The risk and rewards of zero-hours contracts

Zero-hours contracts are not a new concept, but the increasing numbers and perceived exploitation have brought their use more sharply into focus in recent years. There are over 800,000 people employed in the UK on zero-hours contracts in their main employment. Those working under such contracts are most likely to be young (aged 16–24), part time, women, or in full-time education, working on average 26 hours a week. Paul Tew, Small Business Consultant and Freelance Advisor, looks at how this type of arrangement can be used to provide employers with a flexible workforce, in order to meet a temporary or changeable need for staff.

Definition of zero-hours contract

A zero-hours contract means a contract of employment or other worker’s contract under which:

  • the undertaking to do or perform work or services is conditional on the employer making work or services available to the worker (ie employer requests or requires the worker to do the work or perform the services)

  • there is no certainty that any such work or services will be made available to the worker (ie employer does not guarantee the individual any minimum hours of work).

The individual can either accept the work offered, or decide not to take up the offer of work on that occasion. It is not best practice for an employer to try and force the worker to work, as this may imply a more permanent form of work status and potentially mean that the terms and conditions no longer suit the requirements of both parties.

The individual should understand that the contract provides flexibility and the number of hours may reduce or cease at the request of the employer. Where the individual persistently refuses work when offered, this may result in future work being offered to others first and it may ultimately influence the employer to terminate the working arrangement.

The use of a zero-hours contract might be appropriate in respect of new businesses (such as opening a new store), helping out with seasonal work or dealing with peaks in demand, covering unexpected sickness or other absence, special events and testing a service. This type of contact arrangement should not be used as a permanent arrangement, if it is not justifiable, ie the individual will work regular hours over a continuous period of time.

The advantages of a zero-hours contract to an employer are broadly threefold:

  • access to a readily available pool of workers, when demand arises

  • a cheaper alternative to paying agency placement fees

  • no ongoing requirement to pay workers, when the business needs are such that there are often times when there is a surplus of labour.

Depending on the needs of the business, alternatives might include:

  • offering overtime to permanent employees to ensure experienced employees can deal with temporary fluctuations in demand

  • recruiting individuals on a part-time or fixed-term contract, if regular hours need to be worked

  • offering annualised hours contracts, if peaks in demand are known throughout a year.

The contractual terms

When recruiting for a zero-hours contract, the job should be clearly advertised as such. A zero-hours contract can be regarded as continuous (same shifts each week worked, as per a staff rota) or broken on each occasion, ie there is no umbrella contract but each contract starts and ends at the end of each day’s work.

The contract should state how the contract can be terminated, for example, at the end of each work task or with notice given by either party. Where a zero-hours contract means that the contract only exists when the work is provided, a full calendar week without work from Sunday to Saturday is required to bring about a break in employment.

For the avoidance of doubt, employers should be clear about how the work is offered. Employers should consider putting into place a policy explaining the circumstances when and how planned work might be cancelled. Best practice is to avoid cancelling work at short notice, unless this is completely unavoidable.

Everyone employed on a zero-hours contract is entitled to statutory employment rights, without any exception. Individuals on a zero-hours contract will either have the employment status of a “worker” or an “employee”.

A “worker” is entitled to be paid the appropriate rate of the National Minimum or Living Wage (this includes travelling time, where a requirement of the job, and also when “on call” and remaining on the employer’s premises), paid annual leave, rest breaks and protection from discrimination.

Calculating holiday and sick pay

Paid leave is an accrued “day one” right for all workers. One method of calculating paid leave for zero-hours contract workers is to base entitlement on 12.07% of the hours worked (using the statutory minimum leave period of 5.6 weeks). The 12.07% figure is 5.6 weeks’ holiday, divided by 46.4 weeks (being 52 weeks – 5.6 weeks). The 5.6 weeks are excluded from the calculation as the worker would not be at work during those 5.6 weeks in order to accrue annual leave. This formula has no basis in law. Where no hours are worked, no paid leave accrues for the worker. Payment for statutory annual leave must be made at the time when leave is taken.

Zero-hours contract workers may be liable to receive Statutory Sick Pay (SSP) from the employer responsible for deducting PAYE tax and Class 1 National Insurance Contributions (NICs), if satisfying all relevant qualifying conditions. To qualify for SSP, the employee’s average weekly earnings must reach or exceed the NICs lower earnings limit in the “relevant” period, which may prove difficult for those regularly working only a few hours a week.

SSP is only payable for “qualifying days”. These are generally the days that the employee is required to perform work under the contract of service. With zero-hours contracts this may prove problematic, therefore an employer can agree that other days are qualifying days, provided there is at least one qualifying day in every week (default day is Wednesday). The qualifying days must not be defined by reference to the days when the individual is sick.

Use of exclusivity clauses

An employer cannot stop an individual from looking for work or accepting work from another employer. An employer must allow the individual to take work elsewhere, if unable to offer sufficient hours to meet the needs of the individual. Around one in three people (37%) on a zero-hours contract want more hours, with the majority seeking additional work in their current job.

If an employer inserts an exclusivity clause into a zero-hours contract, the individual cannot be bound by it. Such a clause is unenforceable in law. An employer must not attempt to avoid the exclusivity ban by, for example, stipulating that the individual must seek their permission to look for or accept work elsewhere. Individuals bringing proceedings in an employment tribunal, where an exclusivity clause is found, may be awarded financial compensation.

A zero-hours contract worker has the right not to be unfairly dismissed or subject to a detriment, because of breaching a provision which prohibits the individual from doing work under another contract or arrangement. There is no minimum period of service required before it becomes automatically unfair to dismiss a worker under these circumstances.