UK businesses are on the brink due to the government’s highly contentious employment rights agenda and cost hikes, following the first provisions of the Employment Rights Act, which came into force in April. 

According to new research from Employment Hero, an AI-powered employment platform, more than half of UK businesses feel employing staff has “become more complex” over the past twelve months as costs rise and pressure is piled onto firms because of the new law. 

The Employment Rights Act (ERA) officially became law in 2025 and is being rolled out in stages across 2026 and 2027. 

The new worker rights, which have already kicked in, include statutory sick pay, day-one family leave and collective redundancy protections. 

The research, based on responses from over 1,000 businesses across the UK and carried out over the two weeks after the law came into effect, revealed that over half of firms “are worried about unintentionally breaching new employment laws.” 

Alongside this, rising costs are also adding to the employment storm firms are facing, with 65 per cent of UK businesses experiencing higher costs as a result of the new laws. 

Small businesses – which make up the majority of employment in the UK – are particularly being affected, with nearly 70 per cent reporting that costs have spiked since the law took effect. 

“SMEs are the engine room of the UK economy, but too many are now being asked to grow with one hand tied behind their back,” said Kevin Fitzgerald, UK managing director at Employment Hero. 

Over the past year, firms have also said that employment costs for full-time staff have increased by nearly ten per cent, mainly driven by higher salaries and a hike in National Insurance contributions. 

According to the research, more than 70 per cent of firms said higher salaries are the primary driver of heightened costs. 

“Hiring should give business owners confidence, yet this data tells us that it’s actually what’s keeping them up at night as concerns grow around cost, admin and risk to their business and livelihood,” Fitzgerald added. 

The research also revealed that these concerns are directly influencing firms’ hiring decisions, with almost 20 per cent of small businesses surveyed said the new employment laws “significantly discourage” them from hiring.

Businesses are already struggling to stay afloat as growth continues to stutter amid an energy shock, economic fallout from the Iran war, ongoing geopolitical tensions, and political uncertainty. 

Nearly 80 per cent of firms surveyed said changes in the employment landscape have impacted their ability to grow over the last year, and small businesses are “particularly concerned”.

Leading trade body The British Retail Consortium (BRC) in April said it risks adding to an onset of rising costs pressures firms are facing, including wage hikes and supply chain expenses because of the Iran war. 

A drowning Tribunal system

On top of the employment reforms causing hiring and financial havoc for firms, concerns are being raised that the already overstretched Employment Tribunal is drowning in even more of a backlog with cases delayed for up to five years – and the new law will make this worse. 

According to new research from the Employment Lawyers Association (ELA), the phased introduction of the Employment Rights Act “will make matters worse”, and the law will increase the caseload by 17 per cent. 

The ELA said it expects this to be closer to a third, and it “believes that there is a rich irony that whilst the Government celebrates the introduction of valuable rights for workers, the ability for those workers to enforce their rights is locked up behind a no-man’s land of delay.” 

The amount of outstanding UK employment tribunal cases has nearly doubled in the last five years, from around 32,000 outstanding cases in the Autumn of 2022 to nearly 60,000 cases now. 

Ahead of the Employment Rights Bill’s introduction, the backlog jumped by nearly 28 per cent in 2024. 

AI use adding to the pile-on

An uptick in AI use and a spike in discrimination and whistleblowing cases are also adding to the burden. 

The ELA said that the use of AI, particularly by individuals, businesses, or organisations representing themselves in proceedings, is “creating more document-heavy claims that often include voluminous amounts of irrelevant material.” 

Alongside this, discrimination and whistleblowing cases, which are typically legally complex and time-consuming, have increased to amount to 60 to 70 per cent of all claims compared to just 25 per cent 15 years ago. 

“The government’s landmark employment legislation, the Employment Rights Act 2025, will be an empty vessel if the employment tribunals do not have the capacity to enforce those new rights, and quickly,” Professor Catherine Barnard, an expert in employment law at Cambridge Faculty of Law, said.

The ELA is proposing to introduce reforms to resolve the backlog without requiring extra government funding by shifting toward an early dispute resolution and tiered tribunal system. 

The group recommends splitting tribunal cases into three distinct ‘tracks’ based on financial value to allow lower value cases to be fast-tracked by legal officers so judges can focus their resources on more complex cases.

“Justice delayed is justice denied. The ELA has come up with a researched evidence-based plan that does not ask for more money to be poured into the system,” Caspar Glyn KC, chair of the ELA added.