Navigating workforce resilience: employment law strategies for 2025
As employers prepare for National Insurance contributions and National Minimum Wage increases to take effect in April 2025, workforce resilience has never been more critical.
Resilience is about more than just cost control - it requires a strategic approach to pay structures, employment models, and workforce flexibility to ensure financial stability while complying with evolving legal requirements.
Employers must also balance prudent financial decision-making with the wider commercial need to maintain competitive pay structures in order to attract and retain talent. According to the CIPD, employers who are perceived not to be offering competitive salary and benefits packages risk losing talent.
Beyond financial pressures, significant legislative change is on the horizon, including new rights for zero-hours workers and day-one unfair dismissal protections. To build long-term resilience in the face of such extensive reform, employers should explore a range of proactive and legally sound strategies that extend beyond restructuring and redundancies.
This article explores practical strategies to manage costs, ensure compliance, and retain talent - helping employers strengthen workforce resilience while navigating legal changes.
Optimising pay structures for workforce resilience
For employers needing to mitigate rising wage costs, reviewing pay structures can be a sensible strategy to balance financial sustainability with compliance and fairness. A targeted approach to reward and retention, rather than blanket salary increases, can help employers manage costs while keeping key talent engaged.
Aligning pay with business needs
Employers may consider a shift towards performance-linked pay, where salary progression is tied to individual or company performance metrics. This approach enables businesses to reward high performers without committing to across-the-board increases. However, to ensure compliance and fairness, it is essential to establish clear, objective criteria and maintain transparency. Without careful implementation, there is a risk of discrimination claims, equal pay challenges, or contractual disputes.
Another option is market-based pay adjustments, where businesses assess industry benchmarks and prioritise increases for retention-critical roles rather than applying uniform salary hikes. This strategy supports talent retention while keeping pay structures competitive and financially sustainable.
Some employers may also consider deferring pay increases until certain financial conditions, such as profitability targets or contract wins, are met. However, this should be handled carefully to manage employee expectations and avoid potential legal or employee relations risks, particularly where contractual pay review obligations exist.
Alternatives to permanent pay rises
Rather than committing to permanent salary increases, employers may explore stipends and temporary allowances as short-term financial incentives. Retention bonuses or hardship stipends can offer financial relief without creating long-term salary inflation.
Where necessary, temporary pay reductions can help businesses manage financial pressures while preserving jobs. However, these should be carefully structured, consulted upon as a change to terms and conditions of employment, and implemented fairly and reasonably to mitigate legal risk and manage staff relations.
Flexible benefits - such as enhanced pensions, additional leave, or tax-efficient salary sacrifice schemes - offer alternatives to permanent salary increases. These options can be valuable to employees while limiting direct payroll costs. However, businesses must ensure that any salary sacrifice deductions do not reduce pay below the National Minimum Wage threshold. Master lease agreements and associated document for high ticket items such as electric vehicles should also be carefully reviewed before a salary sacrifice scheme is put in place.
Legal and compliance considerations for pay and workforce changes
Changes to pay and employment terms must be legally compliant and transparently implemented. Employers should determine whether a proposed change constitutes a contractual variation, as this dictates whether consultation is required.
Not all pay adjustments will require contractual changes. For example, deferring a planned pay increase is possible without formally amending contracts, provided the increase was not contractually guaranteed. Likewise, introducing discretionary bonuses or temporary allowances does not typically require contractual change.
If agreement cannot be reached, unilateral changes to contracts could be perceived as a fundamental breach of contract leading to claims of constructive dismissal. Similarly, fire and re-hire tactics to enforce changes will result in a dismissal in law and again could lead to claims.
Employers must also consider equal pay risks when adjusting pay structures. Men and women performing equal work must receive equal pay unless differences can be objectively justified, such as on market-based pay adjustments, performance-related factors, or business location. Documenting and reviewing pay differentials can help mitigate claims.
Building a flexible workforce
Workforce flexibility allows employers to respond to demand fluctuations, manage costs, and structure work to support long-term resilience. Workforce flexibility can take two key forms:
- Flexibility in working patterns: adjusting employees' working hours based on business need (through zero-hours contracts, short-time working, or annualised hours models)
- Flexibility in workforce composition: determining who works for the organisation and under what contractual arrangement (eg permanent employees, fixed-term workers, zero-hours staff, or independent contractors)
While flexibility is vital for operational efficiency, employers must balance it with compliance, ensuring that contractual arrangements align with employment law obligations and avoid misclassification risks.
Contractual flexibility
Different contractual models offer varying levels of flexibility but come with distinct legal and regulatory considerations:
- Zero-hours and casual contracts provide flexibility without guaranteeing employees a minimum number of hours. These contracts face increased regulation under the Employment Rights Bill, introducing:
- A right to an offer of guaranteed hours in certain circumstances
- Compensation for late shift cancellations and changes
Zero-hours contracts remain a viable option where workforce demand is irregular and unpredictable. However, businesses that rely on casual labour should review contracts now and prepare for future obligations before the Employment Rights Bill passes into law.
- Annualised hours contracts allow employers to spread working hours across the year, providing a structured yet flexible approach. This model allows employers to avoid excessive overtime costs while ensuring predictable staffing levels, often accommodating seasonal fluctuations.
- Fixed-term contracts remain an effective way to hire staff for specific projects or time-limited needs. However, employers should be mindful that under current law, any employee on successive fixed-term contracts for over two years will gain unfair dismissal rights, and after four years may gain permanent employee status. Employers should monitor contract renewals carefully to avoid unintentionally creating permanent employment relationships.
- Where temporary cost-saving measures are required, short-time working (STW) and lay-offs provide a mechanism for reducing working hours or temporarily suspending work without dismissals. However, these measures must be explicitly permitted within employment contracts. Imposing STW requires explicit contractual authority to avoid legal claims for unlawful deduction of wages or constructive dismissal. Employers should review contracts and negotiate flexibility clauses where necessary to ensure they can implement STW or lay-offs if needed.
Avoiding misclassification risks
Employment status remains a high-risk area, with both tax and employment law implications. The distinction between employees, workers, and self-employed contractors is pivotal, as misclassification can lead to substantial legal and financial consequences.
Recent case law highlights that employment status will always depend on the individual facts of each case. In HMRC v Professional Game Match Officials Ltd, the Supreme Court ruled that part-time football referees engaged on a match-by-match basis could potentially be considered employees due to factors such as mutuality of obligation and control. Conversely, in Johnson v GT Gettaxi (UK) Ltd, the Employment Appeal Tribunal found that a black cab driver using a ride-hailing app was not a "worker" because he operated his own business and retained autonomy over his working conditions.
These cases reinforce the fact that employment status determinations are highly fact-specific. Courts and tribunals will look beyond contractual labels to assess the true nature of the working relationship, examining elements such as personal service, mutuality of obligation, and control. Employers should carefully evaluate their own working arrangements, considering both legal and tax risks, before making strategic decisions that impact employment status.
Employment status tests
The key test for employee status considers three main factors:
- Personal service – Must the individual perform the work personally, or can they send a substitute? Employees typically cannot delegate tasks to others.
- Mutuality of obligation – Is the employer obliged to provide work and is the individual obliged to accept it? An expectation of ongoing work suggests an employment relationship rather than self-employment.
- Control – Does the employer determine how, when, and where work is performed? A high level of control is indicative of employee or worker status.
Where these factors apply, the individual is likely an employee and entitled to employment rights such as unfair dismissal protection, redundancy pay, and paid holiday.
Where possible, employers may wish to assess whether certain types of work can be outsourced to genuinely self-employed contractors. Work that does not require close supervision or control, and where contractors can determine how tasks are completed, could be more suitable for outsourcing.
Businesses engaging independent contractors should ensure compliance with IR35 tax rules. If a contractor is deemed to be working as an employee in all but name, the employer can face significant tax liabilities and employment rights claims. To mitigate risk, employers should:
- Conduct regular employment status assessments using the CEST tool
- Ensure contractual documentation reflects actual working practices
- Maintain compliance records to support their position if challenged by HMRC or an employment tribunal.
Next steps for employers
Employers face a complex landscape of rising costs and evolving employment law obligations, making proactive workforce planning essential. To maintain stability, retain talent, and ensure legal compliance, employers should consider the following key actions:
- Prepare for upcoming legislative changes. New rights for zero-hours workers and expanded unfair dismissal protection could have operational impacts. Employers should review how these changes affect their workforce strategy and seek tailored legal guidance where necessary.
A legally compliant, future-proof workforce strategy requires careful balancing between cost management, regulatory compliance, and workforce engagement. Employers who take early, well-informed action will be best placed to navigate ongoing economic and legal challenges while remaining an attractive and compliant employer.