Zero hours contracts have been in the news recently, but are they really such a bad thing? What exactly are they? Steve Vale, HR Consultant, takes a closer look.

Introduction

The summer of 2013 has seen much debate about the use of zero hours contracts, with calls from a number of quarters for them to be made unlawful. Those calls, however, have tended to highlight the doubtful practices of a small (but perhaps growing) number of employers, and have not been clear over exactly what type of contractual arrangements should be banned, and the possible methods and implications of doing so.

This article examines some of the issues from the perspective of public sector employers and looks at the scope for changing the law in a way which will not have unintended or undesirable consequences.

Background — more use of zero hours arrangements than previously thought

For the past couple of years, concerns have been expressed in some quarters over the way some employers were allegedly using zero hours contracts, or similar arrangements, as a device for paying employees only when they are engaged in actual work, and thus not paying them for other periods when, although not actually undertaking work, they are still at the employer’s disposal, able to be called on to work at any time, and thus seemingly unable to undertake other paid work or non-work activities.

The issues were thrown into sharper relief when, in July of this year, the Chartered Institute of Personnel and Development (CIPD) published new research suggesting that there could be as many as one million zero hours workers in the UK, although this finding was qualified by the fact that just 14% of such workers reported that their employer often fails to provide them with sufficient hours each week.

Data from the CIPD’s summer 2013 Labour Market Outlook — based on a nationally representative survey of over 1000 employers — established the following facts.

  • Around a fifth (19%) of employers said they employed at least one person on a zero hours contract.

  • Employers in the voluntary sector (34%) and the public sector (24%) were more likely to make use of zero hours contracts for some of their employees than private sector employers (17%).

  • The industries where employers said they were most likely to report they employed at least one person on a zero hours contract were hotels, catering and leisure (48%), education (35%) and healthcare (27%).

  • A quarter (25%) of organisations with 250 or more employees used zero hours contracts compared to 11% of smaller organisations with fewer than 250 employees.

  • Among the fifth of employers who made use of zero hours contracts, the majority (54%) employed less than 10% of their workforce on these terms and the mean proportion of workers on zero hours contracts in these organisations was 16%.

Based on this data, the CIPD’s best estimate was that 3–4% of all the workers covered in this survey were on zero hours contracts, which would equate to about one million workers across the UK labour force. (The CIPD did not, however, appear to seek to define exactly what should be regarded as a zero hours contract, and has itself called for greater clarity on the definition — see below.)

Other data from the CIPD’s quarterly Employee Outlook survey series, which was based on a sample of 148 zero hours contract workers, provided additional insight into the circumstances of employees who regarded themselves as either having no guaranteed hours of employment or being a zero hours worker.

  • The average hours worked by zero hours contract workers is 19.5 per week.

  • In all, 38% of zero hours contract workers describe themselves as employed full time, working typically 30 hours or more a week.

  • Of the 62% who are working part time, about a third (38%) would like to work more hours.

  • Across all zero hours contract workers (both part-time and full-time), 14% report that their employer often or very often fails to provide them with sufficient hours to have a basic standard of living. However, 18% say this does not happen very often and 52% say this does not happen at all.

  • By age group, those who are primarily employed on zero hours contracts are twice as likely to be young (18 to 24) or old (55 plus) than other age groups.

The CIPD concluded that its research suggested that zero hours arrangements are being used more commonly than official figures would suggest.

The CIPD’s report therefore seemed to some commentators to imply government indifference or complacency about the growth in zero hours working, as it also pointed out that figures from the Office for National Statistics suggest that only approximately 250,000 people — less than 1% of those in employment — consider themselves to be on a zero hours contract, which its own research had shown to be a substantial underestimate.

At the same time, the CIPD emphasised that it did not support an assumption that all zero hours contracts are “bad”, and stated that its research did not lend credence to the suggestions from some quarters that they should be banned.

It commented that zero hours contracts, used appropriately, can provide flexibility for employers and employees, and can play a positive role in creating more flexible working opportunities, which are mutually beneficial. However, it noted that, for some workers, there may be a significant disadvantage where they need more certainty in their working hours and earnings. It said that there is a need to ensure that proper support for employees and their rights are not being compromised through such arrangements.

On this basis, the CIPD said that there needed to be a closer look at what is meant by a zero hours contract, the different forms that they take, and clearer guidance on what good and bad practice in their use looks like.

The reaction — claims of increasing unfairness

Those concerned about the downside of zero hours working were quick to use the figures released by the CIPD, which they took as proof that zero hours contracts were becoming more widespread. A number of campaigning groups linked this apparent growth in the use of such contracts directly to the anecdotal evidence of increased use by some employers of what they see as a particularly pernicious form of zero hours contract, whereby employees are expected to be available for work at particular times, obliged to work when called upon, paid only when called upon, and unable to undertake other work or pursue other activities during the period when they are required to be available for work.

Such arrangements appear unfair in that they load all the problems and consequences of managing unpredictable operations and fluctuations in the demand for work on to the employee, and make it impossible for employees to anticipate the amounts they would work and earn.

There were a number of media reports illustrating the plight of (mainly young) employees who were unable to do anything other than await a call into work from their employer, but in the end worked fewer hours than they wished and therefore earned less than they needed, making it impossible to plan their finances. Attention was also drawn to alleged increases in questionable practices around zero hours working in the care sector, with some employees being paid only for direct contact time with clients, and not being paid for time spent travelling between different work locations, as well as not being reimbursed for their travel costs.

It was claimed that many employees on such contracts were reluctant to speak out against their working arrangements, for fear that, by way of reprisal, they would be offered even fewer periods of paid work.

There have also been claims that zero hours workers (with no clear definition) earn, on average, £6 an hour less than other workers (although it is not clear whether this is for equivalent work).

Public revulsion at such apparently unfair and exploitative arrangements was understandable, and led to Business Secretary Vince Cable ordering a review of zero hours contracts. Mr Cable said he believed some workers were being exploited under the terms of the contracts, and that, although such contracts can work for both employers and employees, the Government was taking legal advice on the "exclusivity" clauses imposed by some, where a worker is not guaranteed hours, but is forbidden to work elsewhere. He said: "I'm holding open the possibility that next month we could move forward with recommendations to consult on legislation, but we haven't got to that point yet."

Some campaigners took issue with Mr Cable’s view that it was possible to narrow the zero hours issue down to the relatively narrow practice of people being exclusively employed by one company, taking the view that it was not realistic for all zero hours employees to find or take another job alongside their existing one, and that there were wider issues of unfair treatment that needed to be examined. Campaigners claimed that there are many more problems, such as no holiday pay, no sick pay, and employers using contracts to threaten workers by cutting shifts.

The current position appears to be that more heat than light has been generated. It is clear that there is confusion over the definition of zero hours arrangements and a lack of precision in the measurement of the way such arrangements affect employees.

Zero hours contracts in the public sector

Given the background, and given that public sector employers generally espouse good employment practices, it may appear surprising that, according to the CIPD's research, firms in the public sector were more likely to use zero hours contracts than those in the private sector.

However, if we focus in on common practices in one part of the public sector (local authorities), this finding becomes less surprising. Local authorities have made use of zero hours arrangements (or arrangements that include elements of zero hours and could be caught by some of the definitions used) for many years. It is possible to identify at least three different working patterns which are commonly used, but which have not hitherto led to public (or trade union) outcry, or been seen as particularly unfair or exploitative.

Casual workers

The use of casual workers has been widespread in areas such as leisure and catering, where workers are engaged for a specific period of work as a free-standing arrangement on an “as and when basis”, with no ongoing expectation that further work will be offered and no future obligation on the worker to accept it if it is. The employer normally keeps a list of potential casual workers to whom work will be offered when available, and there is no obligation on the person on the list to accept any work offered. Generally, this type of arrangement has benefitted both the employer in dealing with peaks and troughs in their activities, and for individuals who cannot commit to working fixed or regular hours, but can be available for work on an ad hoc basis.

It is probably inevitable, given human nature, that, where a “casual” on such a list continually turns down work when offered, offers of work tend to dry up, but there is usually no restriction on undertaking work for other employers, and it is possible for “casuals” to be on a number of different employers’ lists or have a permanent job elsewhere (in some cases the person may have a permanent job and also be on a casual list with the same employer).

Where problems have arisen, they have tended to be when casuals are offered too much work, rather than too little — there have been instances of so-called casual workers being placed on work rotas (thereby creating mutual obligations to be offered and accept work), or being offered and accepting work more or less every week, to the point where they should be treated as regular on-going employees, and should be acknowledged as having accumulated the relevant employment and contractual rights (something which does not always happen).

By and large however, the systems used for casual employment in local authorities appear to work well, provide flexibility for both employee and employer, and could really not be characterised as exploitative or as obvious unfair treatment.

Zero hours, but with guaranteed minimum hours

This type of contract has obvious benefits in situations where there are strong seasonal fluctuations, such as grounds maintenance, or other fluctuations in the work demand, so that the number of hours the employee may be required to work in any one period cannot be predicted. In most circumstances, the guarantee of a minimum number of paid hours (which may, for example, take the form of guaranteed weekly or monthly hours or annualised hours) means that the pattern of payments can be flattened out during the year, so that the employee receives a regular income at a predictable level, and the employee is treated as a permanent ongoing employee for contractual and employment rights purposes. It may be possible for the employee to undertake work for other employers, especially, for example, during the “low season”, if they wish.

Provided that the minimum number of hours and the degree of seasonal (or other) variations in the pattern and length of working time can be agreed between employer and employee, this type of contract seems sensible and potentially mutually beneficial. Again, while it would be caught by the definition zero hours, it is nothing like the types of zero hours contracts that have led to recent concerns.

Standby and call-out working

This type of arrangement, whereby an employee is at the employer’s disposal and obliged to attend work if called (but with no guarantee of being called), is in some ways similar to a zero hours contract. There is, of course, the crucial difference that most employees will be engaged for this type of working in addition to a core contract with the same employer, but the arrangement can still closely resemble the “paid only when called to work” element within some zero hours contracts.

In addition, agreement to work standby and call-out will often be voluntary, and not something the employee is obliged to do. Methods of payment vary, but it is not uncommon for the employee not to be paid for the standby element, and to be paid only if they are called upon to work. Some employers offer a separate payment to the employee for being “on standby”, which tends to be lower than the normal rate of pay, and may be related to the degree of inconvenience and restriction in being unable to do other things.

The rate of pay that is offered if the employee is called on/out can also vary, with some employers:

  • offering a combined standby and call-out allowance, so that no additional payment is triggered by call-out

  • paying the employees normal rate if they are called out, sometimes with a premium (eg time and a half)

  • offering a special rate for call-out hours, different to the employee’s normal pay, including, for example, a different rate of pay dependent on whether the issue can be dealt with remotely or whether on-site attendance is required

  • paying a minimum call-out payment of (say) two hours, even if the call-out period is substantially less than this.

Employers may use a combination of these.

These types of arrangement are often crucial in enabling out-of-hours services to be provided at reasonable cost. They benefit employers, but also employees who may be looking to supplement their core earnings. The level of pay may be unpredictable, but this has not led to claims that standby and call-out arrangements are exploitative of the employees concerned, and are often a well-recognised, and accepted, feature of working in a particular service area or occupation.

In addition to these arrangements, local authorities (like most organisations) will engage other people, such as agency staff as workers, rather than employees in order to minimise costs and pay only for hours that are required to be worked. While there can be a lack of clarity over this issue (and there have been a number a cases which have shown that a “worker” was, in reality an employee), it is for the most part clear that agency staff do not meet the criteria for being regarded as employees, and do not have an employment relationship with the authority concerned.

Given the extent to which the previously mentioned patterns of work and employment (all of which could potentially be caught by the definition zero hours) are used in the local authority sector, it is not then surprising after all that the public sector comes out as a high user of zero hours arrangements. The key point is that none of these arrangements involves the unfair and exploitative features highlighted in the recent furore. While there may be some issues at the margin over the fairness of working arrangements and payments, they all appear to constitute a reasonable, mutually acceptable and cost-effective way of coping with problems of fluctuating demand for the employee’s services, which do not need to be the subject of further statutory intervention.

So far as employee entitlements to leave, sick pay and contractual rights are concerned, most employers appear to apply (or should be applying) existing statute (such as part-time and fixed-term worker regulations) to ensure that appropriate entitlements are given where the pattern of work and nature of the relationship generates them. (Although one area of abiding concern is the treatment of so-called “casual” workers whose patterns of employment are effectively no different to regular employees.)

If there is a concern in the local government sector, it will probably relate to commissioned or contracted services, where there is anecdotal evidence that employers in the voluntary or private sectors may be indulging in some unfair practices around zero hours — see the allegations about practices in the care sector referred to earlier. This may, of course, be a product of the unrelenting pressure on council budgets, which in turn leads to a drive to minimise the cost of commissioned or contracted services, with a “blind eye” turned to poor or questionable employment practices.

The difficulty of defining and regulating zero hours arrangements

If the Government was to decide to regulate to prevent “bad” or unfair zero hours working arrangements, the range of different working arrangements across the local government sector, which could potentially be caught by a definition of zero hours working, illustrates how difficult this could be.

The first difficulty would be for the Government to come up with a firm definition of the type of work patterns/arrangements it wishes to regulate, which would cover the “bad” or exploitative practices, but without also affecting or outlawing others that are not a source of these problems. By the same token, there would be a high risk that any regulation could have unintended consequences and disrupt working relationships, which are operating satisfactorily, to the benefit of all concerned.

Simply outlawing zero hours contracts would be a “baby out with the bathwater” approach, which would disrupt all types of working arrangements where, for good reason, there is a need for flexibility in work patterns. It could only appear as a draconian and retrograde step following years of government action to encourage different types of mutually beneficial, flexible working arrangements. It would also punish the majority of responsible employers as a result of the actions of an unscrupulous few. In addition, it would produce a major rise in employment costs in the public sector and elsewhere.

Another option might be to require all zero hours contracts to provide for a minimum number of paid hours (which, as has been noted, is already common practice in many instances), but there would be a problem of deciding what the minimum number of hours should be. If the rule was simply that there had to be a guarantee of some paid hours, unscrupulous employers could just offer an hour a week, and then continue to operate in the same way as they do at present.

Either of these provisions could have implications for the legitimate use of casual workers, which would reduce beneficial flexibility on both sides of the labour market, as well as having, albeit more limited, cost implications.

An alternative route might be to require the employee to be remunerated (at at least the national minimum wage (NMW)) for all the hours they were required to be (solely) at their employer’s disposal, regardless of whether they are engaged at work or not. However, such a requirement could have unintended consequences for many current standby and call-out arrangements, and result in all hours the employee is on standby having to be remunerated at (at least) the NMW. This would substantially increase the costs of operating out-of-hours services, especially in the public sector.

It might be possible to make an exception if the standby time is work in addition to the employee’s “normal” contracted hours, but this again would be open to abuse if the employee’s “normal” hours were defined by the employer as (say) just one hour, with the rest of the time treated as standby and call-out.

Against this background, perhaps the Government’s minimal approach of simply seeking to remove the “exclusivity” clauses, which are part of some “zero hours” contracts, makes sense, in that it will at least avoid disrupting all sorts of beneficial working patterns. Although, even here, there could be the following problems.

  • Would the ban on exclusivity mean that the employee could take other work at all times they were in theory “working for” (but not required by) the employer operating the zero hours arrangement, or simply at times when the latter employer did not require them to be available for work?

  • If the former, how could this work in practice? (Unless the intention was to make the way some employers currently operate completely untenable, so that it would be much more difficult to have workers available on a “when required” basis).

  • It would be important not to undermine other legitimate reasons an employer might have for requiring exclusivity (eg commercial confidentiality).

In any case, the current problems are themselves an illustration of how it is nearly always possible for an employer to circumvent or find loopholes in employment legislation if they are really determined to do so — seeking to outlaw poor practice in one area will often lead only to its occurrence in another.

The way forward

An examination of the issues concerning zero hours arrangements suggests that additional regulation (other than maybe the odd gesture) is unlikely to be the way forward. Even if the problem of “bad” arrangements is as great as some campaigners allege, it is more than outweighed by the scale of “good” zero hours arrangements, which provide flexibility for both employer and employee, while minimising labour costs. Additional regulation would also be contrary to the Government’s programme of de-regulation and changes in employment legislation, which have been implemented in support of the objective of creating greater flexibility in the labour market.

This article illustrates that there is a considerable danger that regulating to limit the “bad” would prove hugely disruptive to the “good”, to no one’s ultimate benefit.

A more fruitful approach could be one that stops short of legislation, but seeks to do the following.

  • Offer better guidance to employees and employers on what constitutes an ongoing employment relationship, so that it is clearer that (in most cases) a zero hours contract, which puts the employee at the employer’s disposal even when they are not undertaking paid work, will be evidence of such a relationship, and will trigger the associated rights and responsibilities of the parties to it.

  • Ensure that employees on zero hours arrangements are aware of their rights and entitlements, particularly those that derive from an ongoing employment contract (eg sick pay and unfair dismissal rights) or from equality legislation (part-time and fixed-term worker regulations).

  • Issue guidance to employers and employees on good and fair practice within zero hours arrangements. Whether such guidance could be on a statutory footing (thereby facilitating constructive dismissal or other claims against employers who act exploitatively) is questionable, but at the very least, it would enable the naming and shaming of employers who do not abide by it (which is itself an increasingly valuable weapon in an age of mass communication).

Finally, as far as the public sector is concerned, a more explicit power to take account of and monitor the employment practices of those who undertake work on a commissioned or contracted basis, with an ability to take action in the event of practices that were unreasonable or unacceptable, would be helpful, and might help address some of the elements of “bad” practice, which are allegedly becoming more prevalent in the care sector.

Reference

CIPD press release on findings of research into use of zero hours contracts, available here.

Author

Steve Vale is a Consultant in Human Resources and is a regular contributor to Croner-i HR for Local Government. Croner-i HR for Local Government is an online employment law and practice reference source designed specifically for HR managers and their teams in local government.

Last reviewed 16 September 2013