Overhauling workers’ rights could cost businesses around £5bn a year, the government has said.

The Employment Rights Bill, which aims to tackle low pay and poor working conditions, was debated by MPs on Monday evening and passed its second reading by 386 votes to 105.

Within the bill are a series of reforms branded the biggest overhaul in a generation, including granting workers protection from unfair dismissal from the first day of their employment, the right to statutory sick pay from the first day of illness and the right to flexible working.

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Unions will also be given the right to access workplaces and there will be a ban on “exploitative” zero hours contracts.

But in the government’s own impact assessment published today, the Department for Business and Trade acknowledged that the new measures could cost businesses up to £5bn a year as they adjust to the new legislation and take on administrative and compliance costs.

It also warned that the volume of cases reaching mediation service and employment tribunal could increase by around 15% if there are disagreements between employees and employers over rights.

The impact assessment is the first time the government has revealed the cost of the reforms that are being spearheaded by Deputy Prime Minister Angela Rayner and Business Secretary Jonathan Reynolds.

Unions have praised the bill as “life changing” for millions of workers and say it will also benefit employers in the form of a healthier and happy workforce and boosted productivity.

However, Kevin Hollinrake, the shadow business secretary, criticised the bill as “bad for jobs and wages” and “particularly bad for small businesses”.

He said “day one rights” to sick pay and an employment tribunal as well as the right to demand a four-day week could be “existential for many small businesses”.

“Labour need to stop, listen and think again, at the very least exempting SMEs from this catastrophe,” he posted on X.

The right to statutory sick pay from the first day of illness will end the current three-day waiting period and remove the lower earnings limit, while the right to flexible working will mean that employers who refuse requests will have to demonstrate why they think their decision is reasonable against eight criteria.

The bill will also introduce day one rights to paid and unpaid paternity leave, meaning 30,000 new fathers will qualify for paternity leave. Currently, fathers have to be employed for 26 or 52 weeks respectively to receive the benefits.

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In the economic impact assessment, the government acknowledged there could be “unintended consequences”, including the risk that “higher labour costs could reduce demand for work, damaging the employment prospects of the same workers the package is trying to support”.

The government said that despite such risks, the package will be “significantly positive for society” owing to improved wellbeing and health.

Although the bill is going through its second reading in the House of Commons, the consultation required means officials do not expect many of the 28 measures in the bill to reach the statute book until autumn 2026 at the earliest.