In a direct challenge to Labour’s flagship Employment Rights Bill, a leading think tank with close ties to Downing Street has warned the policy risks deterring hiring and damaging the UK jobs market.

The Resolution Foundation said plans to give workers the right to claim unfair dismissal from the first day of employment would inhibit hiring and bring “little obvious gain to workers”, despite being designed to strengthen protection.

The group, whose former chief executive Torsten Bell is now pensions minister, told The Telegraph that the policy could “only benefit employment lawyers” and create chaos in an already overstretched Employment Tribunal system.

The intervention marks a significant escalation in criticism of the bill, with business leaders, trade bodies and Conservative MPs all voicing concern ahead of a House of Lords debate this week.

Concerns over hiring slowdown and tribunal backlog

The think tank said that while the intent behind the bill may be to enhance fairness, it could backfire by making employers more reluctant to hire, especially in a weak labour market.

“Making dismissals as hard as is proposed might also be for little obvious gain to workers,” it said in a note seen by The Telegraph. “Workers today are about half as likely to lose their job as they were 30 years ago.”

It also warned that tribunal cases were already taking up to two years to resolve, with some firms collapsing before awards were paid. More claims, it said, would put further pressure on the system and increase legal risks for small businesses.

Ruth Curtice, chief executive of the Resolution Foundation, said the proposed change was “high risk” and urged Labour to follow the example of countries such as Germany and New Zealand, which have fixed three- or six-month probationary periods.

Young workers could be hit hardest

While the bill is intended to protect all workers from day one, the foundation said it could disproportionately hurt young people. It pointed to record levels of 16- to 24-year-olds not in education, employment or training — nearly 1 million — and noted that this age group is particularly sensitive to changes in hiring conditions.

“Young people’s employment prospects are more sensitive to hiring conditions than older workers because they are more likely to be looking for work,” the note said. “That’s why policymakers often seek to try to shift things in their favour.”

Business groups have also raised the alarm, warning the bill’s broader measures will significantly increase the regulatory burden on employers. The British Chambers of Commerce, Federation of Small Businesses and Institute of Directors are among those calling for changes.

Shadow business secretary Andrew Griffiths, writing in The Telegraph, said Labour was “bringing in the most wide-reaching restrictions on employers for generations”. He urged ministers to heed warnings from the business community before it is “too late”.

Government figures show almost 30,000 businesses have collapsed since Labour came to power. Employers say the added cost of legal risks, combined with higher National Insurance and other tax changes, could push more to the brink.

Mixed response to other employment reforms

While critics have focused on the unfair dismissal provision, other parts of the bill have drawn a more positive reception. These include expanding statutory sick pay, ending exploitative zero-hours contracts, and improving parental leave protections.

Under the current version, employees would gain protection from unfair dismissal on day one, removing the two-year qualifying period that currently exists. Labour has said a statutory probation period will still apply, but critics argue this “light touch” compromise creates confusion and may not offer enough flexibility to employers.

The Government insists the bill is a manifesto commitment and necessary to improve job security. “Making basic protection against unfair dismissal a day one right gives financial security to people who don’t have it,” a spokesperson said. “We are ensuring new laws work for businesses while continuing to make the tribunal system more resilient.”

Peers push for amendment to delay dismissal rights

Cross-party peers are expected to propose an amendment this week that would delay the right to claim unfair dismissal until six months into a new job, in line with practices in many other developed countries.

Supporters of the amendment argue this would strike a better balance between worker protection and business flexibility. They also point out that extending rights too early risks an uptick in vexatious claims and legal uncertainty at a time when hiring is already slowing.

Official data show UK payroll employment has fallen by 127,000 over the past year, and the Office for Budget Responsibility has previously warned the bill could negatively affect jobs, productivity and prices.

Political tension and fears of a U-turn

Labour sources said there was internal pressure to water down the dismissal reform, with Treasury officials and Downing Street said to be “desperately trying to back-pedal” on the measure.

The party has already rowed back on several other policy areas, including welfare reform and energy support. Trade unions, however, have demanded that Labour stand firm on its employment pledges.

Justin Madders, the former employment rights minister, said the day one dismissal rule was a “clear manifesto commitment” and warned against giving in to business pressure. “The arguments we’re hearing now are exactly the same as those used against the minimum wage,” he said. “And they proved to be utterly false.”