Zero-hours contracts have been the subject of considerable political and social debate in recent times. Although not legally defined, they are widely recognised as contracts under which a worker has no set minimum hours and is paid only in relation to the hours worked. Businesses are not obliged to offer any work to zero-hours workers and, depending on the terms of the contract, the zero-hours workers may or may not have an obligation to accept all work offered.

These contracts provide advantages to organisations in certain industries such as retail and hospitality where there can be seasonal fluctuations in staff requirements. Many workers, who are often part-time students or parents with child care commitments, also value the flexibility they allow. However, there is growing concern that such flexibility comes at the expense of security for individuals and can leave them open to exploitation.

The first question posed by this kind of arrangement is whether an individual on a zero-hours contract is an employee or not. The usual tests apply; if the organisation exerts a high level of control over the individual, if in practice the individual is expected to work fixed hours, has a reasonable expectation of regular work and is not permitted to work for anyone else, this certainly has the potential to be construed as an employment arrangement by an Employment Tribunal and/or by HMRC.

Unite the union estimates that up to 5.5 million workers have zero-hour contracts, whereas the Chartered Institute of Personnel and Development provides a more conservative estimate of 1 million zero-hours workers. Nevertheless, the increasing prevalence of these contracts has resulted in political and media pressure to review them. The Government launched a consultation on the issue in December 2013, with particular focus on tackling any potential exploitation in the system. The two points to be considered are: (1) the use of exclusivity clauses (i.e. clauses that prohibit zero-hours workers from working for anyone else); and (2) ensuring that zero-hours contracts are transparent and that individuals understand what they are signing up to.

Which issues should businesses keep in mind?

As the issue attracts growing debate, employers need to be aware of the potential pitfalls of engaging an individual on a zero-hours contract:

  1. Employment status: Zero-hours workers may be employees with full employment rights, such as the right to a minimum period of notice and the right not to be unfairly dismissed (after 2 years' service).
  2. National minimum wage: Workers on 'stand-by-time', 'on-call time' and 'downtime' must still be paid minimum wage if they are at their place of work and are required to be there. Workers on zero-hours contracts are also afforded this protection.
  3. Statutory holiday pay and holiday entitlement: The irregular hours of zero-hours workers can cause administrative complications when calculating statutory holiday pay. One week of statutory holiday pay is calculated as an average of all the amounts paid over the previous 12 working weeks, including overtime payments and bonuses. Zero-hours contracts should provide that workers are entitled to a set holiday provision, pro-rated to reflect the hours actually worked. However, this can be difficult for an employer to track without the aid of a sophisticated administration system.
  4. Pensions auto-enrolment: The fluctuating earnings of zero-hours workers can make it difficult to determine if a worker has reached the qualifying earnings threshold for auto-enrolment in any particular pay reference period. Also, once a worker is auto-enrolled, it is possible that, in the months to come, their earnings will drop below the qualifying threshold.
  5. Discrimination: Employers tend not to grant zero-hours workers access to the same benefits as full-time employees. However, if a zero-hours worker falls under the definition of a part-time employee, less favourable treatment compared to full-time employees will need to be objectively justified. Employers should also be aware that women are more likely to hold a zero-hours contract, which raises concerns that any less favourable treatment could be argued to be unlawful discrimination on grounds of sex.