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Labour’s flagship workers’ rights bill risks crippling the jobs market, the party’s “favourite” think tank has warned in a fresh challenge to Sir Keir Starmer.

The Resolution Foundation has told The Telegraph it would come out against plans championed by Angela Rayner, the former deputy prime minister, that will give workers a day one right against unfair dismissal.

It said the policy risked blighting the job prospects of millions of people while offering “little obvious gain to workers”.

It also warned that the new rule would “inhibit hiring”, risked plunging tribunal courts into crisis and would “only benefit employment lawyers”.

The foundation warned that the jobs market was already slowing down, with the number of employees on payrolls falling by 127,000 over the past year in the wake of increases to National Insurance.

It added that businesses were already going bust while being dragged through the courts for unfair dismissal claims. Almost 30,000 businesses have collapsed since Labour came to power, official figures show.

Rise in policy backlash

The rebuke by an organisation with close links to Downing Street marks a significant escalation in the backlash against the policy.

The Resolution Foundation wields significant influence over Labour thinking, with multiple former staff now working in Downing Street.

Torsten Bell, the pensions minister, who formerly served as the think tank’s chief executive, was last month handed a central role in writing the Budget.

Labour sources told The Telegraph on Saturday that the Treasury and No 10 were “desperately trying to back-pedal” on the bill in the face of the warnings.

They said that there were active discussions about how to water down the right to unfair dismissal in a way that would make it “almost meaningless”.

It raises the prospect of another Labour U-turn, following climbdowns on welfare reform, winter fuel and a national inquiry on grooming gangs.

The foundation will this week join calls from business groups, which have already written to members of the Lords ahead of a debate on the bill this Tuesday, urging them to water down the plans.

It comes as Rachel Reeves, the Chancellor, is reportedly poised to increase the minimum wage by four per cent in her Budget, on top of the National Insurance tax raid that took effect in April.

Andrew Griffith, the shadow business secretary, said Labour was “bringing in the most wide-reaching restrictions on employers for generations”.

Writing in The Telegraph, he called on the Government to listen to the “chorus of concern from the people who actually drive economic growth – before it’s too late”.

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Sir Mel Stride, the shadow chancellor, said: “When even the Resolution Foundation – Labour’s favourite think tank – warns that their flagship Employment Rights Bill will destroy opportunities for young people, you know this is a serious mistake. Labour’s anti-business instincts are putting jobs at risk. You don’t help workers by making it harder to hire them.”

Richard Tice, the deputy leader of Reform UK, added: “SMEs tell me they are reducing new employees and are very worried about the impact of this bill. It must be stopped.”

The Telegraph understands that ministers are unlikely to ditch the commitment to introduce unfair dismissal from day one as doing so would spark a backbench revolt.

Labour’s union backers – which will be handed sweeping new powers under the bill – have warned the Government not to water down the plans.

Justin Madders, the former employment rights minister who spearheaded the bill before being sacked in last month’s reshuffle, said it was “a clear manifesto commitment that people have elected us to deliver”.

“We should deliver on it and the arguments we’re hearing now are exactly the same arguments we used to hear when the minimum wage was being introduced and they proved to be utterly false,” he said.

But ministers are said to want to make it “as light a touch as possible” by weakening the protections on offer during a statutory probation period for new workers.

This would allow firms to still sack new staff for a variety of reasons, including competence and conduct, without facing an employment tribunal.

Labour MPs have previously expressed fears that almost all of the details on how the new protections would work have been left out of the bill.

The measures will be determined by consultations and brought in through secondary legislation, leaving significant scope for firms to influence them.

Under current plans, the Employment Rights Bill will empower staff to take employers to a tribunal for unfair dismissal from day one, instead of after two years of continuous service.

While ministers have insisted that workers will still be subject to a nine-month probationary period, business leaders across the country have warned that the legislation would inflict “significant damage” on the economy.

Think tank’s note on the bill

The foundation’s note on the proposal, seen by The Telegraph, says: “The Government’s plan ... of getting rid of qualifying periods entirely by making this a ‘day one’ right – has the potential to inhibit hiring, and so looks like getting the protection-flexibility balance wrong. And this concern is heightened in the current labour market context of falling jobs and slowing hiring.”

While the foundation backs major parts of the legislation, including proposals to enhance sick pay and eliminate most zero-hours contracts, it warned that changes to unfair dismissal rules risked damaging the economy.

“Making dismissals as hard as is proposed might also be for little obvious gain to workers,” the note says. “Workers today are about half as likely to lose their job as they were 30 years ago.”

It will warn there is “particular concern” about how the policy will impact young people, with almost a million 16- to 24-year-olds now not earning or learning, the highest level in a decade.

“Young people’s employment prospects are more sensitive to hiring conditions than older workers because they are more likely to be looking for work. That’s why policymakers often seek to try to shift things in their favour,” the foundation added.

Ms Reeves is looking for ways to boost growth and is struggling to balance the books following a series of humiliating about-turns on welfare. The Office for Budget Responsibility, the Government’s tax and spending watchdog, has already warned that the bill will have a negative impact on jobs, prices, and productivity.

The bill will this week face further scrutiny in the House of Lords, where final amendments can be made.

Tribunal claims backlog

Official statistics show the backlog of employment tribunal claims is already rising.

The foundation says: “The employment tribunal system isn’t in a fit state to deal with more claims. The claims backlog has been growing, and some claims are taking as long as two years to be resolved, long enough that some companies go out of business before workers receive awards.

Ruth Curtice, chief executive of the foundation, urged Labour to rethink its “messy” overhaul and follow the lead of countries such as Germany and New Zealand, which have single probationary periods of three or six months.

“Moving to day one rights for unfair dismissal is high risk and should be amended in the bill before it’s too late,” she said.

“Introducing a new legal probation period alongside this is a messy compromise that risks making it harder for firms to hire, confusing workers, and serving to only benefit employment lawyers.”

A government spokesman said: “Our reforms to the labour market and employment rights are crucial for our plans to drive economic growth.

“Making basic protection against unfair dismissal a day one right gives financial security to people who don’t have it, and we are ensuring new laws work for businesses while continuing to make the tribunal system more resilient.”