NMW and Employer NI rises: things to consider as you plan workforce changes

We know that rising employment costs are a big concern for many businesses. With increases to the National Minimum Wage and Employer National Insurance on the horizon, you might be looking for ways to manage the financial impact while keeping things running smoothly.

To help you navigate these changes, we turned to our friends at Stephens Scown, whose expert employment law team has highlighted the main workforce adjustments businesses are thinking about, along with the legal risks and best practices to keep in mind.

Plus, we’ve created a National Insurance calculator, to allow you calculate the potential cost increase per employee. Find a link to this at the end.

Here’s what you need to know:

The increase to Employer National insurance from 6 April 2025 from 13.8% to 15%, with the corresponding reduction in the threshold triggering when it is paid, will place additional burdens on business salary bills. This alongside the increases in the National Living Wage and National Minimum Wage, mean that some employers are thinking about creative ways to change the makeup of their workforce to keep costs down.

Although these alternative options can seem attractive, there are employment law aspects to be considered that can create issues for the unwary:

1. Giving staff fewer hours or fewer guaranteed hours per week/month

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 want some guarantee around how many hours they will be working over a set period, to avoid wage uncertainty, which can create wider issues in family budgets.

You can’t however act unilaterally to simply reduce their hours if they have a current contract with set hours (or if they have been working those set hours consistently for a long period like 18 months to 2 years) without there being a significant risk that they will resign and claim constructive unfair dismissal at an Employment Tribunal.  At present, employees need to 2 years’ qualifying service with an employer to be able to claim this. The new Employment Rights Bill (expected to become law in 2026) will make this something that any employee can claim. Compensation is then up to one year’s gross pay.

Note also that there is no defined period someone needs to have worked set hours before this becomes part of their contract. This will depend on the level of consistency of hours, duration and expectation of both parties.

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 terns in their contract) to put the employee on short-term working or reduced hours for a specific short-term duration. Ultimately this is not a longer term fix to the increased salary bill.

For more detailed guidance on how to seek to change an employee’s contract and when redundancy may be triggered please see our article here. If the change could impact more than 20 employees over a rolling 90 day period this may also trigger collective consultation requirements, with hefty penalties if this is not done.

2. Using zero hours contracts

The above issues also exist if you want to move someone with a permanent fixed hours contract onto a zero-hours (no guaranteed hours) contract. You should get their consent, otherwise this is a unilateral breach of contract and could lead to claims.

If you have someone on a genuine zero-hours contract already (or you are planning to recruit a person into a role on this basis), you can 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.

Attempting to 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 so, reach different conclusions on the same 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 are not self-employed. This can be tricky therefore if you need to still make sure the work is done to a required standard and in the way you want, you may be exercising a level of control more akin to an employer/employer 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.

It’s 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 persons for redundancy and this is linked to a protected characteristic (like disability, sex, race, religion or belief, sexual orientation or age) or a protected act (like them raising health and safety concerns or being a union member), 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. Consider also asking for volunteers for redundancy first.

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 it would be argued by an impacted employee that they should have moved with the work and transferred away from you and into the employment of the new external provider (or back to you or on to another provider, if the outsourced contract comes to an end). This can happen 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.

This means that there is a significant risk if the activities that are moving, are tasks that one of your current employees is essentially dedicated to doing and where they are deliberately organised in your business by reference to that work and identifiable as members of that team.

For example: if you have a cleaning team that work cleaning your office and you decide to outsource the cleaning to an external provider.

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 you think this may apply, 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 but may not give you the savings you need. You would need to also allocate any remaining work to remaining staff members (remembering to update their job descriptions) and / or decide there are certain projects or tasks to delay for now. Sometimes it is worth 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 going forward 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 4505558. 

Here’s a link to our Employer National Insurance changes calculator, to calculate to estimate NI changes per employee: Employers NI Change calculator – Whyfield Accountants

For further forecasting, we’ve put together a calculator that maps out not only the cost of Employer NI per employee, but it also calculates total staff costs, including pensions, shows the year-on-year cost increase, and helps you forecast overall payroll expenses for better budgeting: Forecasting Employer NI changes 25/26: Multiple Employees Calculator – Whyfield

For any other questions, feel free to give us a call on 01872 267 267, email us contact@whyfield.co.uk, or message us on WhatsApp 0777 49 39 111

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