Red tape puts small companies off recruiting more employees, new research has claimed.
A report commissioned by the Federation of Small Businesses (FSB) suggests that while the sector is growing the number of workers it employs has fallen.
The study claims that increased regulation could be the cause of this, with just one in five of firms saying they are confident about employment law.
In addition, it suggested smaller business bear a disproportionate amount of the costs associated with the introduction of new legislation.
However, it also finds many consider small companies to be good employers and they take on more long-term unemployed people than larger enterprises.
John Walker, national policy chairman of the FSB, added: "We are seeing fewer very small companies actually doing what they do well and employing people, which is a real loss to the economy."
Last month, the organisation called for greater recognition of small businesses’ role as skills developers and said the government’s Train to Gain is not tailored to suit their needs.