Zero hours contracts have been in the news recently, with reports suggesting that anything between 250,000 and one million employees are employed on them.  Employers such as McDonald’s, JD Wetherspoon and Buckingham Palace reportedly use them.  We look at how they work, the advantages and disadvantages and the pressure for reform.

Overview of zero hours contracts

There is no legal definition of a zero hours contract.  It is a contract for casual work, under which the employer does not guarantee to provide the worker with any work and pays the worker only for work actually done.  The worker is usually expected to be available for work if called on by the employer.

Under these contracts, workers are not guaranteed any particular hours of work and are usually contacted at the start of each week and told how many hours they will be expected to work that week.  Employees usually agree to be available for work when they are required, although this is not always the case.

These contracts have traditionally been popular in sectors where demand fluctuates, such as the leisure sector, meaning that it is difficult to plan staffing levels.  However, in recent years they have been used more widely, including in sectors such as social care and education and even in Government departments and local councils.

Why are they so popular with employers?

There are clear advantages for employers, as they are not committed to paying employees during times when they do not have work available for them, and employees do not receive paid holidays or sick leave.  Effectively these contracts move the financial risk of underemployment from the employer to the employee.

Individuals working under zero hours contracts are likely to be categorised as workers rather than employees if they provide services personally under a contract, which means they have fewer statutory employment rights and cannot claim unfair dismissal or redundancy payments.  This reduces both the employment costs and risks for employers.

Impact on employees

Some workers find them beneficial – such as students and the semi-retired – as they have more flexibility and can fit work around other activities such as studying or travel.  Others find it difficult to manage their finances if they do not know how much they will be earning and it can be difficult for them to take out a mortgage or loan.  In addition, it is hard to claim benefits or tax credits if you do not know what your hours of work or earnings will be and those with children may struggle to arrange childcare at short notice.  Some contracts are “exclusive”, meaning that employees cannot work for any other employer so are unable to top up their earnings.

Individuals on these contracts do not receive paid holidays, sick leave or a statutory minimum period of notice, cannot claim unfair dismissal or a redundancy payment and have no right to paid family leave (such as maternity, paternity, adoption or parental leave).  As workers, they will be entitled to receive the national minimum wage and should accrue holiday (although it may be paid as rolled-up holiday pay as part of wages instead); they also have protection from discrimination

It is thought that some employers “blacklist” workers who refuse work when it is offered to them or who are unable to work due to sickness and this has led to allegations of abuse.

How effective are they?

The recent growth in the use of zero hours contracts suggests that employers find them effective.  A CIPD survey earlier this month found that one fifth of employers employed at least one person on a zero hours contract; 34% of voluntary sector employers use them, 24% of public sector employers and 17% of private sector employers.  Although one in seven workers reported that their employer often fails to provide them with sufficient hours to have a basic standard of living, the average number of hours worked under a zero hours contract was surprisingly high, at 19.5 per week.

Looking at the wider picture, it is possible that the growth in these contracts has contributed to the decrease in unemployment and that a number of the new jobs created have been on these contracts; if they were unlawful, it could be argued that jobs growth would slow.

Alternative flexible contracts

There are a number of alternative arrangements that an employer could consider, if it wanted to achieve flexibility without using zero hours contracts.  They include:

  • Part-time contracts, which could include minimal hours (such as just a few hours per week)
  • A bank of individuals it could call on at short notice
  • Short fixed-term contracts
  • Agency workers

All of these arrangements have their own benefits and downsides; for example, using agency workers means that the employer would have to comply with the Agency Workers Regulations, which could be costly.  The appropriate solution will depend on the circumstances and for how long the worker is likely to be needed.

Is the Government likely to legislate?

The unions are pressing for a total ban on zero hours contracts and the Labour Party is holding a summit on zero-hours work this month.  Andy Burnham, the shadow health secretary, has called for a ban on these contracts.

The Department for Business, Innovation and Skills is currently carrying out a review of the breadth and impact of zero hours contracts, with Vince Cable stating that he is concerned there might be “some exploitation” of staff on the contracts.  BIS will decide next month whether to hold a formal consultation on proposals for legislation, although an outright ban has been ruled out.  At this stage, we can only speculate as to the form any legislation might take but it has been suggested that employers would only be able to use these contracts if they were not exclusive, meaning that workers would also be allowed to work for other employers.

The Zero Hours Contracts Bill 2013-14 was presented to Parliament on 24 June, when it had its first reading.  Its second reading debate is due to take place on 24 January 2014.  It would prohibit the use of zero hours employment contracts but it is a private member’s bill and is therefore unlikely to become law.

What do employers need to do?

Many large retailers have stopped using zero hours contracts over the last few years and have moved instead to fixed-hours contracts.  With pressure mounting for a change in the law, employers who still use zero hours contracts should consider whether they still work for them and what their options are if the law is changed to restrict their use.

Karen Plumbley-Jones is a Practice Development Lawyer at commercial law firm Bond Dickinson LLP