Employers aren’t waiting for the Employment Rights Act 2025 to fully land before changing how they hire. Recruitment intentions have already fallen to some of the lowest levels on record outside the pandemic, and a third of employers say they’re specifically planning to hire fewer permanent staff because of the reforms still to come.
This piece builds on the pillar’s overview into practical workforce planning guidance: what the hiring data actually shows, why permanent headcount is becoming a harder call to make, what employers are turning to instead, and how to build a recruitment strategy that responds to real risk without over-correcting into a different set of problems.
Explore: Employment Law Changes 2026: HR Guidance on the Employment Rights Act 2025, for the full picture this piece sits within.
The Hiring Chill: What’s Actually Happening
CIPD’s Winter 2025/26 Labour Market Outlook, a survey of 2,082 UK employers, found the net employment balance, the difference between employers expecting to increase staff and those expecting to reduce it, had fallen to +7, the lowest level on record outside the pandemic.
The Act itself is a specific, named factor behind this. More than a third (37%) of employers say they plan to hire fewer permanent staff as a direct result of reforms to unfair dismissal, statutory sick pay, zero-hours contracts, or trade union rights. Among that group specifically, the net employment balance drops to -5, meaning more of these employers expect headcount to shrink than grow.
Cost expectations sit behind much of this. 74% of employers believe the Act will increase their employment costs, but that pressure isn’t evenly spread. In sectors already running on thin margins, it’s sharper: 31% of social care employers and 28% of hospitality employers expect costs to rise “to a large extent,” nearly double the overall average.
This isn’t a single quarter’s caution either. CIPD’s most recent data shows the balance ticking up slightly since, to +9, but describes the pattern as a “low-hire, low-fire” cycle, employers holding steady rather than genuinely recovering their hiring appetite.
Why Employers Are Shifting Away From Permanent Headcount
The caution described above isn’t abstract. It maps directly onto specific changes covered elsewhere in this series:
- The qualifying period drops from two years to six months from 1 January 2027. A permanent hire that used to carry two years of relatively low dismissal risk now reaches that same risk in a quarter of the time.
- Day-one rights compound this. Paternity leave, unpaid parental leave, and statutory sick pay from day one mean a new hire carries administrative and cost obligations immediately, not after a waiting period that used to let employers assess fit.
- The compensation cap disappears on the same date the qualifying period shortens, removing the ceiling on what a dismissal that goes wrong could actually cost.
CIPD itself is explicit about where this pushes employers. Its own analysis warns this could have “the unintended consequence of increasing employment insecurity by encouraging employers to rely more heavily on temporary workers and self-employed contractors to avoid rising costs.” That’s not speculation from outside the process, it’s the body that ran the survey naming the likely behavioural response directly.
The Alternatives Employers Are Turning To (And Their Own Risks)
CIPD’s warning isn’t theoretical. It’s already showing up in real market activity:
- Temps and contractors. The REC’s July 2026 Report on Jobs found revenue from supplying temporary workers had risen for a fourth consecutive month, and IT contractor demand hit a 35-month high. A recruitment specialist quoted in the report linked this directly to clients turning to contractors for flexibility amid ongoing regulatory uncertainty.
- Automation. A BCG survey of UK business leaders found 51% planned to redirect investment from staff to AI, and 57% said they’d hire fewer people specifically because of workers’ rights reforms. The government’s own Economic Analysis names automation directly as a likely employer response.
Neither is risk-free, and treating them as a clean escape from the Act’s requirements can create a different problem:
- DavidsonMorris highlights the misclassification risk: temporary staff or contractors who are, in practice, treated like employees, set hours, close supervision, full integration into the team, can still expose an employer to employment law claims regardless of how the arrangement is labelled on paper.
- The REC’s own guidance is direct about rising stakes for recruiters and hirers alike: the new Fair Work Agency brings civil penalties of up to 200% for underpayment and record-keeping failures.
Shifting toward temps, contractors, or automation doesn’t remove risk. It just changes what kind of risk an employer is managing.
Building a Recruitment Strategy That Doesn’t Just React to Risk
It’s understandable that employers are pulling back on permanent hiring in response to real, quantifiable risk. But a recruitment strategy built entirely around avoiding that risk creates its own costs, chronic understaffing, overworked existing teams, and skills gaps that temporary or automated solutions don’t always fill well.
A more durable approach separates two different questions that are easy to conflate: which roles genuinely carry the kind of risk the Act has changed, and which roles are simply being frozen out of caution without that specific reasoning behind it. Not every permanent hire has become meaningfully riskier under the new rules, roles with clear performance criteria, strong onboarding, and documented review processes from day one carry much of the same profile they always did. The risk increase is sharpest for roles where fit is genuinely uncertain at the outset, which is exactly where the six-month qualifying period and day-one rights bite hardest.
That distinction matters because it points to a better fix than simply hiring less: getting better at the parts of hiring and early management that were always supposed to catch a bad fit early anyway, clearer role definition, stronger onboarding, earlier performance conversations. Getting this right reduces genuine risk without requiring a wholesale shift away from permanent employment.
What HR and Recruitment Teams Should Do Now
- Separate genuine risk from generic caution. Review which roles actually carry heightened risk under the new rules, versus which are being frozen out of general nervousness rather than specific reasoning.
- Tighten onboarding and early review processes. Since the qualifying period and day-one rights now bite earlier, the systems that catch a bad fit early need to work from day one, not month eighteen.
- Audit any existing temp or contractor arrangements for misclassification risk. Especially where those workers are, in practice, treated like employees, before the Fair Work Agency’s expanded enforcement makes that audit someone else’s finding instead.
- Treat automation as a genuine strategic choice, not just a cost-avoidance reflex. Where automation is added, plan for it deliberately rather than as a default response to hiring anxiety.
- Revisit workforce plans by sector-specific cost pressure, not just the general average, since the impact on hospitality or social care looks meaningfully different from the impact on other sectors.
How Avado Can Help
Getting recruitment strategy right under the new rules isn’t just about legal compliance, it’s about building the onboarding, review, and documentation habits that make permanent hiring genuinely lower-risk again. Avado’s HR Compliance for Managers course, presented by employment law specialist Amanda Chadwick, builds exactly that capability, covering the Employment Rights Act 2025 changes alongside the practical, day-to-day judgement that keeps hiring decisions defensible from day one.
Explore HR Compliance for Managers and build a recruitment strategy that manages risk without abandoning permanent hiring!
