The future for zero hours contracts?

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The use of zero hours contracts has been thrown into the spotlight over the last few months following intense media speculation around the potential for them to be abused. Following a Government consultation which received over 36,000 responses, Business Secretary Vince Cable has now confirmed that exclusivity clauses in zero hours contracts will be banned under the Small Business, Enterprise and Employment Bill 2014. This move was supported by 83% of respondents to the consultation and is estimated to benefit around 125,000 workers currently thought to be subject to an exclusivity clause in a zero hours contract.

The Government has also announced that it will work with business representatives and unions to develop a Code of Practice on the fair use of zero hours contracts by the end of 2014.

In this article we examine the issues relating to zero hours contracts and their practical impact for employers.

What is a zero hours contract?

There is no specific legal definition of a zero hours contract. In general terms, it is a contract under which the employer does not guarantee the individual any work, and the individual is not obliged to accept any work offered. Such contracts are perfectly permissible under employment law and are widely recognised to carry benefits for both employers and staff. In particular, they allow businesses to hire staff from a ‘bank’ of suitable individuals while being able to adapt to fluctuations in demand. For individuals, zero hours contracts provide greater choice and flexibility than traditional employment contracts over where and how much they work, which can fit in around childcare or studies, and allow for other earnings to be topped-up.

Why use zero hours contracts?

It is estimated that there are over 1 million individuals working under zero hours contracts in the UK, and their use is recognised to be particularly widespread in sectors such as care, tertiary education, hospitality, leisure and retail. This is not surprising in light of the variable workforce demands these sectors typically experience. Hiring workers under traditional employment contracts, which include defined hours of work, allows for a degree of flexibility, but sometimes not enough. What happens in the case of an unexpected spike or fall in demand or a one-off event being cancelled at short notice? The employer in these circumstances is left either scrambling around for extra workers at the last minute, or with more workers on their payroll than they have work for.

Zero hours contracts can offer the perfect solution. They enable the employer to respond to fluctuations in demand by maintaining a workforce familiar with the organisation and the required levels of customer service, whilst avoiding the costs of unnecessary headcount during off peak periods. In current market conditions, this flexibility and agility is essential.

The problem with zero hours contracts

  • Exclusivity Some zero hours contracts (albeit a relatively small percentage) contain contractual restrictions on the individual working for another organisation, even though there is no guarantee of work from the employer. In banning such clauses, the Government has sought to address concerns that some employers were using exclusivity clauses unjustifiably. The reality is, however, that even without such clauses an unscrupulous employer could still make it perfectly clear to a zero hours worker that if they are found to be working for anyone else they will not receive any further hours. The consequences of this for the worker, where no work is available, are particularly harsh.
  • Transparency The evidence points towards a general lack of understanding amongst both workers and employers about the nature of a zero hours contract. In particular, there is confusion about the employment status and entitlements of an individual working under such contracts. For example, is the individual an “employee” or a “worker” under employment law (relevant because different employment rights apply to each category)? The Government’s proposals include several options to improve transparency including improved Government guidance and model clauses (possibly standard template zero hours contract clauses to be used on a voluntary basis), as well as an employer-led Code of Practice on the fair use of zero hours contracts.

While some form of regulation of the use of zero hours contracts is welcome (for example, by providing much needed clarification), any restriction that impacts on the flexibility such contracts bring could have serious consequences for many sectors. The need to be able to meet operational demand is paramount, and anything which impinges on this could have a significant detrimental impact.

It seems that an outright ban on the use of exclusivity clauses could pose a problem for employers who have good and justifiable business reasons for imposing an exclusivity requirement where, for example, the worker has access to trade secrets and/or confidential information which legitimately require protection, or where there are competition issues. So far there has been no suggestion from the Government that there will be any exemptions from the ban on exclusivity based on good business reasons, but this is something many employers are likely to be looking out for.

Employers who are using zero hours contracts will be keeping a close eye on developments in this area and, in particular, the new Code of Practice and guidance to be issued later this year.