Small firms are tightening their belts on recruitment, with changes to unfair dismissal rules and higher sick pay topping their worries about the Employment Rights Bill.

Research from the Federation of Small Businesses (FSB) showed that in the last quarter of 2024, 33% of small employers said they expected to reduce staff numbers, up from 17% in the previous quarter.

Fewer businesses are looking to hire, with only 10% of small firms planning to recruit more staff, down from 14% in the previous quarter. Fifty-six per cent expected to maintain workforce numbers, but 51% said labour costs were one of the greatest barriers to growing their business.

The Employment Rights Bill was also “causing dread” among the small business community, according to the FSB. In response to a separate FSB survey, 75% of small employers highlighted fears relating to unfair dismissal changes, while 74% raised concerns about changes to statutory sick pay (SSP).

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Two-thirds (67%) of small employers said the proposals in the Employment Rights Bill would make them curb hiring while 32% would reduce headcount before the measures are introduced.

The Employment Rights Bill includes plans to abolish the two-year eligibility period to claim unfair dismissal, making it a day-one right.

Meanwhile, sick pay regulations would be amended to remove the three-day waiting period, meaning SSP would be payable from the first day of absence.

Tina McKenzie, the FSB’s policy chair, said: “The figures speak for themselves – plans to allow employees to sue their employers on their first day on the job will wreak havoc on our already fragile economy, while changes to statutory sick pay will make employers think twice about their hiring plans.

“Of course, existing protections against unfair dismissal for protected characteristics from day one are essential and should remain. But extending these rights to any and all cases from day one risks opening the door to frivolous claims.

“Ministers should recognise the risk to jobs and resist any approach that comes across as out of touch with business reality, instead of brushing off their concerns.”

Last week, deputy prime minister Angela Rayner said the cabinet was fully behind the Employment Rights Bill after fears that businesses and some senior Labour politicians have been trying to dilute it.

McKenzie added: “The prime minister should ditch these reckless changes to unfair dismissal and reinstate the one-year qualification period that worked under the last Labour government. It’s a zero-cost fix that would show he understands what it takes to create and sustain jobs.

“If taking on staff becomes a legal minefield, businesses will simply stop. That means more people on benefits, a ballooning welfare bill, and a devastating hit to living standards. Those who will be shut out of work because of this Bill deserve better from the government.”

The Employment Rights Bill next moves to the report stage in the House of Commons where MPs can consider further amendments, before the legislation’s final reading and its passage to the House of Lords.

A government spokesperson said: “This government has delivered the biggest upgrade to people’s rights at work in a generation and our measures already have strong support from business, as well as overwhelming public support.

“As we deliver our Plan to Make Work Pay, we will ensure all businesses have their say and are given the time to prepare for any changes as we deliver our pro-business, pro-worker agenda.”

The FSB also said the government should introduce an SSP rebate. Its data came from two polls conducted in November and December, each gauging the opinions of around 1,300 small business owners.

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