The use of zero hours contracts has become increasingly widespread over the last fifteen years, with zero hours staff making up 3.2% of the workforce in 2020 compared with just 0.4% in 2005, according to Statista.
However, this could all change as a result of the Labour Government’s proposal to ban ‘exploitative’ zero hour contracts in the not so distant future.
Here, we give you an overview of zero hours contracts. If you’re an employer or manager, this guide will walk you through some best practice tips for managing these contracts appropriately.
The Labour Government’s proposed changes to zero hour contracts
Before we take a deep dive into all things zero hour contracts, it’s important to caveat this guide by highlighting the proposed changes on the horizon.
The Labour Government have pledged to ‘ban the use of exploitative zero hour contracts’. However, at present, the Government haven’t provided any detail or definition of the term ‘exploitative’.
It’s believed that, where zero-hours employees work regularly, they will have the right to a contract that reflects the number of hours they’ve worked in the previous 12 week reference period (unless the employee does not want an employment contract) and to also be given adequate notice of shift cancellations or changes. There are also discussions of compensation associated with last minute changes, with possibly a sliding scale according to how late the notice was.
This has the potential to be hugely impactful to lots of seasonal industries, such as hospitality.
Therefore, it’s important to consider whether a zero hour contract reflects the employment relationship you will have going forward with the individual, or if another type of contract is more appropriate (as there’s a good chance you’ll need to update it in the coming months…).
What are zero hours contracts?
Zero hours contracts are a type of ‘atypical’ working, whereby employers engage individuals on an ad hoc ‘as required’ basis with no guaranteed hours. Currently there is no legal definition for zero hours contracts, however the CIPD defines them as follows:
‘an agreement between two parties that one may be asked to perform work for another but there is no minimum set contracted hours’ .
The employer is under no obligation to offer work, and subject to the terms of the contract, zero hours staff are often under no obligation to accept the work. The individual is paid only for the hours they actually work.
The term ‘zero hours contract’ does not cover those individuals that are genuinely self-employed, such as an electrician working for a number of clients on a zero hours basis (gov.uk).
When are zero hours contracts appropriate?
Workforce flexibility has become increasingly important to employers who need to respond to fluctuations in workload. Zero hours contracts offer a way of managing peaks and troughs in workload, such as seasonal work, staff absences and special events. New business ventures may appreciate the flexibility of zero hours contracts when demand for their service or product is unknown.
Zero hours contracts are particularly well suited to organisations where fluctuations in workload are unexpected and driven by external forces, making it difficult for the employer to offer guaranteed hours of work. (CIPD)
Industries that use zero hours contracts regularly include: hospitality; agriculture; health and social care; education; retail and tourism.
Zero hours contracts also offer flexibility for the individual. For example, it may allow them to study, to act as a care giver, to pursue other interests or to take semi-retirement.
When are zero hours contracts not appropriate?
Zero hours contracts suit situations where workloads fluctuate unexpectedly. Where workloads are predictable, alternative resourcing options are likely to be more suitable.
For example, the retail industry sees an increase in workload during the Christmas season. It may be more appropriate to engage employees on fixed term contracts during this period, either on a part time or full time basis.
Employers that offer a zero hours contract to an individual who works regular hours each week, could face legal challenge. The worker may be able to establish at tribunal that they are entitled to contracted hours and to be treated as an employee.
Alternative resourcing options
Employers should carefully consider their resourcing needs before deciding whether to use zero hours contracts. Factors to take into consideration are:
- The nature of the work, and the skills and experience needed to perform the work
- Whether the fluctuations in workload are predictable
- Whether the increase in workload is regular and ongoing, or irregular and short term
- Whether current employees could perform the work in addition to their normal job role
Alternative options to zero hours contracts include:
- Part time employment on either a temporary or permanent basis
- Fixed term contracts
- Annualised hours contracts which would allow for fluctuations in workload throughout the year
- Offering overtime to existing employees
- Multiskilling employees to enable them to cover different job roles
- Hiring additional employees specifically to cover planned and unplanned leave
- Using agency staff
Employment status
Individuals engaged on a zero hours contract can be classified as either an ‘employee’ or a ‘worker’. (However, stand by for more changes in this area as Labour intend to simplify worker status). In 2015, the CIPD found that 67% of employers classified zero hours staff as employees.
The distinction between employee and worker is important as it determines the legal rights and protections the individual is entitled to. As a result, employers who incorrectly classify zero hours staff as workers may face legal challenge.
However, employment status can be difficult to determine. An Employment Tribunal will consider the contractual agreement between the parties, but will also look at how the relationship works in practise.
For example, ‘mutuality of obligation’ is likely to be the key to determining whether an individual engaged on a zero hours contract is an employee or a worker. Mutuality of obligation will exist where an employer is obliged to provide work and the individual is obliged to carry out the work that is offered. Therefore, if the employer requires the individual to accept the work offered to them, it is highly likely that they would be classed as an employee. This would apply if the requirement to accept work is an express term of the employment agreement, or if it is a matter of custom and practise.
Therefore, if a worker has accepted all work offered over a significant period of time, even where they are not contractually required to do so, there is a risk that an employment tribunal would find that mutuality of obligation exists and an employment relationship has been established (Cornwall County Council v Prater). This would mean that the worker would be deemed to be an ‘employee’ and would acquire the relevant employment rights.
It’s important to note that employment relationships can change and adapt over time, so employers should regularly review the nature of the relationship with zero hours staff.
For further information on determining employment status, please refer to our guide: ‘Employment status: employed or self-employed?’.
Employment rights
Employment rights under zero hours contracts are dependent upon employment status. Zero hours staff that are classified as ‘workers’ will be entitled to the following employment rights:
- A written statement of employment particulars on or before their start date
- National minimum wage
- Paid annual leave
- Rest breaks
- Statutory sick pay, if the eligibility criteria is met. For further information, please refer to gov.uk guidance.
- Itemised pay statements
- Protection against unlawful discrimination
- Protection for whistleblowing
In contrast, zero hours staff that are classified as ‘employees’ will be entitled to the same employment rights as an employee on guaranteed hours. As well as the rights listed above, employees will also be entitled to the following employment rights:
- Family related leave, such as maternity, adoption and parental leave
- Statutory redundancy pay
- Protection against unfair dismissal
Employees will still need to demonstrate that they meet the relevant continuity of service criteria, for example two years’ continuous service for most unfair dismissal claims. Many zero hours employees will find that they do not meet this criteria due to breaks in employment. Currently, continuity of service can be broken if there is a break of at least one complete week.
How is annual leave entitlement calculated?
The statutory minimum holiday entitlement of 5.6 weeks applies to all workers and employees, including those on zero hours contracts. Annual leave entitlement will be calculated on a pro rata basis according to hours actually worked (Heimann and another v Kaiser GmbH). Therefore, if a zero hours worker does not perform any work, they will not accrue any leave.
Holiday pay for zero hours staff is calculated using the ‘week’s pay’ calculation in s.224 of the Employment Rights Act 1996, ie an average of the last 52 weeks’ pay. The Government’s guide states that:
‘the reference period… excludes any weeks where no work was performed. This may mean that the actual reference period takes into account pay data from further back than 52 weeks from the date of their leave. However it should go back no more than 104 weeks; if this gives fewer than 52 weeks to take into account, then the reference period is shortened to that lower number of weeks’ .
The Government has developed a useful online calculator for annual leave calculations you may find useful: Calculate your holiday entitlement
In addition, you can read more about calculating average pay for variable working patterns in our guide: How to calculate holiday pay: A complete guide for employers
Exclusivity Clauses
The Small Business, Enterprise and Employment Act 2015 banned employers from using exclusivity clauses in zero hours contracts. Exclusivity clauses existed to expressly prevent individuals from working for another employer. They were seen by employers as a useful tool to protect confidential information and secrets from being shared with competitors.
The change in legislation means that zero hours staff cannot be prevented from working for another employer and any attempts to do so will be unenforceable. Further regulations have since come into force giving individuals: the right not to be unfairly dismissed or subjected to a detriment for failing to comply with an exclusivity clause; and the right to claim compensation (CIPD).
These changes were intended to address the imbalance of power between the employer and the individual engaged on a zero hours contract, by enabling the individual to have more control over their working hours and income.
The Government has commenced consultation to extend the ban on exclusivity clauses beyond zero hours contracts, to contracts where the workers’ guaranteed weekly income is less than £120. ‘The intention is to allow low-income workers who are not able to secure the number of hours they would like from their current employer to seek additional work elsewhere’ (Gov.uk)
Drafting a zero hours contract
If you decide to engage zero hours staff, the contract of employment must be carefully drafted and should cover the following:
- That you are under no obligation to offer work to the employee.
- The process by which work will be offered, for example a roster published weekly in advance.
- The relevant pay, benefits and notice period. If zero hours workers are not entitled to the same benefits as employees on guaranteed hours, this should be expressly stated in the contract.
- That annual leave entitlement is accrued strictly on the basis of hours actually worked.
- The employment status. If the intention is for the individual to be engaged as a worker rather than an employee, the contract must state that the individual is under no obligation to accept work that is offered and that it is not the intention of the parties to enter into an employment relationship.
- That there is no continuing employment relationship between periods of work. One point of debate around zero hours contracts is whether workers under this type of contract can establish continuity of employment during the periods that they don’t work.
As exclusivity clauses are no longer legal, it is important to ensure that the contract of employment does not include an exclusivity clause. Depending on the nature of the business and the risks posed by competitors, it may be advisable to review the confidentiality clauses and any restrictive covenants to ensure adequate protection of business interests.
For further information, please refer to our article ‘A guide to issuing contracts of employment and the written statement of employment particulars’.
Best practice tips for managing zero hours contracts
Zero hours contracts offer a flexible resourcing solution that can meet the needs of both the employer and individual, provided they are managed appropriately. The CIPD has identified a number of best practice tips for employers, which we have summarised below:
- Make sure that a zero hours contract is the most appropriate resourcing solution for your business. Carefully consider whether there are alternative options available that could achieve the same level of flexibility. Don’t be tempted to offer a zero hours contract when you actually need someone on a part-time basis.
- Be very clear that you are offering the contract on a zero hours basis. This should be included in the job advert and discussed at interview, to ensure the individual understands the nature of the employment.
- Have a conversation with the individual to determine whether a zero hours contract will meet their needs. A zero hours arrangement is more likely to be successful if it suits both the employer and the individual.
- Offer training to your line managers to ensure they are managing their zero hours staff appropriately and in line with their employment status. The training should cover the ban on exclusivity clauses.
- If your zero hours staff are engaged as workers, then it is important to regularly review their employment status to ensure that the reality of the employment relationship matches the contract of employment.
- Provide as much notice as possible of shifts, so that your zero hours staff are able to plan ahead.
- Avoid cancelling shifts at short notice, and consider offering compensation if pre-arranged work is cancelled with little or no notice.
- Offer your zero hours staff the same pay and benefits as workers on guaranteed hours, as well as training and development opportunities.
What can we do to help?
If you would like advice on zero hours contracts, please contact our team on 0330 223 5253 or office@fitzgeraldhr.co.uk. We would be delighted to help you.
Further reading
We hope you found this guide useful. You may also find the resources below helpful.
