Zero hours crackdown could cost firms up to £2.9bn a year

Businesses could face costs of up to £2.9bn a year because of a crackdown on zero hours contracts, according to the government's own analysis.

Labour's employment reforms are set to cut the number of hours staff can work before they must be offered guaranteed time.

Official analysis released on Wednesday showed it could cost employers between £350m and £2.9bn, based on the eventual threshold of hours the policy impacts.

Skills Minister Baroness Jacqui Smith said the reforms would ensure workers are "fairly paid" but business groups said the cost to employers was "disproportionate" compared to how much it would help workers.

Government analysis said there were "potential trade-offs" that include more administrative costs and less flexibility for companies, including making it "harder for employers to respond to changes in demand".

At the upper end of its estimate, about £1.2bn in costs would come from businesses who are forced to pay workers compensation for cancelled shifts.

However, the middle estimate of how much the policy would cost overall is £1.1bn.

The total cost depends on who the policy eventually applies to: if it applies to people working 48 hours a week, as some unions have called for, it will cost companies more.

The government's preference is for it to fall somewhere between eight and 20 hours a week.

In that case, the overall cost would fall far short of the higher estimates cited in the analysis.

Officials also wrote that the reforms could provide a £10bn boost to the economy because of better wellbeing and productivity.

That would lower the net average cost of the reforms to between £300m and £1.4bn.

It said the overall cost figures do not capture the full range of benefits because they are "not possible to monetise".

It said hospitality and retail companies, many of which rely heavily on zero hours workers, would be most affected by the change.

The document was released as part of a consultation into how many hours should eventually fall under the new rules.

Baroness Smith told Sky News the government will "look very carefully" at how it brings in the changes.

"I don't think it's fair for somebody to be on a contract where they literally don't know whether or not they're going to be working at all, and yet they're bound by that contract."

The number of people on zero hours contracts hit a record high of 1.23 million last December, a 91,000 annual increase, according to official data.

But business groups said the costs were more than had originally been forecast.

Kate Shoesmith, director of policy at the British Chambers of Commerce, said it would be "a further hammer blow" for companies that are struggling.

"We are already facing a youth unemployment crisis – now is not the time to make it even more costly for employers to hire."

Helen Dickinson, the chief executive of British Retail Consortium, questioned whether the reforms would "actually deliver value for workers" because of the cost to businesses.

She added that retailers would also have to pay "hundreds of millions of pounds" to update their payroll systems.

The Trades Union Congress said most of the extra costs would only come if businesses cancelled workers' shifts at the last minute.

A spokesperson for the TUC said: "The aim of this legislation is to stop this practice and give variable hours workers security and stability - so good employers have nothing to fear."

Charlotte Brumpton-Childs, GMB national secretary, called zero hours contracts "archaic", adding that businesses were "of course … going to grumble" about the policy.