Day-one employment rights have bosses worried, but pave the way to a stronger economy

This week the next phase of the government’s flagship Pay and Employment Rights Act will be rolled out, including “day-one” sick pay and paternity leave. Next January, the qualifying period for employees to launch unfair dismissal claims will be reduced to six months.

Some see this act as misconceived. The Institute of Directors (IOD) reports that over a third of its members say they will be more likely to outsource roles or operations to other countries, and almost a quarter talk of increased chances of redundancies.

In contrast, the TUC cites the government’s impact analysis that says the benefits outweigh the costs, by some margin. In truth, it cannot be known for sure until after the event, although the evidence suggests that businesses are generally more sanguine than the IoD suggests.

Overall, about a third more firms say their business’s performance will increase over the next 12 months than say the reverse. There is no evidence of impending disaster here. Any fall in confidence this summer is more likely to be caused by rising energy prices, raw material costs and interest rates.

That said, it might have harmful effects for some firms and some employees. This week workers will be eligible for sick pay on the first day they are ill. Those who are mostly part-time will also be able to claim. One firm told me there was a concern this would be abused by sixth-formers and summer job students. These workers, I was told, see such jobs as a short-term way to make money and will never need a reference from that employer. They are surely right on both counts.

I have heard tales that such staff are already more likely to turn up late to work, quit suddenly, and so on. This employer told me that they expect these workers “to throw a lot of sickies”, so they have decided to stop employing such people, rejigging contracts for other workers so that they have to cover Saturdays and Sundays. Whether they are right or wrong in their perception, changes in hiring practices such as these could lead to fewer young people getting valuable experience of work, and perhaps increase the proportion who end up not in employment, education or training.

Yet if some employers worry that the government has gone too far, there are good reasons to think that it has backed down more than was ideal. In particular, the UK has long had a hire-and-fire culture. Hitherto, firms could hire people and fire them in the first two years without having to say why. It is very, very hard for an employee to claim unfair dismissal in their first two years of employment.

This approach encourages firms to hire, but job changes are a two-way process, and losing rights is a real deterrent to moving jobs. After all, moving jobs opens up a worker to the risk of immediate dismissal for two whole years, which will surely persuade at least some not to look for better-paid jobs. Reducing this to six months is a step in the right direction, but giving day-one rights against unfair dismissal – for workers with good work histories – would have increased workers’ willingness to move jobs.

Moving jobs is good for the individual, typically leading to a pay rise three times that of people who stay with the same company. But it is also good for society. Higher earnings imply more tax revenues, and that means better public services. Workers who move take skills and ideas from one firm to another, which in some studies accounts for the majority of knowledge diffusion. Finally, moving gives workers new skills and experience, which makes them more resilient if the economy changes. For these reasons, governments should want to encourage workers to move, and day-one rights would have been a good way to do that.

Photograph by Oli Scarff/AFP/Getty Images