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Retail challenges: workforce costs, risk, and regulation

How rising labour costs and regulatory changes impact the UK retail sector. Discover strategic workforce management solutions to enhance resilience and efficiency.

In the face of rising workforce costs, regulatory changes, and increasing reputational risks, the UK retail sector is at a critical juncture. As businesses grapple with the implications of higher National Insurance Contributions and the National Living Wage, the need for strategic workforce management has never been more pressing. Contact our experts to discuss how they can help support your businesses future development.

The UK retail sector, traditionally reliant on flexibility, seasonal staffing, and tight cost control, is undergoing significant strain. With National Insurance Contributions (NICs) and the National Living Wage (NLW) increasing, the British Retail Consortium (BRC) warns these changes will add £5 billion to retailers’ labour costs in 2025 alone.^[1] Combined with reputational risk, regulatory shifts, and economic pressure, retailers face significant challenges. The question is how to manage costs and build a more resilient, sustainable approach to workforce management.

Rising labour costs will reshape workforce models

The increase to NICs and the NLW is particularly impactful in a sector where roles are typically low-wage or part-time.^[2] The impact is especially heightened in sectors like retail, where many employees earn close to the NLW. The recent lowering of the NIC threshold, more so than the percentage increase, means that businesses employing many lower-paid workers face proportionately higher payroll costs than those employing fewer, higher-paid staff. For example, two employees earning £30,000 will incur double the additional NIC liability for their employer than one employee earning £60,000.

According to the BRC, over one million retail workers earn at or near the National Living Wage, making the sector particularly sensitive to mandated wage increases.^[3]

If your business relies on a high number of lower-paid roles to support operations in stores, warehouses, and logistics hubs, these roles are now set to become significantly more expensive. This puts disproportionate pressure on sectors like retail, where large workforces are structured around cost-efficiency and high turnover.

You may respond by reducing hours, slowing recruitment, or looking for efficiencies through outsourcing, automation and digital transformation. This could accelerate trends already in motion, such as self-service checkouts, AI-driven inventory management, and robotics in warehousing.

As highlighted in a recent Mercer survey amongst HR professionals, there is growing support and readiness for new employment rights such as enhanced sick pay and access to flexible working, so think about investing not just in efficiency, but also in improved employee benefits to stay competitive.^[4]

Salary sacrifice schemes allow employees the option to exchange part of their salary for non-cash benefits, reducing their taxable income (and their income tax bill, if they select tax-efficient alternatives), and potentially lowering NICs for both the employee and the employer. Beyond the financial savings, salary sacrifice arrangements often provide employees with access to benefits on more accessible terms.^[5]

As cost pressures grow, you may shift investment from people to technology. However, while this may drive efficiency, over-automation can negatively impact staff morale, dilute the customer experience and undermine your brand. In contrast, salary sacrifice enhances your employee value proposition, contributing to better engagement and improving service and customer satisfaction.

Employee wellbeing is under pressure, with rising reports of in-store hostility and the mental health toll of low-paid, high-stress roles. The Retail People Index highlights increased presenteeism and burnout, particularly among frontline staff. Supporting this, the Health on Demand report from Mercer Marsh Benefits for 2025 suggests that only 56% of UK Retail employees surveyed feel physically and mentally well. With 36% reporting that they feel stressed everyday whilst at work and a further 30% stating that they are actively looking for new employment.^[6] Proactive support, such as counselling, training, and safety measures, can help maintain morale and resilience across the workforce. You must also prepare for the proposed changes to statutory sick pay from day three to day one eligibility, improving employee health and wellbeing could improve absence costs and support this additional business cost and workforce related risk.

Profit margins under pressure

Even before labour cost increases, the sector was already contending with rising rents, energy prices, and supply chain disruption. With profit margins tighter than ever, you may find there’s little room left to absorb cost increases without passing them on to consumers.

This could result in price hikes at a time when consumer confidence remains fragile,^[7] raising questions about affordability and competitiveness. This is particularly challenging if you're already competing with discount chains or e-commerce players.

Growing risk from pay inequity claims

Retailers also face significant legal and reputational risk from unresolved equal pay disputes. Landmark cases highlight the widening scrutiny around pay inequity, particularly between men in logistics roles and women in customer-facing positions. These cases could be financially costly and reputationally damaging.

More than ever, ensuring fairness and transparency in your pay structures is crucial. Failing to address these disparities may lead to more legal action, strained employee relations, and public backlash, particularly as investor pressure mounts, as evidenced by the recent coalition of UK investors demanding major retailers commit to the real living wage.^[8]

Regulatory reform is shifting the landscape

The introduction of the Employment Rights Bill, which is expected to receive Royal Assent this year, introduces changes to individual and collective employment rights. Among the key measures are a right to guaranteed hours, expanded redundancy consultation rights, enhanced sick pay provisions and greater powers for trade unions, including the right to access the workplace and strengthened bargaining rights.^[9]

To prepare for the Employment Rights Bill, consider auditing your use of zero-hour contracts and introducing systems for logging and managing shift regularity. Your HR teams should review employment contracts and policies to ensure compliance and prepare for potential union engagement under the strengthened access rights.

While some of these reforms align with responsible employment practices, you might find the increase in union influence challenging. Collective bargaining can lead to higher wages and more complex negotiations—something you'll need to be prepared for. If you prefer to operate an ununionised workplace then think about strengthening your individual employment relations. This might involve more employee listening/engagement survey work; transparent plans that build on the feedback, a more flexible and supportive culture that recognises individual needs, supported by improved well-being options and flexible benefit, and genuinely supportive line managers.

From compliance to transformation: a strategic response

Rather than defaulting to headcount reductions or reactive cost control, now is the time to take a more strategic approach. Think beyond compliance—this is a chance to reimagine how you deploy, support, and reward your workforce.

This begins with strategic workforce planning, moving from a narrow focus on "heads and hours" to a more agile model focused on skills, capabilities, and flexibility. Consider seasonal patterns, employee expectations, and the mix of part-time and full-time roles across the year. This also includes multi-skilling staff and designing roles that can stretch across different departments, from sales floors to fulfilment centres.

Looking ahead

By adapting to these challenges proactively, embracing fairer employment practices, investing in workforce skills, and planning intelligently for seasonal needs, you’ll be able to weather the current storm and emerge stronger. Businesses that move now will gain an edge over slower, less agile competitors.

If you would like to discuss any of the topics raised in this article further, please contact us.

Sources:

¹ https://brc.org.uk/news-and-events/news/corporate-affairs/2025/ungated/one-in-ten-part-time-retail-jobs-at-risk/

²,⁵ https://www.marshcommercial.co.uk/articles/smes-challenges-national-insurance-increases.html

³ https://brc.org.uk/news-and-events/news/corporate-affairs/2025/ungated/labour-costs-will-harm-employment/

⁴ https://www.mercer.com/assets/uk/en_gb/shared-assets/local/attachments/pdf-cr-employment-bill-pulse-survey.pdf

⁶ https://www.marsh.com/en/services/employee-health-benefits/insights/health-on-demand.html

⁷ https://www.retailresearch.org/retail-forecast.html

⁸ https://www.theguardian.com/society/2025/mar/27/major-uk-investors-join-push-for-retail-giants-to-pay-workers-real-living-wage

⁹ https://www.gov.uk/government/publications/employment-rights-bill-factsheets

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Retail challenges: workforce costs, risk, and regulation