The Employment Rights Bill: considerations for lenders 

In October 2024, the new Labour Government upheld a manifesto commitment by publishing their flagship Employment Rights Bill (the Bill) within the first 100 days of taking office.  

The Bill has recently passed its third reading in the House of Commons and introduces substantial workplace reforms in the UK by making wide-ranging changes to, amongst others, zero/low hours contracts, unfair dismissal rights, family leave and flexible working, industrial relations and statutory sick pay (SSP).  

The first consultation exercises on some key reforms under the Bill were conducted in late 2024, with the Government’s responses published earlier in March. A new version of the Bill has been published and has started its passage through the House of Lords (see our Employment Team’s latest article). Further consultations are expected soon, although the Government has indicated that many of the major reforms will not take effect until 2026. However, given the wide-ranging reforms under the Bill, and potential impact on businesses, lenders should already start to consider the implications for borrowers particularly in sectors with a high number of low paid and/or zero hours employees. 

Overview of changes 

Key changes include: 

• SSP payable from the first day of absence, and payable to low earners (who currently do not qualify). 

• Strengthened rights to request flexible working. 

• Paternity and parental leave becoming a day one right. 

• Increased protections for pregnant women and new parents returning to work after a period of statutory family leave.  

• Changes to the right to bereavement leave, including the right to take leave following pregnancy loss prior to 24 weeks (this has been introduced as an amendment to the Bill). 

• Strengthened protections in relation to harassment and the employer’s duty to prevent sexual harassment.  

Employees will also have the right to bring unfair dismissal claims from day one of employment, without the current requirement for two years’ minimum service (which applies to most unfair dismissal claims). However, the Bill suggests an ‘initial period of employment’, similar to a probationary period, during which period employers will be able to terminate employment contracts without engaging with the full dismissal process. It is currently unconfirmed how long this initial period will be, although indications are that it will be set at nine months. The time limit for bringing a claim in the employment tribunal will also be extended to six months, from the current three. 

The Bill introduces significant changes to zero and low-hours contracts. The right to be offered a guaranteed hours contract, based on an employee’s work patterns over a set reference period (likely to be 12 weeks), will apply to both minimum hours contracts and zero-hours contracts. Employers must also give reasonable notice of changes to or cancellations of shifts. The Bill also sets out a right for employees to receive a payment each time a shift is cancelled or moved at short notice.  

Important restrictions will be placed on the current ability for employers to ‘fire and rehire’ employees to force through a change in contractual terms, other than in exceptional circumstances when the business is in severe financial constraints. In addition, it has been confirmed that penalties for failing to collectively consult with employees in relation to large-scale redundancies will be doubled, from a maximum of 90 days’ pay to 180 days’ pay (uncapped).   

The existing process for trade union recognition will be simplified under the Bill, and protections for participation in trade union activities are increased. Additionally, reforms to the current rules relating to industrial action will simplify the process for unions to conduct strike ballots. 

Impact on borrowers  

Increased costs 

The obvious potential impact of the Bill will be that higher operational costs as a result of the Bill may lead to reductions in cash flow and reduced liquidity for businesses, especially if a higher proportion of profits are being allocated to labour costs. When assessing the suitability of a borrower, one of the main considerations for lenders will be a borrower’s debt-income ratio, and a lower cash flow and income may make a borrower less attractive.  

An increase in business costs may lead to an increase in redundancies, particularly in industries that rely on zero-hours contracts, seasonal and agency workers (especially in the short term, prior to the legislation being introduced). Lenders should consider both the long- and short-term stability of employment of borrowers to ensure the risk of default is kept to a minimum.  

Businesses may also be forced to use debt to cover increasing costs potentially jeopardising the solvency of borrowers.  

Additional legislative requirements and the risk of default  

The Bill sets out a multitude of legislative requirements that businesses will need to comply with, and the additional protections afforded to employees may increase the risk (and value) of claims such as unfair dismissal or breach of the collective consultation obligations. If these claims can be brought more easily, this could lead to further expenditure on litigation proceedings and any penalties awarded, making it more difficult for borrowers to meet loan repayments and further reducing cash flow.  

Lenders should adopt more stringent processes when assessing the suitability of a borrower. A failure to comply with new legislation may make a borrower less attractive as the risk of default is higher.  

Impact on individuals as borrowers 

For borrowers borrowing in their capacity as individuals, increased job protections may result in improvements in income stability which may reduce the risk of default, making them more attractive borrowers. These improvements in income consistency could also lead to a higher demand for credit and a more inclusive job market which may widen the criteria for lending, allowing lenders to expand their financial product offering and access new markets. 

With changes to sick pay and family leave entitlements, lenders may come under pressure to factor in temporary income interruptions in ways they have not before. The Bill may lead to increased competition from alternative lenders, particularly as consumers feel more financially secure and less dependent on traditional lending products that fail to meet their needs. A more nuanced approach to assessing an applicant’s financial situation may be required, taking into account both current income and employee benefits.  

Conclusion  

Despite the employment-focused nature of the Bill, it is clear that it will impact the wider financial environment within the UK. It would be prudent for lenders to consider the impact of the Bill on businesses and individuals as borrowers, both in the short term before the Bill is implemented, and beyond.  

For more details about the changes being introduced in the Bill and to keep track of its development, see our Employment Rights Bill Hub.