Transform employee relations to offset rising employer costs

AdviserPlus HR Technical Consultant, Hayley Saunders, recently shared her insights with People Management Magazine in this article on the CIPD’s latest Labour Market Outlook which found that 32% of UK businesses anticipated reducing their staff, whether through layoffs or hiring freezes.

In this blog, Hayley delves deeper into the findings, offering her insights into not only the challenges presented by rising employer costs but also potential strategies and alternative approaches that businesses can adopt to navigate these turbulent times and protect their workforce.

Rising employer costs and hiring confidence: balancing short-term pressures with long-term strategy

It’s inevitable that rising employer costs make hiring decisions more complex. We’ve seen many organisations prioritising cost-cutting measures to prepare for the impact of the NIC and minimum wage increases, so difficult decisions around workforce reductions are being made.

In fact, a survey from the Recruitment and Employment Confederation found that around 14% of employers reported plans to reduce their permanent headcount between January and March 2025, up 5% on the three months to October 2024, before the budget announcement. And our own Empowering People Group survey found a startling 4 in 5 large UK enterprises plan to make large-scale redundancies in the next year. So, hiring confidence is understandably fragile.

Simply put, rising costs means fewer jobs, but focusing solely on short-term cost reductions, such as recruitment freezes and workforce reductions, will be detrimental – and widespread cost-cutting measures will only exacerbate the economic volatility.

While many businesses will have to scale back recruitment to manage cash flow, organisations should be taking a longer-term, strategic approach to workforce planning.

Hayley suggests, “While cost-cutting may seem necessary now, neglecting employee development will create skills shortages and recruitment problems later, hindering productivity and long-term success. Investing in upskilling and reskilling is a much wiser approach, as a skilled and engaged workforce is a company’s greatest asset.

Many organisations are also prioritising investments in automation technology to enhance productivity and efficiency in response to rising employer costs. Digital transformation initiatives should be a key component of long-term sustainability strategies in the current climate.”

Rising costs and job losses: which businesses will feel it most?

Small businesses, with their tighter financial margins, will be hit hard by these cost increases. Even a small increase in costs can significantly impact profitability and viability for small businesses, and while the increased Employment Allowance is intended to provide some relief to the NIC increases, it won’t entirely offset the rising costs they face – and it isn’t open to all small businesses. So, many will face difficult staffing decisions to remain viable.

Larger businesses, though generally more resilient to cost increases, will also feel the strain with such a significant increase. Despite greater resources and economies of scale, the sheer size of their workforces means these cost increases translate to a substantial impact on the bottom line. We’re likely to see hiring freezes, restructuring and a shift towards automation and other investments in technology and AI to help drive cost efficiencies.

Perhaps even more vulnerable are medium-sized enterprises.  They lack the economies of scale and resources that large businesses have, while they typically have higher operational costs than smaller businesses due to more complex infrastructures, processes, and workforces. This “squeezed middle” are particularly susceptible to the increased financial strain.

Hayley adds, “Certain sectors will face greater challenges than others. Labour-intensive industries (such as retail, hospitality and construction), which have more frontline workers on minimum wage, will most likely feel the squeeze more than those with higher profit margins or automation potential.”

Rethinking workforce strategy: smarter ways to offset rising costs

Labour has a monumental task ahead of it in winning back confidence from businesses following the budget announcement and the upcoming legislative complexity to come in the Employment Rights Bill. While business leaders anxiously await the latest updates from the government, they simply MUST consider alternative approaches to headcount reductions to balance fair wages and job security.

Organisations can get tax incentives for investment in digital transformation and adopting automation responsibly (rather than as a cost-cutting measure). Offsetting the costs while benefitting from the productivity efficiencies could help protect jobs. The key is investing in strategies that give businesses the flexibility to adapt while ensuring employees benefit.

Hayley concludes, “In our experience, employee relations transformation is an area with untapped potential that delivers significant cost efficiencies. By implementing technology that empowers managers to handle HR tasks more efficiently, organisations can see substantial cost savings in areas such as sickness absence and employment tribunal costs due to a more proactive approach to people management.

This can help de-escalate issues that could otherwise escalate to costly employment tribunals, and it increases employee engagement, leading to better employee experience, increased productivity and higher retention. This type of strategic investment is crucial for long-term success in the face of rising employment costs.”

Contact us

Navigating these challenging economic times requires a strategic approach to workforce planning. If you’re concerned about the impact of rising employer costs on your business, or if you’d like to discuss how to optimise your workforce for long-term success, contact us today for a consultation.

The first session in our ‘People priorities 2025’ webinar series explores how businesses can effectively manage downsizing and adapt to wage and employer NI changes. Register for the on-demand session here.