Navigating the new employment landscape in 2025

A challenge for employers in the face of legislative change and economic pressures

As the UK continues to evolve its employment law framework, employers face a growing web of challenges that threaten the delicate balance between cost control, operational efficiency, and employee relations.

The imminent passage of the Employment Rights Bill 2024-2025, with its prohibition on the controversial ‘fire and rehire’ practices, is set to create substantial implications for employers already grappling with rising costs.

At the same time, the recent increases in employer National Insurance contributions as part of the UK Budget only exacerbate the situation. Together, these factors create a complex landscape for employers striving to maintain profitability while meeting their obligations to employees.

The end of ‘fire and rehire’:A risk to flexibility?

The Employment Rights Bill will restrict employers’ ability to ‘fire and rehire’ by making it automatically unfair to dismiss an employee for refusing to agree to a change in their contract of employment.

The dismissal will be unfair if the principal reason for dismissal is either that the employee refused to agree to a variation of contract sought by the employer or to enable the employer to recruit another person (or rehire the employee) under new terms, but with substantially the same duties.

There is a limited exception whereby it prevents a total business collapse.

This change represents a major shift in the employment landscape. Historically, employers have used this strategy to change the terms and conditions of employment, especially in times of financial strain or business restructuring.

In simple terms, this approach allowed an employer to terminate an employee’s contract, only to offer them a new contract with revised terms, often including reduced benefits or introducing changes to working conditions.

The new law will significantly restrict this practice, which will dramatically curtail an employer’s ability to impose changes on terms and conditions of employees.

Instead, employers will need to focus on ensuring good employee relations, which will be key to securing agreement to any proposed changes to terms and conditions once this restriction is in place.

For businesses that currently rely on such mechanisms for cost-cutting or aligning their workforce with changing business needs, this could be a serious setback.

Instead, employers will need to find alternative means of achieving flexibility in their workforce arrangements. The challenge now will be to adapt without risking legal liability or jeopardising employee morale.

Employers will need to engage more in open dialogue and negotiation with their workforce, but this comes with its own set of complexities. For many businesses, the risk of not being able to adjust employment terms swiftly may lead to a prolonged financial strain.

The National Insurance hike: A double-edged sword

In addition to the legislative changes, the recent increase in National Insurance contributions for employers further increases the financial pressure on businesses. As of the most recent budget (October 2024), employer National Insurance contributions have risen by 1.2 percentage points, directly increasing the cost of hiring and retaining employees.

This increase means that employers must either absorb the additional burden, pass it on to customers, or explore other avenues for cost reduction.

Absorbing the increased costs without adjusting business practices could put considerable strain on an employer’s bottom line. Some businesses may struggle to cope with the compounded impact of rising costs and declining margins. Others may find themselves considering hard decisions, including reductions in staffing levels or benefits, in an attempt to protect their overall financial health.

Passing on the increased costs to customers through price hikes may offer a short-term solution, but it is not without risk. Increased prices can lead to reduced demand and, in highly competitive markets, businesses risk losing customers to competitors who have not raised their prices.

There is also the danger of alienating price-sensitive consumers, particularly at a time when inflation continues to affect household budgets.

Refining wage increases: A subtle approach to redundancy

One potential strategy that employers may consider is refining their approach to wage increases. While some may view wage adjustments as a subtle form of redundancy, this tactic can allow businesses to manage escalating costs while avoiding the more dramatic step of downsizing.

Refining wage increases could involve offering employees a smaller wage rise than previously anticipated, or potentially freezing wages altogether for a set period.

This strategy, if communicated effectively, may allow an employer to maintain a stable workforce while aligning their labour costs with the broader financial realities of the business. However, this approach requires careful consideration of the potential fallout.

Employees may view this as a breach of trust, particularly in industries where inflation and cost-of-living increases are putting additional pressure on workers. Employers will need to ensure that any changes to compensation are communicated transparently and that employees understand the rationale behind such decisions.

Balancing the need for cost control with maintaining morale and avoiding legal challenges will be a key task for employers.

A shift toward collaboration and negotiation

With the combined pressures of the new Employment Rights Bill and rising National Insurance contributions, employers will have to rethink their approach to employment law and workforce management.

Instead of relying on fire and rehire tactics, businesses will need to engage in more collaborative negotiations with employees. This may involve looking at flexible working arrangements, revising benefits packages, or exploring other innovative ways to improve efficiency without resorting to job cuts.

Employers will also need to invest more heavily in employee relations, ensuring that they are equipped to manage the complexities of employment law. This includes building strong lines of communication, understanding the legal constraints, and fostering a corporate culture of mutual respect and understanding.

While this may seem like an onerous task, it represents an opportunity for employers to build a more resilient and loyal workforce.

The path forward

Navigating the new Employment Rights Bill and taking on board the National Insurance increase, will undoubtedly be challenging for employers. However, businesses that adapt to the changing legal and financial landscape, embrace more transparent and constructive negotiation with their workforce, and explore creative solutions to cost management, will be in the best position to thrive.

For employers seeking to navigate these turbulent times, the key lies in striking the right balance between meeting financial objectives and fulfilling legal obligations.

The days of relying on ‘fire and rehire’ tactics are over, but the opportunity to build stronger, more sustainable relationships with employees is just beginning.

By taking a proactive and strategic approach to employment law, employers can weather the storm and continue to succeed in a rapidly changing business environment.