Zero hours contracts: Advantages and disadvantages

Think of zero hours contracts and the 2016 Sports Direct scandal may well spring to mind. Big brand names like Uber and Deliveroo have also come under scrutiny recently for the exploitation of casual labourers, and zero hours contracts were a key topic of discussion during the 2018 party conferences with the Labour Party proposing to ban them altogether.

With all this press coverage over recent years, you might be feeling uneasy about using these contracts in your business. Do the potential benefits, such as flexibility, outweigh the negatives?

We take a look at the pros and cons of zero hours contracts to help you make an informed decision about using them. We also share some tips on using them correctly and successfully, and suggest some alternative options if zero hours contracts aren’t quite the right fit for you.

What is a zero hours contract?

‘Zero hours contract’ is not a set legal term and there’s no universally accepted model. Most often, it refers to a casual working arrangement, usually with no guaranteed hours. Such an arrangement might also be referred to as a ‘bank contract’, ‘ad hoc contract’ or ‘casual worker contract’.

Surveys from November 2017 indicated that around 6% of all employment contracts could be considered zero hours contracts.

Key features of a zero hours contract

Zero hours workers:

• don’t usually have to accept the work offered
• can work for more than one employer
• are entitled to annual leave, the national minimum and national living wage.

The employer is also under no obligation to offer a minimum number of hours.

What are the benefits of zero hour contracts?

• Flexibility: If the workload for your business fluctuates, you might need more staff during certain seasons or to cover events. Zero hours contracts allow you to remain agile.

• Growth: If you’re a new business, or experimenting in new market areas, you may be unsure what the volume of work will look like. Taking on zero hours contract workers will help to mitigate the risk of taking on, and having to pay for, more employees than you need.

• Simplicity and affordability: If the worker isn’t working, the employer isn’t paying. People classed as ‘workers’ rather than ‘employees’ have a more straight-forward financial relationship with their employer and are not entitled to additional rights such as maternity pay, statutory minimum notice periods and redundancy payments.

• Productivity, worker retention and quality of work: Flexible working patterns have been shown to have a positive impact on productivity and staff retention. The number of employees asking for flexible hours is increasing too.

• Choice: Workers on zero hours contracts have a greater say over when they work, giving them greater flexibility to fit work around other commitments, such as education or caring for dependants.

• Foot in the door / Keeping a hand in: Zero hours contracts are a good way for inexperienced workers to gain useful grounding in a new industry, and may lead to permanent contracts and more reliable employment. They also allow retired or partially retired people to ‘keep their hand in’, generate an income and pursue a wider range of interests.

Disadvantages of zero hour contracts

• Unpredictability for the employer: As zero hours workers don’t usually have to accept work, there’s the risk that you may not be able to find anyone available to take on work you need doing. It’s always best to give as much advance notice as you can to avoid this. Remember, flexibility works both ways here. Several companies have been called out for placing unreasonable demands on zero hours workers’ availability at short notice.

• Unpredictability for the worker: It can be tough to do any kind of financial planning on a zero hours contract, creating a state of permanent uncertainty.

• Lack of control over the worker: An employer can’t stop a zero hours worker from working for another employer, even a competitor, and the law is on their side if the employer treats them unfairly for doing so. In this situation they have the right to claim unfair dismissal from day one of their contract.

Employee rights under zero hour contracts

In most cases, those working zero hours contracts will be classified as ‘workers’ rather than ‘employees’. As such, they’re not legally entitled to:

• protection from unfair dismissal
• the statutory minimum notice of intention to terminate employment,
• redundancy pay
• the right to request flexible working
• unpaid time off to care for dependants
• protection in the event of a buyout or change of employer.

But they’re still entitled to statutory employment rights including:

• the statutory minimum level of paid holiday
• rest breaks
• the National Minimum Wage
• protection from discrimination
• whistleblowing protection
• health and safety protection.

If you do employ workers, don’t forget that they have these entitlements.

When does a zero hours worker become an employee?

This is an important one to watch.

If a worker on a zero hour contract works for a long enough period of time, they may become entitled to full employee status, and therefore the employment rights of an employee.

It’s therefore a good idea to keep zero hour contracts under regular review. Sometimes it might be right to start someone off on a zero hour contract, but be prepared to put them onto a permanent or fixed term contract if, for instance, their hours become more regular.

Despite what it says on paper, in an employment tribunal, what actually happens in practice will also be taken into account.

Using zero hours contracts correctly

Zero hours contracts shouldn’t pose a risk to a business if used correctly, with respect for the worker’s entitlements. The biggest risk is incorrectly classifying someone as a worker, and treating them as such, when they are in fact an employee in the eyes of the law. A well written zero hours contract will assist you.

Alternative options to zero hours contracts

Used correctly, zero hours contracts could bring you, and those working for you, many advantages. But there are several other options you might want to consider if you need to accommodate fluctuating staffing needs:

• Offering overtime to permanent staff to ensure experienced staff deal with temporary fluctuations in demand.
• Recruiting a part time employee or someone on a fixed term contract if regular hours need to be worked to adapt to a change in the business needs.
• Offering annualised hours contracts if peaks in demand are known across a year.
• Using agency staff can be a quicker and easier way to hire someone if staff are needed temporarily or at short notice.

Upcoming changes to zero hours contracts

The Independent Review of Employment Practices in the Modern Economy, led by Matthew Taylor, was launched in November 2016 to consider the implications of new models of working, particularly in the gig economy.

There was no proposal to ban zero hours contracts, but it was recommended that they offer increased rights, including: the right to request a contract that guarantees their hours after 12 months; an increase in minimum wage for those who do not have guaranteed hours; and easier access to statutory sick pay.

We’re still waiting to hear which of the proposals will be taken forward, so watch this space.