A zero-hours contract is an agreement between an employer and an individual where the employer does not guarantee to provide a set number of working hours and only pays for the work actually undertaken. In practice, this means the employer does not have to give the individual work, and they are not obliged to accept any work offered to them.
Government guidance on the use of zero-hours contracts is that they “should not be used as a permanent arrangement if it is not justifiable”, stating that such contracts are unsuitable for people working regular hours over a protracted period. In this scenario, it is probably better to offer the worker a different type of contract. This could be a fixed-term or part-time contract, for example. If an individual works regular hours, they could assume the position of an employee through custom and practice, so employers should be wary of offering regular hours of work on a zero-hours contract.
The government has also banned the use of “exclusivity clauses” in zero-hours contracts, which legislates against restricting zero-hours employees from taking on work with another employer.
Benefits of using zero hour contracts
Flexibility: at certain points in the year, your business may experience fluctuations in demand and you may need more staff to cover these periods. Zero-hour contracts allow your business to remain nimble.
Growth: new businesses, or those more established companies who are experimenting in new market areas, may be uncertain as to the volume of work to expect. Taking on zero-hours workers could help to reduce the risk of hiring and having to pay more employees than is required.
Affordability and simplicity: if the worker does not work, then the employer does not have to pay them. Individuals classed as workers are not entitled to additional rights, such as statutory minimum notice periods, maternity pay, and redundancy payments, and will therefore cost less to the business.
Productivity, quality of work and worker retention: flexible working patterns generally have a positive impact on staff retention and productivity, with the number of workers asking for flexible working hours increasing exponentially over recent years.
Choice: workers on zero-hours contracts generally have a greater say over when and how they work, which gives them increased flexibility to fit their work around other commitments.
Getting a foot in the door: zero-hours contracts are an excellent way for inexperienced workers to gain useful knowledge and experience in a new sector. This may lead to permanent contracts and more reliable employment. They also let partially retired or retired workers to work on an ad hoc basis and generate extra income.
Risks of using zero hour contracts
Over time, an individual’s employment status may change to reflect changes in the working relationship. Despite what is said on paper, an employment tribunal will look at what happens in practice. This means the employer will need to be aware if a zero-hours worker in effect becomes a worker or employee due to changes such as the degree to which the individual has become integrated in the organisation. If such changes do take place, it is advisable to agree to a new contract with the individual to reflect the change of status and avoid issues such as failing to provide the individual with their full rights and entitlements in accordance with their ‘actual’ employment status.
Other disadvantages include:
Unpredictability for the employer: because zero-hours contractors do not have to accept the hours allocated to them, there is a risk that an employer may not be able to find another worker who is either suitable or available. In order to limit this happening, it is always wise to give the worker as much advance notice as possible. Remember that flexibility works both ways. There have been several high-profile companies who have been called out for placing unreasonable demands on zero-hours contractors’ availability at short notice.
Unpredictability for the worker: it can be difficult to do any financial planning on a zero-hours contract, which creates a permanent state of uncertainty and anxiety.
Lack of control over the worker: employers cannot prevent workers from working for another employer, even a competitor, and the law will be on their side if an employer treats them unfairly for doing so. In such a situation, the worker has the right to claim unfair dismissal from the first day of their contract.
Rights under zero-hours contracts
Establishing an individual’s employment status is important because it determines their legal rights. Although it is possible for an employer to give an individual additional rights within their employment contract, their legal rights conferred by government cannot be taken away.
Employees benefit from the highest levels of protection, which includes the right not to be unfairly dismissed, the right to statutory minimum notice, and statutory redundancy pay, family centred rights, certain other rights to time off and protection against whistleblowing and discrimination.
Workers have much fewer rights than employees, and have rights relating to pay, rights under the working time directive and whistleblowing legislation and protection from discrimination. Self-employed individuals come in third who only have contractual rights, although they may be protected from discrimination. And are protected under the data protection legislation as “data subjects.”
In most circumstances, those individuals working on a zero-hours contract will be considered ‘workers’ as opposed to ‘employees’. Workers on zero-hours contracts are entitled to some statutory employment rights such as the right to receive the statutory minimum level of holiday pay, rest breaks, protection from discrimination and whistleblowing, health and safety protection, and the National Minimum Wage.
They are 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 company buyout or change of owner
If used correctly, zero-hours contracts should not pose a threat or risk to a company regarding a worker’s rights and entitlements. The greatest risk is incorrectly categorising an individual as a worker, and treating them as one, when they are in practice and in law, an employee.
Are zero-hour contracts workers or employees?
There are legal tests to determine employment status, which include the type of responsibilities and obligations that employers and employees owe to one another. The three main types of employee are: employee, worker, and self-employed workers. Almost every working person will fall into one of these categories. The correct category an individual will fall into depends on factors such as what the contract of employment says, how the working arrangements operate in reality, and the outcome of the relevant statutory tests on employment status.
Key terms defining employment status
Control: this means the employer has the ability and power to determine what, how, when and where the work is carried out. There is also a focus on whether the employer has a contractual right to control, as opposed to exercising day-to-day supervision over the individual.
Mutuality of obligation: essentially means there is either a contract between the employer and the individual under which the employer is obligated to provide work, and the individual is obligated to accept it in return for being paid a wage. In simpler terms, it can also mean there is a contract (written or spoken) between the parties. So even if the contract does not obligate the employer to provide work, nor an obligation on the individual to accept it, the individual will still be considered as an employee or worker if the contract is in every other respect consistent with employee or worker status.
Personal service: this means that the individual agrees to carry out work or services personally, that is, by themselves. If an individual is free to send a substitute to carry out work in their place, this will be inconsistent with an employee or worker relationship. That said, the right of the individual to substitute must exist in practice, and not be significantly restricted.
Determining zero hour contract employment status
For example, an individual will probably be considered as an employee where there is an obligation on them specifically to provide a personal service; where there is a ‘mutuality of obligation’; where the employer controls the manner and way in which the work is undertaken by the individual, and where additional factors are present that are deemed consistent with employment. This could be the level the individual is integrated into the company, the label applied by the employer and employee, the length and nature of their engagement, and any benefits received by the individual in question, for example.
An individual is likely to be considered self-employed if they are not a worker or an employer. This would apply where there no obligation to provide personal service can be established; where there is no mutuality of obligation between the parties; where the individual is carrying out a business and the other party is the customer. Whether the individual is carrying out a business and whether the other party is a customer depends on a variety of factors being established, including: the employer not having a high level of control over the person, the individual not being integrated into the employer’s business, the individual actively marketing their business and/or services to the world in general, engagement between the parties is relatively short, they are providing the employer with specialist services; they invoice the employer for fees, the individual supplies their own equipment required to complete or perform the service, and they carry a level of risk such that if they do not finish the work, they will not be paid.
Workers are generally the hardest category of employment status to identify. This is because they tend to share characteristics of both self-employed and employed status. Someone would tyopically be considered a worker where: there is an obligation to provide personal service; there is mutuality of obligation; the worker is not carrying out a business and the employer is not a customer; and the individual does not otherwise meet the test for being considered an employee.
Alternatives to zero-hour contracts
Keeping zero-hours contracts under regular review is a good idea if you want to avoid an individual becoming entitled to full employee status and all the rights that accompany it. Sometimes it might be sensible to start someone on a zero-hours contract but be prepared to move them onto a permanent or fixed term contract if their hours become more regular, for example.
There are other options you may want to consider if you need to accommodate varying staffing requirements. By offering overtime to permanent employees, you can ensure experienced staff deal with temporary variations in demand. Perhaps recruiting a part-time employee or someone on a fixed term contract if more regular hours are needed to respond to changes in the business’s requirements could help in the short term. If peaks in demand are known to occur at certain times of the year, consider offering annualised hours contracts. Additionally, using agency staff can be a quick and easy way to hire workers if they are needed at short notice or temporarily.
Our HR and employment law specialists advise employers on all aspects of workforce management and employee entitlements. Zero hour contracts can offer employers a number of benefits, but they require careful management to ensure individuals on zero hour contracts are given their full entitlements. To minimise legal risks while protecting your business’ commercial interests, speak to our experts today.
Zero hour contracts FAQs
What are the pros and cons of a zero-hour contract?
The pros: flexibility, business growth, increased ability to respond to demand or downturn, and cheaper than hiring agency workers. Cons include: higher turnover because of unguaranteed work, difficulty getting staff, particularly at short notice and many people doing the same job.
Who benefits the most from a zero-hour contract?
Zero hours contracts can benefit both employers and workers alike. Although zero hours workers do not acquire the same employment status or the associated rights of a permanent employee.
Are zero-hour contracts good?
Zero-hours contracts can be appealing to individuals who need or like the flexibility of being able to accept or turn down work, or not having to adhere to a strict schedule.
What are the disadvantages of zero hours contract?
Employees have no guaranteed income and may miss out on employee benefits, whereas employers may find that they struggle to get staff, particularly at short notice or during busy periods. It is also more difficult establishing a company’s culture and values if workers are coming and going.
Last updated: 17 April 2023