Zero hours clampdown will cost businesses £2.9bn
Sara White, Editor, Business & Accountancy Daily
Government move to restrict the use of zero hours contracts set to cost up to £2.9bn a year in direct costs to business
The plans to limit zero hours contracts are currently out for consultation with no definite decisions on exactly how the government will draft the rules, but initial proposals would abolish effectively the use of this type of employment, except in very limited cases.
The move is part of the sweeping changes to employee rights sets out in the government’s flagship Employment Rights Act 2025. When the consultation was released previous minister for business Peter Kyle said the measure would ‘ensure all jobs provide a baseline level of security and predictability, ending exploitative zero hours contracts’.
Under the new rules, these workers, including those placed through agencies, will have the right to:
- guaranteed hours, where the number of hours offered reflects the hours worked by a qualifying worker during a reference period;
- reasonable notice of shifts and changes to these; and
- payment for shifts cancelled, curtailed or moved at short notice.
Now the government has released costings for the proposals, setting out a maximum £2.9bn bill for businesses every year to comply with the rules. This includes a total of £450m per annum to pay for the right to guaranteed hours, £1.2bn to implement the workers’ new right to reasonable notice of shifts, and up to £1.3bn in compensation payments for cancelled or shortened shifts.
The latest costs for businesses are not welcomed, with the 2025 national insurance hikes already hurting.
RSM’s latest Workforce survey indicates most businesses will scale back their use, with over a third turning to agency workers instead – driving up the cost of flexible labour.
The survey found that over three-quarters of businesses (78%) said they were making changes to zero hours contracts as a result of the proposed reforms, while 32% plan to offer guaranteed hours instead, while 17% will no longer use them at all.
Charlie Barnes, head of employment legal services at RSM UK said: ‘The new legislation is leading businesses to essentially stop using zero hours contracts by either offering guaranteed hours, reducing the use or not using them at all. Without banning the use of such contracts, the complexity of the new rules has essentially led to the same end result.
‘Employers trying to do the right thing risk being burdened with increased administration, alongside an obligation to provide a set number of hours, even where demand isn’t there. This will ultimately drive-up costs and push businesses to explore alternative ways to fill labour gaps, rather than hiring more staff.
‘Retail, leisure and hospitality employers already struggling in the current economic environment, following employment, national insurance and rate cost rises, will bear the heaviest burden.’
One tax expert suggested the Budget in October could give the government an opportunity to revisit the plans.
Sue Robinson, employment tax practice lead at Ryan said: ‘The headline £3bn business cost gives pause for thought… banning zero hours contracts also increases complexity as well as costing employers more, particularly in relation to employer’s NIC.
‘Many will be encouraged to seek alternatives such as taking on contractors to avoid the NIC. But this isn’t without risk so it may not be a realistic option in most cases. It feels like a bit of a “Hobson’s choice”. Will the autumn Budget give the government an opportunity to simplify and rectify this?’
The major overhaul of zero hours contracts will change the working environment for millions of workers, with the popular model of gig work in particular seriously impacted by the changes, and already hard hit sectors like hospitality and retail likely to be most affected, as well as younger workers, who are already facing a tough employment market.
Ben Willmott, head of public policy at the CIPD, the professional body for HR and people development, said: ‘It’s really important that there’s meaningful consultation on these new rights, including the reference period which will be used to decide the number of guaranteed minimum hours a zero-hours contract worker will be entitled to.
‘A longer reference period will be easier for employers to manage, but even with this, the new measures are likely to be extremely complex and challenging to comply with, particularly for small firms or those with fluctuations in demand.
‘If the final regulations are too difficult to manage, employers will simply find other ways to achieve workforce flexibility. They are likely to rely more on self-employed contractors and fixed term contracts, for example, potentially resulting in more rather than less insecure employment.’
The consultation on zero hours contracts closes for comment on 25 August 2026.
