HR leaders today face unprecedented challenges as economic shifts and legislative changes reshape the employment landscape. With the introduction of the Employment Rights Bill and the implications of recent budgetary measures, the cost of managing and maintaining a workforce has never been more complex. From rising direct expenses such as National Insurance contributions to indirect challenges like increased compliance requirements, HR functions must adapt swiftly to ensure operational efficiency and financial sustainability.
In this video, Eloise Knapton, Partner, Head of Employment Solutions, Tim Payne, Partner, Financial Services, and Donna Sharp, Partner, Head of Employment Law, explore practical strategies HR leaders can use to manage direct costs and control indirect costs and what opportunities AI can bring to the table.
Eloise: We've all been following developments in the Employment Rights Bill and the Budget, a lot going on there, certainly. The feedback we're getting from all our clients and all our client conversations is cost. The cost of these measures is really driving concerns and interactions with our clients at the minute.
Donna: I completely agree, and I think that clients are looking at three sorts of levers. There’s looking at direct costs, there's looking at indirect costs, so, the costs of BAU, running a business, running an HR function, and there's also structural costs looking at the size and shape of the workforce. In terms of direct cost, the obvious trigger for that is the Budget.
Eloise: Certainly. So, the immediate impact coming out of the Budget is the increase in the National Insurance rates, and that is driving a lot of conversations at the minute. Clearly, the impact will vary on the size and profile of your workforce. Second area is if you're a business around national minimum wage rates and having a look at those, how are you structuring your pay to achieve compliance with that? So, anything you can do there? And then a third way of looking at your direct costs is a broader pensions and benefits piece to see if there are any areas you can optimise or more efficient ways of delivering the same. So, kind of a comprehensive HR and tax policy review to see if there are any direct costs you can manage there being top of the agenda. But once you've had a look at those, I guess the next step, Donna, is then back to indirect costs, isn't it?
Donna: Yes, and I mean there are some direct costs coming out of the Employment Rights Bill. There's day-one rights to leave, and statutory sick pay that will also drive that direct cost agenda. But probably the bigger impact of the Employment Rights Bill changes is indirect costs. So, whether that's SSP rights, meaning that more people are taking sickness absence and that needs to be managed on the ground by HR and operations in a consistent and robust way, or probably the headline the day-one rights not to be unfairly dismissed is undoubtedly going to increase the time and complexity of issues that are being looked at on the ground by operations managers and by HR, and I think there's a real question for business about how they keep those indirect costs under control and making sure that decisions that are made that have to be every day are robustly consistent and so there's a great deal to do in terms of training, learning, ensuring managers know how to make those decisions. I think some other indirect levers are also being brought out of productivity concerns, Tim. Is that something you're seeing?
Tim: Absolutely. I think once you've pulled your policy levers to take some cost out, the obvious next place to look is around productivity. And right now, all the conversations that I'm having with HR directors are about how to use AI or various forms of automation to help their people do more with less. Whether that's using AI to support investigations, employee relations-type work, or whether it's a broader application using things like AI-driven chatbots to help people understand HR policy and actually to take HR actions through AI. So, all of that is happening at the moment. Then outside of the HR function, there's a broader consideration around how AI may drive up productivity. So, products like Microsoft CoPilot, for example, which is becoming very popular.
Eloise: The third area then is really the composition of your workforce as a whole, isn’t it? And looking at that total cost. So, looking at your permanent employees, your temporary, fixed term contractors, any gig workers that you might want to engage or other structures as well. And really looking at the overall package that you offer to each of those groups of individuals and how, and what the sort of return on that your getting is and what the cost base is for each. And is that going to be fit for the future? Is that what you're going to need?
Tim: I think there's three things here. If you are going to be hiring, focusing probably a lot harder on the sophistication of your recruitment process and the quality of your recruitment decisions. So, making a recruitment mistake becomes a lot more expensive. Secondly, then, for the workers that you have, are there location decisions you can take either within the UK or even with outside of the UK, which will reduce your cost base? And then thirdly, and sadly, people are looking at headcount reduction to manage some of these extra cost pressures.
Donna: I agree. And I think with that in mind and kind of looking strategically, employers are thinking about changes to the triggers for collective consultation. They're thinking about changes to the fire and rehire regime in the context of the flexibility that takes away from them. In that context, 2026 is the looming date. And so, employers are thinking, OK, what can I do to get myself ready for a tighter regime? And that's not just about headcount reduction, that's about the deal with the workforce. And that might be hybrid working policy, where they're working, how they're working, but also looking at more skills-based roles rather than job description specialist roles. And that's to give them flexibility to make changes within their contract rather than having to rely on a statutory regime that's got tighter.
Eloise: That feels like we've covered a lot in the last couple of minutes. What's clear, though, is that post the Budget and the Employment Rights Bill, the cost of employment is going to be higher, So, there is this kind of broader need to look at costs. But there's no silver bullet; no one size is going to fit all clearly, and so it's important to go through all of the points we've just discussed and work those through in the context of each individual business and what's most relevant.
If you’re looking for actionable strategies to manage rising employment costs, please reach out to your usual KPMG contact.
