Changes to labour laws: What to expect

Labour, regulation and inflation

Labour costs are a major driver of food prices – and policy-led changes continue to add pressure.

Labour is a key input for the food system. There are currently about 4.1m jobs in the food system, making food and drink employment about twice as big as the entire NHS.

A new IGD study Where does your food pound go? examined a basket of none everyday food and grocery items and found that labour cost made up about 28% of the final retail price in January 2025 – although there was wide variation.

With profit margins in many parts of the system low, even modest increases in labour costs can quickly feed through into increased retail prices.

Recent policy changes have pushed labour costs higher

In recent years, government policy has contributed to labour cost increases. Key changes include increases in the National Living Wage (NLW) and changes to rules on employer National Insurance Contributions (NICs).

About one-third of workers in the away from home (AFH) sector are paid at or close to the NLW, so this part of the food system is most affected by changes to the NLW, making this part of the food system most exposed to NLW changes.

Workers in other areas tend to be paid more than the NLW, but increases still matter, as they shape wider pay expectations across businesses.

For example, if the lowest-paid roles in a business receive a pay increase, then better-paid colleagues will expect a similar increase in order to reflect seniority and maintain differentials.

Changes to employer NICs, enacted over 2025-26 were also impactful. These lowered the threshold for NICs, covering more workers, especially lower-paid and part-time workers. The NIC rate also went up.

Retailers and AFH businesses were hit hard, since they tend to employ a large number of part-time and casual workers, who were previously not subject to employer NICs.

What happens next? Fewer surprises, but ongoing pressure

Changes to NICs are likely to be one-off; a major change has been made and cannot be made again. NLW changes are established as an annual event, however.

From April 2026, the main NLW will move from £12.21 per hour to £12.71. Compared with recent years, this is a relatively modest increase.

However, given the size of the food workforce, even smaller increases still have a system‑wide impact, including higher pension and NIC bills.

One aim of the NLW was to raise it gradually until it reached two‑thirds of the national median hourly wage. This has now been achieved. Looking ahead, future NLW increases are therefore likely to track wage growth more closely, unless policy changes.

Employment Rights Act: a new layer of change

A new element is the Employment Rights Act 2025, which is being introduced in stages over 2026-27. Changes over the rest of 2026 will include, among other measures:

April:

• Statutory Sick Pay available from day one, lower earnings limit removed

• Paid paternity leave and unpaid parental leave available from day one

• Establishment of new Fair Work Agency

• Introduction of voluntary gender pay gap and menopause action plans

October:

• Ban on fire-and-rehire

• New rules around tipping – employees must receive 100% of tips after tax

• Enhanced protection against harassment

• Strengthened union rights

2027:

• Protection from unfair dismissal from six months (instead of two years)

• Bereavement leave a statutory right

• Zero-hours workers to have right to guaranteed hours

• Workers entitled to pay if a shift is cancelled or changed

• Mandatory gender pay gap and menopause action plans

• New industry relations framework

What this means for food businesses

The Employment Rights Act includes multiple new or strengthened protections for workers, representing a positive step for job quality and retention. For large food businesses, many of the changes reflect their existing good practices.

Both government and businesses want to move more people into the workforce and help them stay there, so improved conditions should support this aim.

However, implementation will require management time, operational change and additional cost, with some increase in legal risk as responsibilities expand. New day one rights will create additional costs, as even workers on short term contracts will become entitled, for example, to statutory sick pay.

Within the food system, AFH businesses may be most affected, given high staff turnover and a greater reliance on flexible working patterns to manage fluctuating demand.

For retailers and manufacturers, the greatest impact may come around the peak Christmas trading period, when large numbers of temporary workers are taken on and will now have stronger protections. Planned changes to requirements for mandatory consultation when redundancies are proposed may also impact those businesses operating across multiple sites if they wish to make changes to their workforce.

IGD’s recent report Food and drink workforce – a quiet crisis building explores workforce challenges in more detail and sets out actions to help make the workforce future-fit.