Britain’s fiscal watchdog has warned Labour’s overhaul of workers’ rights will have a “negative economic impact” as the cost to businesses will far outstrip any boost to workers’ productivity.

The government’s sweeping employment reforms in its landmark Employment Rights Act (ERA) have reduced the qualifying period for unfair dismissal to six months, removed the compensation cap, and strengthened trade union rights.

The new laws are set to be rolled out over the next two years, with third-party harassment protection, which makes businesses directly liable for harassment staff experience from third parties, coming into effect on Friday.

In its first assessment of the act’s economic impact, the Office for Budget Responsibility (OBR) said, which assesses the government’s fiscal policy, said the changes are expected to hit growth in the economy.

“Our analysis suggests that the ERA will likely have a negative economic impact from negative impacts on businesses,” the OBR said in its economic and fiscal outlook, which is published alongside the Budget.

The OBR said that while the new rights might make workers slightly more productive, extra labour costs, lost operational flexibility, and general uncertainty for businesses will drag down the economy more than productivity gains will lift it.

The report added there was also still “uncertainty about the final policy design of the zero-hour contract-related measures”. Under the changes, Labour has proposed giving far greater powers to workers on zero-hour contracts.

Laws hit ‘substantially less’ than initially feared

The OBR also noted that the final version of the ERA was substantially less damaging to businesses than the original ideas proposed back in 2024.

Part of the initial Bill was ‘watered down’ after ministers had pushed for ‘day one’ rights, which would have given workers the opportunity to claim unfair dismissal from day one of their employment. The House of Lords eventually okayed the plans after instead setting a limit of six months.

But as a compromise, Labour added a last-minute amendment to appease its supporters that removed the compensation cap for unfair dismissal of £123,543 or one year’s salary. The change is already being felt across the City and triggering exits from senior roles, lawyers have told City AM.

The new worker rights law has also burdened the already backlogged Employment Tribunal system as workers challenge work claims, lawyers have warned.