A Guide to Zero-Hours Contracts

Hoteliers are relying on zero-hours contracts more than ever before. But are you clear on the legal pitfalls? Ashfords LLP partner, Stephen Moore, explains to Hotel Industry Magazine what UK hoteliers need to know.

NOTE: This article was originally published in the Q3 2014 edition of Hotel Industry Magazine.

In April, the Office for National Statistics (ONS) published statistics on the number of contracts that do not guarantee a minimum number of hours (often described as zero-hours contracts).

According to the statistics, women are more likely to have zero-hours contracts than men (55%), and these individuals are also more likely to be in full time education (18%), or be in young or older age groups (36% are between 16 and 24 and 7% are 65 or over, compared with 12% and 4% respectively for their counterparts not on zero-hours contracts).

In addition, nearly two thirds of zero-hours workers work part-time.

The ONS estimated that between January and February 2014 there were 1.4 million zero-hour contracts that provided work in the reference period of the fortnight beginning 20 January 2014.

This estimate is higher than that of the Labour Force Survey of 583,000 people, who have primary employment on a zero-hours contract between October and December 2013.

Although this difference can be attributed to reasons such as employees being able to have more than one contract, there has clearly been a recent increase in the number of people employed on zero-hours contracts and they are particularly popular in the hospitality industry which experiences such variations in demand from season to season.

It is therefore important to consider the advantages and disadvantages of zero-hours contracts and the risks for employers when using them.

Defining Zero-Hours Contracts

There is no legal definition of a zero-hours contract and there are varying opinions as to what such contracts include from the employee and employer perspective.

Indeed, one criticism is that workers can be unaware of their limitations and not realise there is no obligation to be offered minimum hours of work.

The Department for Business Innovation & Skills (BIS) consultation on zero-hours contracts in 2013 states that:

“in general terms, a zero-hours contract is an employment contract in which an employer does not guarantee the individual any work and the individual is not obliged to accept any work offered.”

A lack of a guaranteed minimum number of hours of work is a key element of such contracts.

The Risks for Employers

There are issues to overcome that the employer should consider prior to entering into the contract, in particular, the danger of falling foul of relevant employment legislation since the contracts should be considered on an individual basis.

1. Employee or worker?

Employers should consider prior to entering into the contract whether the individual will be an employee or a worker, as there can consequently be a contract of employment during the period when the individual is not working.

If the individual is legally an employee rather than a worker, they would qualify for rights such as any statutory redundancy payment or unfair dismissal rights if they have accrued the relevant continuity of employment.

If the individual is only a worker they would not accrue such rights, but would still be entitled to statutory holiday rights.

If, according to the contract, the individual is not obliged to accept work, the employer could have an argument that there is not the required mutuality of obligation between the parties to indicate that the individual is an employee.

Employers should therefore consider how they wish to implement such contracts in practice.

This is particularly important where the individual may in reality be given regular work as a court or tribunal would consider the written contract as well as how the contract has been performed in practice.

2. Holiday Pay

Calculating holiday pay with zero-hours contracts is notoriously difficult as, unlike full-time workers who are entitled to the statutory minimum of 28 days’ holiday per year, zero-hours contract workers will normally only be entitled to pro-rated holiday pay.

As rolled up holiday pay has been prohibited by the European Court of Justice (in the case of Robinson-Steele v P D Retail Services Ltd), employers will need to keep track of accrued holiday throughout the year to avoid administration difficulties.

Holiday pay entitlement will differ according to whether holiday has been taken or paid for in lieu.

However, as the normal rule is that a week’s holiday pay is the average pay a worker received over the previous 12 weeks (in which they were paid) this can be difficult to calculate: zero-hours workers work irregular hours and as these calculations include overtime payments and bonuses paid during the 12 weeks, there are consequently financial advantages for the workers to take their holiday following a busy 12 week period.

3. Discrimination Claims

As stated above, employers are likely to be reluctant to provide zero-hours workers with extensive benefits.

However, if the employer is considering whether or not these employees should have different benefits, as zero-hours workers will probably be considered part-time employees, any less favourable treatment may need to be justified by the employer so they do not breach the Part-Time Workers (Prevention of Less Favourable Treatment) Regulations 2000.

That said, should a zero-hours worker bring such a discrimination claim, they would need to identify a suitable comparator employed on the same type of contract and case law demonstrates that this is difficult for zero-hours workers to establish.

Employers should also consider the potential for indirect discrimination claims if many zero-hours workers share a protected characteristic.

4. Pensions

Due to the recent obligation for employers to auto-enrol eligible workers into company pension schemes, this has introduced a further issue regarding zero-hours workers, who will likely have fluctuating earnings, and whose pay dates will probably not coincide with the company’s relevant pay reference period.

Another issue arises in establishing when a zero-hours worker reaches the threshold of qualifying earnings for the auto-enrolment requirement.

Furthermore, if the zero-hours worker is auto-enrolled, their earnings could subsequently decrease below the qualifying threshold, and for such a period any deductions made to reflect employee contributions into the pension scheme will not be mandated by statute.

Employers could face unlawful deductions claims if there is no contractual basis on which they can deduct such pension contributions.

This risk can be avoided by enrolling all employees contractually into an auto-enrolment compliant scheme, or by using advanced (and likely expensive) payroll system making sure that deductions are only made for the month where the worker reaches the threshold.

Employers should track employee earnings carefully and periodically re-enrol employees into the scheme under auto-enrolment rules as, should the employment contract provide employees with the right to opt out of the scheme, the risk would again be that the employer could face liability for unlawful deductions if contributions are still deducted from salary.

Undoubtedly, despite the risks these contracts are proving popular with UK businesses, however as detailed above care should be taken by employers not only prior to offering a zero-hours contract to workers, but continuously throughout the working relationship.

Actionable Intelligence

Advantages for the Employer:

The main advantage is that zero-hours contracts are flexible and allow employers to hire staff as and when the business requires.

As the employer can tailor its staff requirements to demand, the business can not only develop without risks of recruiting permanent staff, but employers can also hire staff to whom it may subsequently want to offer full time employment or guaranteed hours of work.

Advantages for the Individual:

Zero-hours contracts can be a foot in the job market door for individuals and a stepping stone to alternative employment.

An attraction for young people in particular is that the contracts can help them focus on their future career path, provide them with skills in a work environment and allow students to continue with their studies.

For individuals approaching retirement, they provide the flexibility to plan for retirement and ease out of the labour market whilst maintaining an income and job skills.

However, the contracts often include exclusivity clauses preventing workers being employed elsewhere and supplementing their salary, even though they are not guaranteed a minimum number of hours work per week. Furthermore, the employer may be reluctant to provide the zero-hours worker with benefits that full-time employees enjoy.

NOTE: This article was originally published in the Q3 2014 edition of Hotel Industry Magazine.

ASHFORDS LLP

T: 020 7544 2424
W: www.ashfords.co.uk

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