The Tory-led coalition suffered a major blow on Wednesday after two employers' organisations rejected its controversial no-fault dismissal plans.
The EEF manufacturing organisation warned that plans to make it easier to sack workers, outlined in the Beecroft report on labour reform, would be "counterproductive."
And the Federation of Small Businesses said that the current unfair dismissal laws were adequate and that no-fault dismissal "should not be necessary."
The government-commissioned report by venture capitalist Adrian Beecroft claimed that the introduction of no-fault dismissal would increase recruitment.
The proposals have been vociferously condemned by unions which accused him of seeking to allow employers to sack staff at will.
A spokesman for the TUC, which staged a Victorian-themed protest last week to highlight the regressive nature of the plans, said: "The Beecroft proposals will turn the clock back on employment rights, causing industrial scale anxiety at work while failing to create a single job.
"The fact that sensible employer organisations, some ministers and even Conservative MPs are rejecting Beecroft shows just how wildly unpopular his proposals are.
"The government should ditch the report and focus instead on job creation and a plan for proper economic growth."
And now in a formal submission to the government the EEF has also questioned the plans.
In its submission it stated: "The government is right to focus on making our labour market more flexible, but the case for no-fault dismissal is far from proven.
"We've found little support from industry for introducing no-fault dismissal, its benefits look pretty limited and we've seen no evidence it would increase recruitment."
It added that the government needed "to take a long hard look at whether the claims for its benefits are real and at the risk of damaging employment relations."
Instead it has set out a five-point plan of its own "less controversial" proposals including reducing the 90-day consultation period on collective redundancy to 30 days, streamlining employment tribunals and simplifying TUPE rules.
The deadline on submissions to the Department of Business, Innovations and Skills on the Beecroft proposals concludes on Friday.
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