This article first appeared in the June 2013 issue of Employment Law Journal, published by Legalease. Click here to view the article.
Luke Blackburn weighs up the pros and cons of a controversial method for employers to cope with peaks and troughs in demand for labour.
With the recession putting even the most efficient businesses under pressure, the use of zero-hours contracts is on the rise. They are lawful, and the benefits they bring to employers are considerable. Employees and their representatives, however, should be wary to avoid the sort of worker exploitation last seen a century or more ago.
High fixed labour costs are a problem for businesses in the event that turnover falls during quiet periods. Conversely, where there are spikes in demand, businesses need access to good, reliable workers at short notice.
In some fields, employers have got round this issue by using casual workers without employment contracts, and varying their use of them as the market varies. The construction industry is one in which this adaptable deployment of casual labour is often seen.
However, many employers have labour requirements that are not so easily fulfilled.
In the field of healthcare, for example, Disclosure and Barring Service checks (previously called Criminal Records Bureau or CRB checks) can take some time, and so there are advantages in being able to engage staff straightaway who are known to have passed them.
More generally, employers who have experience of staff will know their virtues, such as skill, honesty and reliability, whereas a casual worker will often be unknown and untested.
Therefore employers might be well advised to make use of the same casual workers time and again, to avoid the potential difficulties of using new people: but that does nothing to help the employer looking for the services of a specialist worker with unusual skills.
Where a business has contracted to supply a particular service to a large part of the country, it is at risk of being liable for significant damages if it fails to provide what it has agreed. One example is in interpreting at police stations and in the criminal courts. The business will want to be in a position to guarantee that it can provide an interpreter for any of the languages covered by the contract, but not want to pay that person for the time they are not working.
As many employers have begun to appreciate, a convenient answer lies in zero-hours contracts. The employer has almost all of the flexibility of using casual workers, but no obligation to pay anything where no work is available.
Advantages To Employees
The clearest advantage to the individual is that they are an employee; in other words, they have the benefit of an employment contract, rather than being a casual worker. The protections that come with that status are important: rights in the event of unfair dismissal or redundancy, maternity-leave entitlement and the statutory minimum notice period.
A rather more speculative advantage depends in part on the mutuality of obligations between the employer and employee. In a more conventional employment contract, the former is obliged to provide work, and the latter is obliged to attend and do the work as directed. In a slight distinction, the Employment Appeal Tribunal (EAT) said of the zero-hours contract considered in Wilson v Circular Distributors .
It cannot be construed as removing any obligation on the part of the employer to provide work if work is available…We consider that what this clause means is that ‘if there is no work available to be done you will not get paid for doing it, you will not get paid for down-time, you will only get paid for the work that you do’. It is quite consistent with there being an obligation to provide work to Mr. Wilson if it is available and indeed that is what Mr. Wilson said he understood the contract to mean… In our opinion the proper construction of this clause is that if there is work available it must be offered and when work is offered, we are quite satisfied that the terms of the contract or conditions of employment require Mr. Wilson to undertake that work unless obviously there is some very good reason such as that he is too ill to work.
Given that the obligation is to provide work where it is available, the zero-hours employee will have a modest advantage over any prospective casual worker, because the employer must satisfy its obligations to the employee before looking to use any casual worker.
One of the benefits of zero-hours contracts in the eyes of employers is that they provide a truly flexible workforce. In times of plenty, known staff are available and under an obligation to work; in lean times, there is no payroll drag on the business from unused workers. With that advantage comes a clear potential danger to employees: given that it is efficient and cheap to maintain such contracts, why would the employer not have more of them than it is likely to need? Why not have twice the number of employees that might ever be necessary, as a hedge against the faint possibility that an unexpected wave of work might swamp the employer? Of course, most employers will act in a responsible manner but it is likely that at least a few will not.
If a zero-hours contracted employee seeks to exercise any employment rights, there are weekly pay calculations to make, which are more complex than they are for an ordinary contract. In addition, if the employer has provided little work under the contract, this is likely to put the employee at a marked disadvantage because these rights largely depend on the work they actually did, which in turn determines their weekly pay. For this calculation, s224 of the Employment Rights Act 1996 (ERA) requires an average to be taken of the 12 most recent weeks in which there was any pay due (because s224(3) means that no account is taken of weeks in which no remuneration was due).
This weekly pay figure is used to calculate holiday pay. In addition, and in the event of an employment tribunal claim, it forms the basis of the basic award, any redundancy payment and awards relating to employment terms and failure to provide the employee with reasons for dismissal.
A further disadvantage of a zero-hours contract relates to the uncertainty of the employee’s position. They are left free to undertake a second job, but only if there is no possibility that that other work would prevent them from doing any work offered under the first contract. Some state benefits such as working tax credits depend on the claimant working a set minimum number of hours per week: for people aged 25 to 59 without children, the figure at present is 30 hours. However, whether the claimant actually works those hours under such a contact is outside their control. In these circumstances, there is the risk of a double loss: little or no work in a particular week, combined with a lost benefit entitlement. By way of comparison, if a contracted employee went through a period of no work being offered, but was still liable to be offered work at any time, they might have difficulty in demonstrating availability for work, one of the criteria for the grant of Job Seeker’s Allowance.
An employment tribunal will look at the way someone worked, as well as what was in the contract, and so all is not lost if the writing and the reality fail to match up – evidence can be called about the latter, if need be.
However, as with many employment law disputes, the best way of avoiding difficulties under zero-hours contracts is by protecting the employee through the careful drafting of that contract. The employer will often prefer to keep its options open by simply describing the absence of any obligation to provide any work. The employee can counter this by insisting on particular terms, where otherwise there might be a disadvantage.
For example, unless specified in the contract terms, holiday pay will follow the average of weekly pay (see above). The employee should instead seek a minimum holiday pay figure stipulated within the contract. If times of work are not specified within the contract, the employer might ask that work be done at unsocial hours: this can be avoided simply by a term specifying the times of day when work may not be required.
Although it will be difficult for individual employees to negotiate on how many zero-hours contracts an employer creates, trade unions and employees’ representatives may have more influence. Given that employers can misuse such contracts, it would be wise to keep a watchful eye on the manner of their use and the particular companies which seek to use them. Unions will want to monitor whether particular groups are more often employed under zero-hour as opposed to standard contracts; just as with part-time work, direct or indirect discrimination against women or ethnic minority groups is a possibility.
Employees and their representatives should be very cautious of putting undue trust in a seemingly well-meaning employer. Plenty of work may have been provided in the past, or the employer may have promised to restrict its use of zero-hours contracts, but it is harder to do right by employees when the economy slows. Alternatively, what if the contract remains, but the employer changes under TUPE (the Transfer of Undertakings (Protection of Employment) Regulations 2006)? The workers in Pulse Healthcare v Carewatch Care Services  underwent such a transfer, and found the new employer unwilling to recognise that there was an employment contract at all (see box on pxx).
Finally, there is no harm at all in spelling matters out clearly when drafting the zero-hours contract. Wilson is clear on this point, but the right to be given work where work is available should be made explicit nonetheless. Advisers should make sure there is no doubt that it is indeed an employment contract, because of the rights that accompany that status. This does not simply mean the document’s title, but also the provisions within it. It is therefore important to include those details that are ordinarily expected in an employment contract.
Difficult trading conditions for employers and economic pressures on employees will tend to put pressure on both to approach contracts in a creative, even radical manner. This will sometimes work out well for both sides, but the less a contract guarantees, the more the employee is in peril of mistreatment. The best time to build defences against that chance is before the contract is agreed.
In the well-known case of Ready Mixed Concrete (South East) v Minister of Pensions  it was held that it is the relationship between the parties, rather than their declaration of what the relationship is, that matters.
Zero-hours contracts have repeatedly been held to be employment contracts, and there is no suggestion that there is anything unlawful about them. Three modern cases have dealt specifically with the boundary between such contracts and casual work.
In Carmichael v National Power  the House of Lords noted that employment was advertised as being on a ‘casual as required basis’ and acceptance letters signed on this basis. Moreover, the claimants did not receive sick pay or holiday pay, they were not covered by pension arrangements, and grievance and disciplinary procedures did not apply to them. In spite of some evidence in favour of the existence of an employment contract (income tax deduction, uniforms, a company vehicle, and the same pay increases and opportunity to buy company shares given to employees), it was held that there was no such contract.
The EAT in Wilson v Circular Distributors  found that there was an employment contract in spite of no guaranteed hours of work. This was because the relevant document was described as ‘a statement of terms and conditions of employment’, and expressly included the particulars required under s1 of the ERA. It was also considered significant that the claimant was entitled to payment for overtime, holidays and sickness absence, was included in the company pension scheme, and covered by grievance and disciplinary procedures. He was also subject to written terms on notice, retirement, exclusivity of service and confidentiality.
Last August, the EAT in Pulse Healthcare v Carewatch Care Services  found there to have been an employment contract, based on a combination of what was in the zero- hours contract agreement and the manner in which work was in fact provided and performed. After a TUPE transfer, the new employer had contended that there was no contract. However, the agreement included many references to employment, and (as in Wilson) included the particulars required under s1 of the ERA. There were also provisions on payment, deductions, uniforms, annual leave, sickness, notice and pension. There was evidence that one employee worked 36 hours a week, and another 24. The former worked three nights regularly, taking time off only for holidays or sickness; the latter was at one point suspended from work, but was paid in full during that period.
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