Zero-hours contracts have long been a staple for businesses with fluctuating demands or irregular work patterns, as they offer flexibility for both employers and employees, allowing for adjustments to the workload in response to demand.
Essentially, these contracts mean that employers are not obliged to guarantee any specific hours of work, and employees are not required to accept work when it is offered. Consequently, they allow employers to adjust their workforce as needed without the commitment of fixed hours. At the same time, workers enjoy the flexibility to accept or decline shifts, accommodating other obligations such as studying or caring responsibilities.
According to research by The Work Foundation at Lancaster University, over a million people in the UK are on zero-hour contracts. These contracts are primarily used in sectors with fluctuating or seasonal demand, such as hospitality, retail, health and social care, as well as industries with seasonal or project-based work, such as construction, film production, and delivery services.
This guide outlines the legal status of zero-hours contracts and helps employers utilise them responsibly while addressing associated legal concerns, particularly regarding holiday pay entitlements.
Are Zero-Hours Contracts Legal In The UK?
Zero-hours contracts are legal in the UK but are subject to specific regulations and restrictions.
Workers’ Rights Under a Zero-Hour Contract
While zero-hours contracts offer flexibility, they also require employers to adhere to certain standards. If an individual is on a zero-hours contract, they will usually be legally classified as an employee or a worker. By law, they will still be entitled to employment rights associated with their employment status, including:
- The National Minimum Wage and National Living Wage
- Holiday and Holiday Pay
- Statutory Minimum Level of Rest Breaks
- Protection from Discrimination
- Receiving Pay Slips
- The Right to a Safe Working Environment
An individual employed under a zero-hours contract may also qualify for Statutory Sick Pay, depending on their average weekly earnings.
Employers’ Responsibilities and Restrictions
Employers with zero-hour workers have specific responsibilities outlined by the law. This includes:
- granting workers their statutory rights
- upholding protected employment rights
- communicating to staff what their rights are
- letting staff know how the contract will end and
- using PAYE to disburse wages and make tax and National Insurance deductions.
It is illegal to prevent a worker on a zero-hours contract from working for another employer whilst employed by your business. This is the case even if you have incorporated an exclusivity clause in the employment contract.
It is also good practice to make it clear to staff that work is not guaranteed and that the worker isn’t obliged to accept any work offered. You should also demonstrate a fair and transparent process for distributing work among staff based on each individual’s circumstances.
How Do Zero-Hour Contracts Work?
A zero-hours contract does not specify a minimum number of hours that the worker is required to work on a weekly or monthly basis. This arrangement provides employers with the flexibility to request work from employees as needed, without the obligation to offer consistent work on a regular basis. Similarly, it grants employees the autonomy to choose their working hours and protects them from unfair treatment and discrimination should they refuse work offered by the employer.
Key Terms Usually Incorporated In Zero-Hour Contracts
Key terms in a zero-hours contract commonly cover the following:
- Compensation for hours worked. Employees are only paid for the hours they have actually worked. There will usually be a provision outlining how the employee will be paid, such as an hourly rate or salary for hours worked.
- The procedure by which the employer requests work and the employee responds.
- The method for calculating and paying holiday pay.
- The process by which either party may terminate the contract.
- Non-exclusivity; an employer cannot restrict a zero-hours worker from seeking work with other organisations.
Right To Decline Work and Protections Against Unfair Treatment
Individuals on zero-hours contracts can refuse a work shift offered without providing a reason, and employers cannot penalise the worker or impose disciplinary measures for such refusals.
Similarly, employers are not permitted to penalise workers for accepting jobs with other companies, nor are they allowed to discriminate against them or subject them to a detriment, such as reducing work shifts or harassing them, for working elsewhere.
Finally, employers must ensure that zero-hours workers are treated equally and are not subjected to less favourable treatment than other workers.
Are Individuals Employed Under Zero-Hour Contracts Entitled To Holiday Pay?
In the UK, individuals on zero-hours contracts possess the same right to paid holiday, including bank holidays, as any other worker.
Zero-Hours Contracts and Legal Entitlement To Holiday Pay
The Working Time Regulations 1998 state that all full-time workers, including those on zero-hours contracts, are entitled to a minimum of 5.6 weeks’ paid leave, which is equivalent to 28 days per year. However, the specific days or hours may vary according to the number of hours worked each week.
Employees start to accumulate holiday entitlement as soon as they start work with your company.
You can pay zero-hours workers holiday pay alongside their regular wages for work done during a pay period, instead of when it is taken; this practice is known as rolled-up holiday pay.
Calculating Holiday Pay
Firstly, you need to ascertain holiday entitlement before calculating the pay for each day of holiday.
To determine holiday entitlement for a worker on a zero-hours contract, the 12.07% rule should be applied. This percentage reflects the statutory minimum holiday entitlement of 5.6 weeks per year, divided by 46.4 (the number of working weeks in a year, i.e. 52 weeks - 5.6 weeks).
The 5.6 weeks equate to 12.07% of the total 52 weeks in a year. Essentially, this method enables pro-rata holiday entitlement based on actual hours worked, ensuring that a worker accrues 5.6 weeks of leave annually, regardless of fluctuations in their working hours. This percentage must be adjusted if a worker’s contract stipulates more holidays than the statutory minimum.
You will need to calculate the total hours worked during a pay period and multiply this by the accrual rate of 12.07% to determine the total holiday entitlement in hours. If the entitlement is 0.5 hours or more, it should be rounded up to the nearest hour; if it is less than 30 minutes, it should be rounded down to zero.
For example, if a zero-hours contract worker has worked 28 hours during a pay period, their entitlement will be calculated as 28 x 12.07%, resulting in 2.31 hours. In this case, this should be rounded down to 2 hours.
To calculate holiday pay, you must multiply the average weekly pay from the previous 52 weeks by the number of holiday days to which the employee is entitled. If the employee has not completed a whole year, the calculation should reflect the actual weeks worked.
Common Mistakes Made By Employers
Common mistakes made by employers when calculating holiday pay for zero-hours workers include miscalculating the percentage or neglecting to account for all hours worked.
Employers should ensure that, in addition to accurately calculating holiday pay, they provide zero-hours workers with a clear explanation of their entitlements, the calculation process, and the procedure for taking leave.
Managing Holiday Pay for Zero-Hour Workers
Effectively managing holiday pay for zero-hours workers necessitates thorough record-keeping and a solid understanding of the relevant legislation, particularly the 12.07% method.
Best Practices for Calculating and Tracking Holiday Entitlement
Establishing efficient holiday accrual systems is essential for accurately tracking the hours worked and pay for every zero-hours worker. These systems play a crucial role in ensuring fair and compliant holiday pay.
Furthermore, there should be a clear process for leave requests and a system to track the days or hours of leave taken. Employers might consider implementing rolled-up holiday pay, where holiday pay is included in each pay cheque, simplifying the process for both employers and workers.
Finally, employers should regularly review their holiday pay practices to ensure they are fair, compliant, and meet legal requirements.
What Steps Can Workers Take If Holiday Pay Is Withheld?
If a zero-hours worker’s holiday pay is withheld, they can consider various options, such as involving their trade union, if applicable, and potentially seeking legal action for back payments.
Benefits and Disadvantages of Using Zero-Hour Contracts
While zero-hour contracts offer flexibility for both employers and employees, they also carry potential downsides.
For employees, zero-hours contracts can be appealing as they provide flexibility and control over their schedules, allowing them to pursue other opportunities or manage caregiving responsibilities. Furthermore, these contracts offer a means to supplement their income from other sources or take on additional work when necessary.
However, the absence of guaranteed working hours can result in financial uncertainty and difficulties in future planning. It also means that employees might miss out on certain benefits typically provided to full-time workers, such as paid sick leave or redundancy pay. Lastly, the temporary nature of zero-hours contracts may dissuade employers from providing opportunities for career development or training.
Regarding employers, zero-hours contracts allow them to respond to fluctuating demand without the financial burden of fixed-hour employees. This can lead to reduced labour costs and overheads, as they can swiftly adjust staffing levels up or down in response to unforeseen events or changes in demand.
However, workers on zero-hours contracts may feel less committed to their employers and be more inclined to seek other opportunities, potentially leading to higher turnover. Furthermore, scheduling and managing work assignments and shifts can present challenges. Such contracts also heighten the likelihood of disputes regarding benefits and pay calculations, particularly concerning issues like holiday pay.
Upcoming Reforms Relating to Zero-Hours Contracts
Zero-hours contracts have become a contentious issue, as many believe they offer one-sided flexible employment, unfairly benefiting employers at the expense of workers. These contracts do not guarantee a minimum number of working hours and often place employees in a precarious position, requiring them to be available for work at short notice while offering no security in return.
Consequently, the government has committed to restricting exploitative zero-hour contracts and enhancing job security for workers under such arrangements by 2026 as part of its broader employment reform agenda. Key changes outlined in the Employment Rights Bill include the right to guaranteed hours for qualifying regular workers and compensation for situations where an employer cancels a shift with less than reasonable notice. For further details on the changes, see our update (link to newsletter on zero-hours contracts changes).
Alternatives to Zero-Hour Contracts
Employers should carefully assess their staffing needs before choosing zero-hour contracts. There are alternative employment options available that offer employers flexibility while providing workers with greater security and stability.
Fixed-Term Contracts vs Zero-Hours Contracts
Fixed-term contracts can act as an alternative to zero-hours contracts for seasonal needs, specific projects, or to cover an employee’s absence. The benefit of fixed-term contracts is that they offer workers a defined period of employment and guaranteed hours, thus providing employees with a degree of income predictability. In contrast, zero-hours contracts offer flexibility without guaranteeing any specific hours or income.
Other Flexible Working Arrangements
Alternatives you might consider instead of zero-hour contracts include:
- Part-time employment on either a temporary or permanent basis
- Annualised hours contracts are flexible employment agreements that calculate an employee’s total working hours over a year. This approach permits adjustments in scheduling according to workload needs.
- Offering overtime to existing employees
- Training employees in multiple skills to enable them to perform various job roles
- Employing agency workers.
Next Steps
As the landscape of zero-hours contracts in the UK is changing rapidly, employers must review all existing agreements to ensure compliance. They should also remain informed about legal developments in this area and prepare for forthcoming legislative changes.
If you would like advice on zero-hours contracts and how changes to these contracts may affect your organisation, please contact our experienced employment law team on 0300 303 2071 or email us.
