versa). An example is seen in Greece, Spain, Italy and Portugal, which all substantially weakened their dismissal regulations since the 1990s but saw no greater improvements in employment rates than other European countries that did not do this.   

Wider economic effects are also likely to be small if the Department for Business and Trade (DBT) is roughly right about the impact of the Bill: it estimates upper-end additional costs to business of £5 billion a year. If the Office for Budget Responsibility (OBR) treated these additional costs of employing workers in the same way as they did the recent increase in employer National Insurance Contributions, then that would lead to an estimated employment effect of -11,000 (reducing the employment rate by just 0.02 percentage points), and an estimated impact on the level of average wages worth £2 per week. Even so, such modelling assumes that higher labour costs always lead to lower employment, and it is important to note that the experience of the minimum wage suggests this isn’t always the case. But even if it did, then costs at this level would amount to a small economic effect and an acceptable price to pay for better quality jobs for millions of low-paid workers. Proponents also argue there could be countervailing positive economic impacts from employment reform (such as higher participation as workers are attracted by better jobs, or higher productivity via fewer ‘inefficient’ job separations), although the evidence in favour of these is as weak as the evidence about big negative effects. Either way, the DBT’s impact assessments don’t put a monetary value on the benefits of the ERB – such as higher worker wellbeing – in the same way they do the costs to businesses. 

Finally, it’s important to keep the size of the ERB’s changes in perspective. The UK starts from a low level of employment regulation – it ranks 34th out of 38 OECD countries on the University of Cambridge’s regulation index (which covers forms of employment, dismissals, working time, and unions), and 31st out of 38 OECD countries on the OECD’s index relating to dismissing workers. Even after making unfair dismissal a day one right, the strength of the UK’s regulation will still only rank 21st out of 38 OECD countries on the OECD’s specific index relating to individual dismissals, because many aspects of employment law relating to dismissals (such as minimum notice periods, redundancy payments, and compensation in the event of unfair dismissals) aren’t changing. 

Nevertheless, signs of recent weakness in the UK’s labour market mean that any negative risks should be taken seriously, and avoided if possible. The employment rate has been falling steadily since 2023, and the recent rise in employer NICs – concentrated on the same low earners whose employers will be most affected by the ERB – has likely exacerbated hiring weakness. With that in mind, the Government could consider simplifying its approach to strengthening unfair dismissal protection. Its approach is to make protection from unfair dismissal a ‘day one’ right but then have a nine-month probation period where employers have a lower bar to clear to show they have acted reasonably. A simpler approach would be to reduce the qualifying period (the length of time in a job before a worker is eligible for protection against unfair dismissal) from its current two years to three or six months. This would massively improve worker security and bring the UK into line with other rich countries, but lessen employers’ worry about getting stuck with bad hires.  

Action to tackle hours insecurity is among the most important elements of the ERB. The plan has two parts: a right to a contract that reflects the number of hours someone regularly works (expected to be over a 12-week reference period) and a right to reasonable notice of shift patterns and compensation for cancellation at short notice. Although framed as a clampdown on zero-hours contracts, these reforms would potentially (depending on where eligibility thresholds are drawn) apply to many workers who regularly work beyond their contracted hours, and who are vulnerable to losing shifts (and pay).  

Most of the detail of these important policies is being left for secondary legislation. The three biggest questions are: where to set any ‘low’ hours threshold (workers with contracted hours above this threshold wouldn’t be eligible for a new contract even if their hours of work vary considerably); what will count as ‘reasonable’ notice of shift cancellation; and how much compensation employers will have to pay when cancelling with less notice. Here we offer answers to these, but because the evidence base is currently thin (we don’t have good information on workers’ contracted hours, or on employers’ potential responses) they are intended as starting points to be developed. Where there is a trade-off between favouring workers and raising costs for businesses, we have leant towards workers. That’s because the starting point is an uneven sharing of risk that needs redressing, and the wellbeing benefits to workers of greater security could be substantial. 

On the question of where to set a ‘low’ hours threshold, we suggest setting this at 25 hours per week. We estimate this would mean at least half of workers on variable hours contracts would be covered by the new entitlement to a contract that reflects their regular hours (although this is uncertain because we lack good data on workers’ contracted hours). A very low threshold – say seven to eight hours – would exclude around three-quarters of workers on variable hour contracts from the new entitlement. It would also create an incentive for employers to pre-emptively move workers from zero-hours contracts (ZHCs) to contracts just above the ‘low’ hours threshold to avoid triggering the right. Moreover, the evidence shows that workers on or around 25 hours per week are just as likely as workers on low hours to face anxiety about unexpected changes to their hours.  

On cancelled shifts, we suggest that the threshold for ‘reasonable’ notice of shift changes should be set at two weeks. This would represent a huge improvement on current practice: currently three-in-four workers on variable hours say they get less notice than this. It would bring the UK in line with parts of the US where two weeks’ advance notice is fast becoming standard practice. When shifts are cancelled with less than two weeks’ notice, we recommend that compensation is paid on a sliding scale in line with the lateness of the notice, with shifts cancelled with less than 24 hours’ notice being compensated in full.  

Collectively, these reforms will reduce workers’ anxiety and help them plan their lives effectively. There will be costs to business – the Department for Business and Trade estimate costs of £470 million a year, covering administration, payments for shifts at short notice and extra workforce planning . There may also be economic costs, if employers become less able to respond flexibly to changing demand. Nothing in the new rules will prevent employers offering workers additional shifts at short notice, but employers may hesitate to do so if they think this will create an ongoing commitment. There may be unintended consequences for workers if employers shift away from short-hour contracts altogether. We suggest three possible mitigations.  

First, the test for ‘regularity’ – i.e. how many weeks out of the 12-week reference period a worker needs to exceed their contracted hours – should be set at eight. An employer would have to be offering extra shifts very regularly to create a commitment to keep doing so. Second, the Government may want to consider excluding seasonal peaks (such as summer and December, in the case of hospitality) so that employers can freely scale up in those periods. Third, it may be useful to incorporate a ‘buffer’, such that workers’ hours would need to be meaningfully above their contracted hours to trigger a new entitlement – this would lessen employers’ worry about offering small bits of overtime. Each mitigation does risk making the law more complex, and we support further consultation with employers and unions on these details. 

The ERB boosts the statutory entitlements that come with being a worker (as opposed to being self-employed). One risk of doing so is that it strengthens employers’ incentives to take on self-employed contractors rather than hire employees. These incentives have always existed, thanks to the large differences in the taxation of self-employed and employee labour (Employer National Insurance Contributions are not paid on self-employed work, and the rate paid by the worker is lower). Employment and tax law are not perfectly aligned in their treatment of the boundary between self-employment and worker status but in practice there is a lot of overlap. The Government’s decision to raise employer National Insurance Contributions from April 2025 has made these incentives larger: the ‘tax gap’ between employee and self-employed work now equals 9 per cent of the value of the labour for a worker on median earnings. So the combination of these changes may make the problem of ‘bogus’ self-employment – where an employer contracts someone and pays tax as if that person were self-employed when in reality the relationship is really one of dependent worker –get worse. 

The Government proposes to address bogus self-employment by getting rid of the UK’s middle-tier employment status (‘limb (b)’ work): this relatively new innovation (created in 1996) was intended to recognise that some workers have a greater degree of control and dependency on an employer than the self-employed, but not as much as an employee. Limb (b) workers have some employment rights, including minimum wage and holiday pay, but not redundancy pay, unfair dismissal protection, and maternity leave.  

The Government argues that the current system is confusing, and this makes it hard for workers to know what they are entitled to. It plans to consult on moving to a two-tier system – getting rid of the limb (b) status. Moving to a two-tier system may help insofar as it would make the system easier to understand. But this wouldn’t itself address the main problem with the UK’s approach to employment status, which is the lack of clarity in the law. Bogus self-employment will persist if the boundary between it and worker and employee status remains murky. It is imperative that, alongside reform of the number of statuses, the Government provides much more clarity over where the boundaries lie in practice. Indeed, more clarity (or changes that lead to a presumption in favour of worker status unless an employer can argue otherwise) would be a great help even under the current three-tier system.  

But even with clearer law, there will remain a big enforcement challenge. Government can make progress on enforcement even without legal reform. Currently, employment tribunals are workers’ only route to resolving questions about their status. But backlogs in the employment tribunal system, along with legal costs and the effort involved, put many workers off bringing a claim. The Government must take more of the burden off individuals (and off the employment tribunal system) by establishing its new enforcement body (the ‘Fair Work Agency’) and tasking it with proactively investigating instances where employers are avoiding their legal responsibilities by misclassifying workers.  

The ERB is an ambitious undertaking. The Bill itself was 168 pages long at its first reading, with at least 27 important policy changes across multiple areas of employment law. When enacted, it will make life better for millions low-paid workers, in particular by regulating insecure hours. However, it mustn’t be the final word on employment reform. The Government has plans beyond the ERB, including action on enforcement and employment status. But even then, there will be more to do to tackle insecurity in the UK’s labour market. A priority should be further improvements in Statutory Sick Pay (SSP). The Government’s reforms to extend coverage to the lowest earners and make SSP payable from the first day off sick are welcome, but the UK will continue to have the lowest level of legal income protection for sick workers in the OECD (besides the US and Korea who do not have statutory systems in place).