What implications might employment status reform have for businesses?

Daisy Burton explains how firms can navigate the planned move toward a two-tier system and the risks of a single worker status 

Employment status is one of the most complex and contentious areas of UK employment Law. Under the current framework, individuals fall into one of three categories: employee, worker or self-employed. The government feels that this ambiguous and complex framework requires reform and has proposed a move towards a simpler two-tier model and a single ‘worker’ status. 

The current three-tier system 

Under existing law, employees enjoy full statutory employment rights, including protection from unfair dismissal, entitlement to redundancy pay, statutory sick pay, family-related leave, holiday pay and protection from discrimination. Workers sit a tier below employees. They are entitled to certain rights, such as holiday pay, the national minimum wage and protection from discrimination, but do not benefit from protections such as unfair dismissal or redundancy pay. At the other end of the spectrum, self-employed people have only limited statutory protection, including health and safety obligations and discrimination protection. 

Crucially, employment status is not a matter of choice or labelling. It depends on the reality of the working relationship, assessed through complex legal tests involving control, mutuality of obligation, integration into the business and the individual’s ability to operate independently. This has resulted in uncertainty for businesses and workers alike and is a frequent cause of litigation. 

The government’s proposed reforms 

In its Make Work Pay plan, Labour committed to abolishing the distinction between employees and workers, creating a simpler two-tier framework. This would change the definition to distinguish between those who are genuinely self-employed and everyone else, who would be classified as a ‘worker’. In practice, the intention appears to be that workers would benefit from the same rights as employees.  

This aim of moving towards a single status of worker is to prevent exploitation, tackle bogus self-employment and remove the grey areas that have allowed some employers to avoid legal obligations. Although the Employment Rights Act 2025 did not include employment status reform, the government has confirmed that consultation on a simpler framework remains on the agenda. 

Navigating the move to a two-tier model 

For employers, fewer status categories could reduce misclassification risk and help HR teams manage compliance more consistently, reducing disputes and future litigation. That said, the change will come with cost and administrative impact. Combining employee and worker status would extend rights such as redundancy pay and collective consultation to a much wider group, potentially making workforce models that rely heavily on casual or flexible labour significantly more expensive. 

Businesses should therefore start by auditing their workforce arrangements now, assessing which roles might be affected by reform, and whether existing business models remain viable if full employment rights apply. Where flexibility is essential, employers will need to consider whether genuinely self-employed engagement is realistic, bearing in mind that this requires a real reduction in control, not just a change in contract wording. 

Employers should take practical steps by reviewing engagements and ensuring contracts are in line with actual working practices to reduce exposure to disputes and litigation.  

Further actions organisations can start taking include:  

• reviewing their business models;  
• reviewing roles as they evolve; and  
• training managers to understand the difference between contractual wording and practical reality.  

This will be particularly important as enforcement is expected to increase, including through the establishment of the Fair Work Agency in 2026. 

The risks of a single worker status 

While simplification is attractive in principle, a single worker status carries real risks. Expanded rights across a wider group would increase costs and administrative burden, potentially discouraging hiring or increasing outsourcing.  

The economic impact of a single worker status may be significant, as the increased cost liability of employers could cause reduced profitability and higher prices for consumers. Additionally, it could lead to higher unemployment if businesses are unable to adapt to the change.  

There is also a risk that flexibility suffers. Many individuals actively choose non-employee arrangements, valuing autonomy and variety over employment protections. A ‘one size fits all’ status could undermine those preferences, making the labour market less responsive rather than more secure.  

Employers that depend heavily on flexible working arrangements warn that a single worker status risks undermining the efficiency and adaptability of the gig economy and could discourage genuinely flexible forms of work valued by both businesses and individuals. 

Finally, simplification does not guarantee clarity. Even a two-tier system would still require legal tests to determine who is genuinely self-employed, meaning disputes are unlikely to disappear entirely. 

Businesses should begin preparing for these reforms now, as proactive steps will be the most effective safeguard against the changes.  

Originally published on the People Management website on 29-April-2026