Fines for businesses failing to protect new workers’ rights will hammer confidence and “stifle” economic growth, critics have warned.

Labour’s planned overhaul of workers’ rights could lead to firms being hit with more red tape and penalties.

Ministers are said to be considering a ‘warning system’ that would allow companies to first make improvements.

But the Labour Government is being warned their planned “tidal wave of regulations” and fears over tax rises will damage the economy.

Shadow Business Secretary Kevin Hollinrake said on Monday morning: “We absolutely deserved to lose at the general election, but business and the country does not deserve this.

“Together with the rest of the tidal wave of regulations coming down the track, I can’t think of a better way to damage business confidence and stifle growth, business and job opportunities.”

A new body – the Fair Work Agency – will oversee the sanctions regime which will bring together existing watchdogs into a single enforcement body for workers’ rights.

It will have the power to bring prosecutions or issue fines.

Craig Beaumont, from the Federation of Small Businesses, said: “We must prevent any changes that add risk to employment, as that’s a perfect storm that hits economic growth, wealth creation, jobs and worker participation all at once.

“A public agency should not be fining UK small businesses thousands of pounds simply because they don’t provide formal corporate tick-box bureaucratic policies and paperwork. That overreach would [have] a devastating inadvertent consequence.”

And fears over tax rises will see money “fly from the country”, according to a former president of the Confederation of British Industry.

Cobra beer founder Lord Bilimoria called on the Government to concentrate on growth, calling any rise in capital gains tax “a short-sighted move”.

“Investors are not going to come here if you keep putting up taxes,” he told the Daily Mail.

“It will not bring in more money; in fact, money will fly from this country.”

His comments were echoed by lastminute.com co-founder Brent Hoberman, who told the newspaper it “does not make sense to scare off business investment”.

Their comments follow a drop in the Institute of Directors (IoD) Economic Confidence Index from a three-year high of plus seven after the general election in July to minus 12 in August.

The IoD’s chief economist Anna Leach said: “The newsflow in recent weeks on employment rights and autumn tax rises has dented confidence in the environment for business.

“Further clarity on the industrial strategy and the business tax road map, in conjunction with more progress in engaging with business on workers’ rights, would be welcome.”

Commons leader Lucy Powell said on Sunday that Labour had been forced to make “tough choices” on the economy after being left with “a huge legacy of overspend”.