Terminating Zero Hour Contracts: Employer Guidance

While zero-hours arrangements can bring flexibility and agility to an organisation, employers should be aware that those individuals engaged on zero-hours contracts do benefit from a range of employment law protections.  These include rights and entitlements relating to pay, paid annual leave and rest breaks. Furthermore, individuals on zero hours contracts may also have the right not to be unfairly dismissed.

While the Government has made proposals to actively reform employment laws concerning zero-hours contracts under the proposed Employment Rights Bill, specific changes have yet to be outlined in relation to any new ban on exploitative practices associated with such contracts.

From a legal risk management perspective, therefore, it is important for employers to understand the current rules and rights when dismissing individuals on zero hours contracts.

 

What are zero hour workers’ rights?

 

Individuals working under zero hours contracts have the following employment rights:

 

• The right to be paid the National Minimum Wage, regardless of how many hours the worker works for you
• The right to receive payslips
• The right to take rest breaks
• The right to paid annual leave, accrued at 5.6 weeks per year, pro-rata, with holiday pay calculated based on average weekly earnings over the previous 52 weeks.
• The right not to be discriminated against
• Protection for whistleblowers
• Protection against being treated unfairly because they work part-time.
• Protection against unfair treatment for turning down shifts or refusing work offered under the contract.
• Protection against exclusivity clauses. These are specifically banned in zero hours contracts, i.e. you cannot seek to prevent a worker or an employee on a zero hours contract from working for another employer, nor can you require them to ask your permission before they take up such additional work.

 

But what about the right to not be unfairly dismissed?

 

Zero hours contract workers’ & contract termination

 

A ‘zero-hours contract’ is not specifically defined in English law but is formally recognised as a contract where an employer is not obliged to offer work, and the worker is not required to accept it. These contracts are flexible for both parties but must comply with UK employment protections, including prohibitions on exclusivity clauses.

Where there is genuinely no mutuality of obligation between the two parties —meaning the employer does not guarantee work, and the worker is free to reject it—the individual is unlikely to be classed as an employee and cannot claim unfair dismissal. However, tribunals will look beyond the contract wording to determine employment status based on the nature of the relationship.

In contrast to this, if the person engaged under a zero hours contract is classified as an ‘employee’, they will have the right not to be unfairly dismissed. This right is stated in section 94 of the Employment Rights Act 1996. The Act also states that there are only five legally fair reasons for dismissing an employee, including those related to their conduct and capability, and redundancy.

Employees under zero hours contracts have the right not to be unfairly dismissed after two years’ continuous service, as set out in section 94 of the Employment Rights Act 1996. However, automatic unfair dismissal claims, such as those involving whistleblowing or asserting statutory rights, do not require the two-year qualifying period.

Employers should also note that even workers, who have no right to claim unfair dismissal, can make a claim in the Employment Tribunal for unlawful discrimination if they suspect the reason why their employer has not given them any work is a discriminatory one.

Both zero hours workers and employees are protected against exclusivity clauses in zero hours contracts. In the case of employees only, if they are dismissed from their employment for the reason that they have broken an exclusivity clause in their contract, they can make a claim for unfair dismissal in an Employment Tribunal without having worked for their employer for the usual qualifying period of two years. In the case of workers, they are protected against suffering any detriment for not complying with an exclusivity clause in their contract. A ‘detriment’ would include being dismissed, so the worker would be able to make a detriment claim in an Employment Tribunal. For these reasons, employers are strongly advised not to include exclusivity clauses in any of their zero hours contracts.

 

How to reduce the risk of unfair dismissal claims

 

In order to reduce the risks of unfair dismissal claims, and given the law is moving towards aligning zero hours’ rights with those on fixed-time contracts, employers are generally advised to follow the same procedure when dismissing an employee on a zero hours contract as with one on a standard employment contract, such as giving statutory minimum notice.

Other key considerations include:

 

Assessing employment status

 

The most important step an employer can take to avoid the risk of an unfair dismissal claim is to make an honest and continuing appraisal of whether a worker under a zero hours contract is still a worker, or whether the nature of the employment relationship has developed into that of employer and employee. This is because, as we have seen, employees qualify for the right not to be unfairly dismissed, as long as they have worked for their employer for at least two years.

Whether a person is a worker or an employee depends on a combination of factors:

 

• how much control the ‘employer’ has over the worker;
• whether there is an obligation on the employer to offer work;
• whether there is an obligation on the worker to accept work;
• who is responsible for paying tax;
• who provides the work equipment;
• how they are paid;
• the type of employment contract; and
• how far the worker is integrated into the organisation.

 

It is possible for a worker to commence working for you under a zero hours contract, but for the arrangement to evolve over time into that between employer and employee because each side has an expectation of ongoing work. It does not matter if you never formalise the arrangement in a new employment contract, the employee can still argue in the Employment Tribunal that they are an employee. Furthermore, HMRC will also look at the substance of the ‘employment’ relationship if it is asked to investigate, to prevent incidences of employers trying to avoid tax and National Insurance obligations.

 

Check continuity of employment

 

An employee will qualify for unfair dismissal rights only if they are an employee and they can show that they have been continuously employed by you for over two years. If an employee is engaged at least once every seven days on their zero hours contract, for a number of months, then the employee will have continuity of employment and the contract must be terminated either by giving statutory minimum notice (see below) or by giving notice in accordance with the contract.

An employee will also have continuity of service if you decide at the outset of their employment that they will be hired on an ‘umbrella’ contract. An umbrella contract is ongoing, regardless of whether there are breaks in employment, because both employer and employee recognise that there are continuing obligations between them. It is also possible that a zero hours contract hiring a ‘worker’ on an assignment by assignment basis, becomes an umbrella contract over time if the engagements become regular and both employer and employee have an expectation of ongoing work.

 

Workers’ rights to notice

 

Technically, employers are not required to give notice to a worker on a zero hours contract – you can simply stop offering them work. This is because, as previously stated, workers do not have the right to statutory minimum notice and pay.

However, it is generally considered bad practice not to include a notice provision in a worker’s zero hours contract. By giving notice to your worker, you will allow them time to look for alternative work and give your organisation time to make other arrangements. Whilst the contract remains in place, the worker is ‘on your books’, regardless of whether they are actually doing any work for you. There are health and safety, and reputational reasons why allowing an unused arrangement to roll on is unwise. In addition, by continuing not to offer work, you run the risk of being sued for discrimination.

Remember that the situation is the same in reverse. If a worker wishes to terminate their zero-hours contract, they need not communicate this to you. Instead, they can simply decline your offers of work until, presumably, you stop offering it.

Therefore, contracts for workers on zero hours contracts should contain provisions on notice arrangements. It is recommended that this should be the same as the statutory minimum notice periods, which are as follows:

 

• if the worker has worked for you for between one week and two years, then the notice period is one week;
• for between two and twelve years of work the notice period is one week for each complete year of work; and
• for work over twelve years, the notice period is capped at twelve weeks.

 

You can of course set your own contractual notice period, but it would have to be above the statutory minimum outlined above.

 

What does this mean in the context of redundancy?

 

It is essential to determine the individual’s employment status. Only those classified as ’employees’ are entitled to redundancy rights, such as redundancy pay and notice periods. Workers, who lack employee status, are generally not entitled to these protections.

Employees or workers on zero-hours contracts are entitled to be paid for any accrued but unused holiday. Holiday entitlement is calculated on a pro-rata basis, using the statutory 5.6 weeks per year. Holiday pay is based on the average weekly pay over the last 52 weeks in which the individual worked and earned pay. If the worker has not been employed for 52 weeks, the reference period will be the total number of weeks worked.

You should calculate holiday entitlement in the normal way. That is, calculating the pro-rata entitlement of the employee / worker to 5.6 weeks per year and using a pay reference period. The pay reference period was increased from 12 to 52 weeks on the 6th April, 2020, but where the worker has not worked for the employer for 52 weeks, then the reference period is the number of weeks for which they were engaged.

 

Notice rights for employees

 

You must include a statutory minimum notice provision in your employees’ zero hours contracts. The statutory minimum notice periods are outlined above.

In addition you will have to calculate any holiday pay due to the employee. If the employee was employed for two years or more they will also be entitled to a redundancy payment and you will have to calculate this and provide a statement of your calculation to the employee.

Of course, you do not need to offer your employee any work during their notice period, nor do they need to accept work from you once you have given notice to them, subject to their contract of employment obliging them to accept work offered.

 

Reason(s) for the employee’s dismissal

 

You will also have to inform the employee why they are being dismissed (giving them one of the five legally fair reasons for dismissal) and follow a legally fair procedure for dismissing them. Most organisations have their own dismissal procedure which provides for meetings with the employee and the right of appeal.

Employees on zero hours contracts have the same rights as other employees to be consulted if they are in a redundancy situation. The consultation must be meaningful, and if the employer is making more than 20 employees redundant at the same time there are extra obligations relating to the timing and form of the consultation. If an employee on a zero hours contract is to be made redundant then they will be entitled to a redundancy payment based on the statutory minimum calculations, or more if that is offered in their contract.

Failure to follow a fair redundancy procedure may result in claims for unfair dismissal under the Employment Rights Act 1996, provided the employee has at least two years’ continuous service.

 

Need assistance?

 

Our HR and employment law specialists advise and guide employers on how to approach dismissals, including those concerning complex issues such as redundancies and disciplinaries. To minimise legal risks while protecting your business’ commercial interests, speak to our experts today.

 

Terminating a zero hours contract FAQs

 

Are zero-hours workers entitled to redundancy pay?

Zero-hours workers are not entitled to redundancy pay unless they meet the legal definition of an employee. Only employees with at least two years’ continuous service qualify for statutory redundancy pay.

 

How do I calculate holiday pay for zero-hours employees?

Holiday pay is calculated using the average weekly pay over the last 52 weeks in which the employee worked and earned wages. If they have not worked for 52 weeks, the pay reference period is adjusted to the number of weeks they have worked.

 

Do zero-hours employees get notice pay if made redundant?

Zero-hours employees are entitled to statutory minimum notice pay, based on their average earnings over the previous 12 weeks worked. The statutory notice periods depend on their length of service.

 

What is a fair redundancy process for zero-hours employees?

Employers must provide a fair reason for redundancy, consult with the affected employee, and follow a fair dismissal process, including offering the right to appeal the decision.

 

Can zero-hours employees claim unfair dismissal?

Zero-hours employees can claim unfair dismissal if they have at least two years’ continuous service and believe the redundancy was unfair or the process was not followed correctly.

 

What happens if I am making 20 or more zero-hours employees redundant?

If 20 or more employees are to be made redundant within 90 days, employers must follow collective consultation rules, including notifying the government and consulting employee representatives.

 

Do zero-hours employees need to work during their notice period?

Employers are not required to offer work during the notice period, and employees are not obliged to accept it unless their contract specifically requires this.

 

What happens to accrued holiday if an employee is made redundant?

Any accrued but unused holiday entitlement must be paid as part of the redundancy package, calculated up to the final day of employment.

 

Do zero-hours employees have consultation rights in redundancy situations?

Zero-hours employees are entitled to a meaningful consultation process before redundancy, similar to other employees.

 

Can zero-hours contracts include exclusivity clauses?

Exclusivity clauses are banned in zero-hours contracts. Employers cannot prevent employees from taking on work elsewhere or penalise them for doing so.