Zero-hours contracts – balancing interests

05 September 2013

Stephen Musgrave

A recent survey revealing that the number of workers in the UK currently on so-called "zero-hours contracts" could be as high as one million – four times the number previously reported - has sparked a public debate over the use of such contracts. Whilst some insist that zero hours contracts provide essential flexibility, both for employers and workers, others fear that such arrangements result in workers being exploited.

As businesses, politicians, unions and employment law specialists debate the relative merits of these casual working arrangements, we look at what, if any, reforms are likely to be implemented and what effect these might have on employment in the UK.

What is a zero hours contract?

There is no legal definition of a zero hours contract, and their terms and the arrangements arising under them can vary widely. Indeed, the term is used to cover many different types of working relationships. Generally speaking, a zero hours contract is a contract for casual work where there is no guarantee from either side as to the amount of work to be undertaken and the individual is paid only for the hours they work. A worker is normally expected to be available for work as and when required although not all arrangements go so far as to contain an "exclusivity" requirement (i.e. a provision stating that the worker cannot accept work from any other source).   

Organisations may choose to use zero hours contracts where work demands are hard to predict. The contracts are typically used in the catering and leisure sector, where work is often undertaken using a shift system, and in the healthcare and education sectors.

Why are they in the news at the moment?

Whilst the Office of National Statistics' Labour Force Survey estimated that 250,000 people in the UK (0.84% of total workers) were on zero-hours contracts in the fourth quarter of 2012, a survey of 1,000 employers published in August 2013 by the Chartered Institute of Professional Development (CIPD) has estimated that number to be much higher, at around one million workers or 3-4% of the total UK workforce. The CIPD have said that one in five of the employers they surveyed employed at least one person on a zero hours contract and, of those, the mean proportion of their workforce employed on a zero hours contract was 16%. 

This news has fuelled an already lively debate over the use of zero hours contracts and has put the spotlight on the employers using them. Whilst it had previously been thought that zero hours contracts were generally being used only as a temporary measure to top up permanent workforces, these statistics showed that the use was far more widespread. Indeed, it has since been reported that that 90% (or 82,200) of food giant McDonalds' UK workers are on them, and Care Secretary Norman Lamb MP has revealed that 307,000 workers in the UK care sector alone are employed on the contracts. Bread maker Hovis has also come under fire after it was reported that, having made 30 permanent staff at its Wigan bakery redundant in April, it has recently brought in several agency workers on zero hours contracts.

What are the arguments? 

For both employers and workers, a zero hours arrangement can provide valuable flexibility.

For employers, this means taking a "pay as you go" approach to workers – adapting workforces to meet your demands and not being tied into an employment relationship which brings with it obligations to pay workers regardless of the hours they work, to pay holiday and sick pay and to pay for the costs of recruitment and training and which exposes you to tribunal claims from employees. For workers, a zero hours contract can mean having the ability to choose the hours you work – whether this be so that you can undertake part time work in order to supplement income from an existing job or simply to fit your work around your home life.

On the other hand, there are fears that zero hours contracts can be used to exploit workers by requiring them to be available and on "standby" for work (often at home, rather than at the employers premises, thereby avoiding liability to pay the National Minimum Wage for time on call) with no guarantee given that there will be any work for them. Indeed, Business Secretary Vince Cable has voiced concerns over the potential for exploitation of workers, noting that, in some cases, workers are being told that they need to be available for work whilst also being told that they are not allowed to work for anyone else, thereby preventing them from seeking work elsewhere even when they are not working enough hours to support themselves financially through their zero hours contract.

The apparent flexibility for workers which is provided by these contracts has also been questioned. It has been argued the relative bargaining positions of employer and worker mean that the idea that workers have the flexibility to refuse work is unrealistic, as many are likely to fear that rejecting work will result in them being offered less or no work in future.

Irregular and unpredictable work may also create financial insecurity and statistics from the Resolution Foundation show that those employed on zero hours contracts receive lower than average gross weekly pay (£236 per week compared to £482 per week) and tend to work lower than average weekly hours (21 hours per week compared to 31 hours per week). Despite this, the CIPD's survey of 148 workers on zero hours contracts reported that just 14% of workers on zero hours contracts felt that their employer often or very often failed to provide them with sufficient hours to have a basic standard of living, whilst 52% claimed that this was very rare. 

What are the legal issues?

The legal status of zero hours contracts is unclear and whether or not an employment relationship will arise under such a contract will depend on the particular circumstances of the agreement made between the parties, not just the wording or the fact that it is marked as being for "Zero Hours".

The key question to be considered in determining whether a worker on a zero hours contract is an employee will be of whether there is a "mutuality of obligation" between the parties arising under the contract.  In Pulse Healthcare Ltd v Carewatch Care Services Ltd and Ors EAT 0123/12, the employment statuses of five care workers on zero hours contracts were scrutinised in order to ascertain whether there had been a transfer of their employment from Carewatch to Pulse pursuant to the TUPE service changes provisions. The EAT held the zero hours contracts of the care workers to be contracts of employment on the basis that, despite the contracts being labelled "Zero Hours Contract Agreement", the contracts themselves did not reflect the true agreement between the parties. There was a clear mutuality of obligation between the parties as the employer was obliged to provide work and the care workers were obliged to accept it.

In making this decision, Richardson J relied on Consistent Group Ltd v Kalwak [2007] IRLR 560 (which had recently been applied by the Supreme Court in Autoclenz Ltd v Belcher and others [2011]UKSC41I) which set out that in considering employment status the tribunal must look to "the reality of the obligations", not just to the written agreement itself.  In that case, it was held that even where a contract purported to provide flexibility, for example, allowing a worker to refuse work or to provide a substitute, one must look to the reality of the agreement to see whether there was any genuine expectation that the worker would be able to do this. It is therefore the reality of the agreement between the parties which tribunals will look to in determining the employment status of someone on a zero hours contract.

This legal distinction is at the centre of an Employment Tribunal claim which has recently been brought by a part-time worker of Sports Direct. The part-time worker is trying to establish that Sports Direct's 20,000 part-timers currently on zero hours contracts are in fact employees, rather than casual workers, who, as such, are legally entitled to paid holidays, sick pay and bonuses. The Claimant argues the obligations placed on her as a part-time worker of the Company are no different to those placed on its full time employees as she does not genuinely have the flexibility to work the hours she wants.  If this Claimant is successful in arguing that she is in fact an employee, this will have potentially serious consequences for the retailer, who could find itself open to claims and demands from thousands of employees.

In addition, this legal issue is important as some argue that the use of zero hours contracts has increased because employers are trying to evade liability for employment rights, knowing that a worker, unlike an employee, will not be protected against unfair dismissal, have rights under TUPE or be entitled to maternity and redundancy rights. A recent report from The Work Foundation suggests that the fact that the courts look to the reality of the employment relationship under a zero hours contract is unhelpful, as it incentivises employers to treat workers badly. For example, it is suggested that an employer might try and make sure they don't offer work on a regular basis to ensure that a worker's status remains that of a worker and doesn't elevate to that of employee.

What next?

It was announced in June that coalition Business Secretary Vince Cable had ordered a review of the use of zero-hours contracts and in July 2013 Minister for Employment, Jo Swinson, confirmed that a team of government officials were undertaking a review of how they were being used by businesses. There are currently no plans to launch a public consultation on the issue, although The Work Foundation have argued that a more formal and systematic public review is needed.

Whilst some have called for an outright ban on zero hours contracts, Vince Cable has confirmed that a ban is not currently being considered.  Indeed, many of those lobbying for action in relation to the use of zero hours contracts have stated that they would not be in favour of an outright ban, because of the advantages they bring to many.  

In the absence of a ban, it is more likely that the government will legislate to regulate these contracts and their use. Vince Cable has indicated, for example, that he views clauses which exclude workers from obtaining work from other sources whilst working under a zero hours contract  as exploitative, so it is possible that the use of these will be banned. Removing the potential for employers to use such "exclusivity" clauses could remove what many see as the most serious problem with zero hours contracts. Preventing employers from locking workers into an employment relationship with no guaranteed income would help to restore the power balance between workers and employers and could provide financial security to some.

Alternatively, the Trade Union Commission have called for the Government to adopt a minimum threshold for the number hours being offered to workers. In this way, zero hours contracts could become "minimum hours" contracts and would provide workers with a minimum weekly wage.  Whilst this suggestion may be welcomed by some as a solution to the financial insecurity which some experience when working on zero hours contracts, it appears that in doing this one would be creating exactly the mutuality of obligation which is required to establish an employment relationship.  Given that this would expose employers to all of the obligations and costs which they hope to avoid in hiring workers on a casual or zero hours basis, it is arguable that introducing such a threshold could act as a disincentive to employers taking on new staff and potentially leading to higher unemployment.

Others have suggested that the Government should legislate to amend the definition of "employee" under the Employment Rights Act 1996 to remove the requirement that there must be "mutuality of obligation" in order to establish an employment relationship. This would mean that all workers are protected by statutory employment rights. Such a measure is unlikely to be considered by the Government, who have committed to making the UK a flexible labour market and is unlikely to gain mainstream support.

Conclusion

It is difficult to predict what the future looks like for zero hours contracts, as the Government's review is in the very early stages and, as yet, it does not appear that any formal consultation is being planned. One difficulty for decision makers will be that information around the use of zero hours contracts is currently limited and reports relating to them have been inconsistent. Whilst for some, zero hours contracts provide essential flexibility to adapt workforces to changing demands or to fit work around a home life, for others, they may represent exploitation and financial insecurity. It is unlikely that there will be a ban on these contracts, and nor should there be, but if the debate surrounding them continues at the current pace then it is likely that at some point in the future there will be a serious discussion, leading to more careful regulation and monitoring.

References

Cases:

Pulse Healthcare Ltd v Carewatch Care Services Ltd and Ors EAT 0123/12

Consistent Group Ltd v Kalwak [2007] IRLR 560

Autoclenz Ltd v Belcher and others [2011]UKSC41I

Other:

ONS, Zero hours contract levels and percent 2000 to 2012, ad hoc analysis, 31 July 2013 and ONS briefing note "Estimating zero hour contracts from the Labour Force Survey"

"Resolution foundation: A matter of time – The Rise of Zero Hours contracts" at http://www.resolutionfoundation.org/publications/matter-time-rise-zero-hours-contracts/

Work Foundation Report: "Flexibility or insecurity? Exploring the rise in zero hours contracts" at http://www.theworkfoundation.com/Reports/339/Flexibility-or-insecurity-Exploring-the-rise-in-zero-hours-contracts

http://www.cipd.co.uk/pressoffice/press-releases/zero-hours-contracts-more-widespread-thought-050813.aspx

http://www.independent.co.uk/news/uk/home-news/they-wont-be-lovin-it-mcdonalds-admits-90-of-employees-are-on-zerohours-contracts-without-guaranteed-work-or-a-stable-income-8747986.html

http://www.independent.co.uk/news/uk/politics/300000-people-on-zero-hours-contracts-in-social-care-alone-8688796.html

http://www.personneltoday.com/articles/07/09/2012/58795/we-have-the-national-minimum-wage-now-we-need-national-minimum-hours.htm

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/32148/11-1308-flexible-effective-fair-labour-market.pdf

http://www.independent.co.uk/news/uk/home-news/legal-challenge-to-zero-hours-contracts-launched-against-sports-direct-8750104.html

http://www.theguardian.com/uk-news/video/2013/aug/05/vince-cable-zero-hours-contracts-video

http://www.theguardian.com/politics/2013/aug/27/hovis-workers-strike-zero-hours