The increase to Employer National insurance from 6 April 2025 from 13.8% to 15%, with the corresponding reduction in the threshold (the level at which employer NICs starts being levied on employers) from £9,100 to £5,000 will (according to the Office for Budget Responsibility) result in 940,000 employers seeing their direct costs increase by around £26,000. Of course, the actual effect from business to business will vary greatly as it depends on many factors such as the proportion of low wage individuals in the business and the number of employees in total. For those employers who do employ low wage workers there will be another impact on costs through the increases in the National Living Wage and National Minimum Wage.
All of this combines to force employers to think about creative ways to change the way that people work to keep costs down.
Some of the options available can initially appear quite attractive, but it is important that due consideration is given to the underlying employment law and employee relations aspects and the impact that these considerations can have both in the short, medium and long-term.
1. Reducing hours of work or providing fewer guaranteed hours
One of the ways in which we have already seen some employers react is by reducing hours of work. If staff expressly agree to work reduced hours, this can be a positive way forward. This can work with people’s own life plans, although most will need a guarantee around how many hours, they will be working over a set period in order to avoid wage uncertainty, which can create wider issues and stress in family budgets. Anecdotally, we have seen some employers move to a 4-day week or 9-day fortnight in response to these increased costs.
However, you can’t act unilaterally to simply reduce hours of work if your staff have a contract with set hours without there being a very significant likelihood that you will fundamentally breach the contract of employment and expose the business to successful (constructive) unfair dismissal claims at an Employment Tribunal.
Even if the hours are not clearly set out in the contract of employment itself (albeit that they should be), there is the possibility that the hours of work can become a contractual right through custom and practice. This will depend on the level of consistency of hours, duration and expectation of both parties.
At present, employees need to have 2 years’ qualifying service with an employer to be able to claim this. It follows that currently you have greater ability to make a change like this to short serving members of staff. However, the new Employment Rights Bill (expected to become law in the autumn of 2026) will make this something that any employee can claim because unfair dismissal will become a day-1 right. Compensation is then up to one year’s gross pay (or £115,115 – until April 2025 – whichever is the lower).
This can be the case even if you call the person a worker rather than an employee. If you exert sufficient control over what they do and they are obliged to work when requested, they may be deemed an employee. This is a complex legal area – see section 3 below.
It may be possible (if you have appropriate terms in their contract) to either vary their hours of work through the use of a flexibility clause or place the employee on “short-term working” or reduced hours for a specific short-term duration. Short-term working is only a short term fix though and will not ultimately be able to address the long term effects of the increase in NI and the National Minimum/Living Wage.
For more detailed guidance on how to seek to change an employee’s contract and when and how this can become a “fire and rehire” situation, please see our article. If the change could impact 20 or more employees over a rolling 90 day period this is likely to also trigger collective consultation requirements, with hefty penalties if this is not done. The government has proposed to make “fire and rehire” practices unlawful in their Employment Rights Bill. They have said that fire and rehire practices can only be used in circumstances “where there is genuinely no alternative” for the business and will also make it automatically unfair to dismiss an employee for refusing to agree to a change in their contract of employment.
2. Using zero hours contracts
The same is true if you want to move staff from a permanent fixed hours contract onto a zero-hours (no guaranteed hours) contract. You must get their agreement to such a change as otherwise there will be a unilateral breach of contract by the employer which will potentially result in employment tribunal claims.
The benefits of zero hours contracts for employers is that it is then very quick and easy to take steps to reduce the amount of hours that they do and flex this according to your business needs. This is as the basis of the contract is engagement on an ad hoc basis with no guarantee of work.
You should however be aware of the current legal restrictions in place:
- You cannot prevent a person from working elsewhere while on a zero-hours contract with you. You also can’t treat them detrimentally for doing so.
- A true zero-hours worker has the ability to say no to shifts as the basis of the arrangement is that you don’t have to offer work, and they don’t have to accept it.
- Zero-hours contracts can be in place for both employees and workers. Knowing which status applies to the individual will be important to understand. See section 3 below.
There are also important changes coming down the track in 2026 in relation to zero-hours contracts:
- The Employment Rights Bill aims to end what the Labour Government describes as ‘exploitative’ zero-hours contracts.
- Employers will be required to offer a guaranteed hours contract to zero-hours workers after the end of every reference period (expected to be every 12 weeks), if the worker’s hours exceed the minimum hours in their contract of employment.
- The offer of guaranteed hours would reflect the hours worked during that period.
- This requirement will also extend to workers who are employed on guaranteed minimum hours contracts. This extension is designed to avoid employers seeking to circumvent the new rules by moving their zero-hours workers on to guaranteed hours contracts with very low guaranteed hours.
As part of measures give workers greater ability to plan their lives, the Government intends to ensure workers employed on a zero-hours or minimum hours contract (as well as workers who do not have a set working pattern) are given reasonable notice of a shift they are required to work. This will include the time and day of the shift and how many hours will need to be worked. Coupled with this right, those same workers will need to be given reasonable notice of any change to, or cancellation of, a shift. Any worker denied reasonable notice will be entitled to a proportionate level of compensation.
Further consultation is currently taking place around the details of these proposals – so one to watch.
3. Moving staff from being employed to self-employed
Sometimes staff are happy to move to become self-employed if this means they get an increased hourly rate. This can feel like a win-win, although the individual can swap initial gain for longer term pain, as they lose out on mandatory benefits like holiday pay, sick pay, pension contributions and employment protections. They may also need to top up their NIC contributions to get a full state pension.
The main risk factors for businesses are:
- Would HMRC agree that the person is actually self-employed? If not, HMRC can seek payment of the Tax and NICs on the individual’s earnings from the business – even if the individual has already paid this.
- Would an Employment Tribunal consider that the person is truly self-employed? If not, the individual may be given either worker or employee status which can mean they are entitled to employment protection rights and can bring claims, even if the parties have expressly called the relationship one of self-employment.
- If the business is a medium or large entity and you are engaging the individual through their own personal service company, you also need to complete an IR35 / off payroll working assessment and give specific information on your decision to the individual. For more information see here.
The HMRC tests and Employment Tribunal tests for status (self-employed/worker/employee) are complex and not the same; HMRC and Employment Tribunals can, and do, reach different conclusions on the same or similar facts. You should take legal advice if you wish to ascertain and best protect your position in this regard. One aspect of those tests is the more control you have over the individual, the more likely it is that they are an employee (or a worker) and not be genuinely self-employed. This can be difficult for businesses who still make sure the work is done to a required standard and in the way they want. This can result in the business exercising a level of control more akin to an employer/employee or employer/worker relationship.
4. Making staff redundant
Sometimes this is inevitable if you are reducing the need for a person to do work of a particular kind or closing a site or department. However, we have seen in recent months that the impact of NI and NMW/NLW is not necessarily affecting the volume of work or the need for the same number of employees.
If you do intend to make a reduction in the number of employees, it is important that you plan appropriately, select fairly, consult and follow due process. Failing to do so can result in unfair dismissal claims from those with more than 2 years’ service. If you select specific people for redundancy in a way that can be linked to one of the protected characteristics (disability, sex, race, religion or belief, sexual orientation, age, gender reassignment, pregnancy or maternity, and marital status or civil partnership) or a protected disclosure (like them raising health and safety concerns) or other protected statutory rights (for instance, for being a member of a trade union), then this is a claim that can be brought by an affected individual irrespective of how long they have been with you.
You can find useful guidance here.
5. Outsourcing specific tasks to another company or self-employed person
You may be considering outsourcing some aspects of work that your employees do – like to contract cleaners, security, marketing agencies or admin providers. This provides some buffer for future costs as this is then a commercial arrangement you have with that provider rather than an ongoing employment situation.
This is usually not an issue unless the outsourcing of the work results in a TUPE situation, resulting in the transfer of the affected employees from your business to the new contractor under the Transfer of Undertaking (Protection of Employment) Regulations 2006 (‘TUPE’).
The legal tests are detailed, but in essence the following conditions need to be met for TUPE to apply when you outsource to another provider:
- There must be activities that are being carried out by your employees that are moving to be done by the external provider. These are ongoing services, not services connected to a one-off event or short-term duration. It does not apply to the provision of goods.
- Those activities making up the services must be fundamentally the same before and after that move.
- There must be an employee who immediately before the move was part of an ‘organised grouping’ that has as its principle purpose the carrying out of those activities. This can be a single employee.
For example: if you have a cleaning team that work cleaning your office and you decide to outsource the cleaning to an external provider, this is likely to result in the transfer of your current cleaning employees across to the new cleaning company.
If TUPE applies, the employee automatically transfers into the employment of the provider company, on their current terms and conditions and with their length of service intact and continuing. The employee has protection from being dismissed or having their terms changed and there are specific legal requirements on you and on the new provider relating to information and consultation. If they do transfer with these accompanying protections, then you may find it practically difficult to reduce cost. However, the commercial agreement may still provide you with a level of flexibility in the future that you are seeking.
If you think TUPE may apply in any situation, you should raise this in your discussions with any potential providers as part of your commercial negotiations with them and take legal advice.
6. Avoiding recruitment and not replacing when colleagues leave
This is the lowest risk option – and probably the most common one at the moment. Of course, the implementation of such savings using this option is unpredictable as the business is not in control of when people leave. The other issue is that you may have good people leaving that has a further knock on effect on the business which does not permit you to simply make the salary savings. You would need to also allocate any remaining work to remaining staff members (remembering to update their job descriptions if necessary) and / or decide whether there are certain projects or tasks to delay for now.
It would also be prudent to undertake a review of what people are doing to make sure they are working on the business priorities and not just doing tasks that no longer are needed or are not fit for purpose.
Conclusion
Understandably, at this time employers are looking for ways to help manage the extra costs around employment wage bills. In making any decisions the wider legal impact should be considered. Claims and disputes with employees and HMRC can be expensive, stressful and time consuming, so it is best to make any decisions in this regard with awareness of the risks.
There is also the cultural impact to consider – as the way you navigate these aspects can impact on the morale and performance of the remaining staff members. So, it’s worth balancing that along with the books, as happy and well performing staff members can make all the difference to your bottom line.
If you would like to discuss any of the above issues, the specialist Employment law team at Stephens Scown would be very willing to assist and to help you find a way forward that works for your business. Email employment@stephens-scown.co.uk or call 0345 450 5558.