IEA warns labour’s plan will depress wages and burden small firms with billions in hidden costs

Angela Rayner’s landmark Employment Rights Bill has come under fire from leading economists and business figures, who claim the reforms amount to a hidden £5 billion “stealth tax” on the very workers they aim to protect.

According to a new report by the Institute of Economic Affairs (IEA), the Deputy Prime Minister’s plan to expand workers’ rights will ultimately suppress wage growth and make hiring less attractive for employers—particularly smaller firms.

The Bill, returning to the Commons on Monday, promises sweeping changes: protections from unfair dismissal on day one of employment, restrictions on zero-hours contracts, and easier access to trade union representation and strike action. But critics say the price of those rights will be borne not by bosses, but by workers themselves.

Professor J.R. Shackleton, an economist at the University of Buckingham and author of the IEA report, argued that the Government’s own impact assessment shows employers will face £5 billion in additional costs—costs likely to be passed on through lower wage growth.

“Politicians love announcing new ‘rights’ as if employers foot the bill. But in reality, these mandates—be it paid leave or union powers—act like stealth taxes,” he said. “They don’t raise money for the Exchequer, but they quietly erode workers’ pay packets.”

The critique echoes growing unease in the business community, where many fear the proposals will bring back 1970s-style union dominance and undermine the UK’s fragile economic recovery.

Andrew Griffith, the shadow business secretary, called the Employment Rights Bill a “Trojan horse” for union power and “state interference.”

“Labour’s love-in with the unions is dragging Britain back to the worst economic mistakes of the 1970s,” he said. “Far from protecting workers, this Bill will price them out of jobs, scare off investment, and send small businesses under.”

The Office for Budget Responsibility (OBR) has also raised eyebrows, forecasting a “probably net negative” effect on employment, prices, and productivity if the reforms go ahead in their current form.

According to insiders, tensions have flared behind the scenes between Ms Rayner’s office and the Treasury. Sources suggest officials at HM Treasury are worried the reforms could dampen business confidence and deter job creation—especially at a time when growth remains a government priority.

Despite the backlash, Ms Rayner has defended the reforms as essential to “upgrading” Britain’s economic model. “This is about delivering higher living standards and driving growth by putting power back in the hands of working people,” she said recently.

A Government spokesman doubled down, describing the bill as a generational shift in rights for millions: “Too many workers are trapped in insecure, low-paid work with weak protections. This transformative legislation delivers the biggest upgrade to workers’ rights in a generation.”

However, Professor Shackleton warned that the plan will backfire. “These billions in hidden costs will ultimately fall on workers themselves. The Government claims it’s boosting growth, but it’s doing the opposite—hobbling job creators and choking pay.”

With the Conservatives vowing to scrap the Bill if returned to office, the political battle lines are clearly drawn. But for now, millions of British workers and business owners are left to watch and wait—uncertain whether the future of work will be more secure, or more costly.