understanding compliance

The Employer’s Guide to Zero-Hour Contracts

Have a seasonal business or company that could benefit from occasional support? Zero-hour contracts can sound like the ideal solution, but using them can create more issues than they solve. Here's what you need to know about this unique type of employment contract.

Shannon Hodgen
Written by Shannon Hodgen
July 27, 2022
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Many employers turn to zero-hour contracts when they want to provide workers with flexible schedules and save on employee costs. This type of employment contract is common in the UK, with 917,000 workers on zero-hour contracts in 2021 alone.

Despite the popularity of zero-hour contracts, there is some debate on whether they should be banned, as some political parties claim this type of employment contract opens the door to worker exploitation.

In this article, we’ll help you navigate the use cases, advantages, and disadvantages of zero-hour contracts so you can determine whether they’re a good fit for your organization.

What is a zero-hour contract?

A zero-hour contract is a type of employment contract wherein the employer isn’t obligated to provide the worker with a minimum number of working hours, and the worker isn’t obligated to accept the work that’s offered to them.

Say you run a catering company and summer is your busy season. During this time, you may hire a few zero-hour contract workers that work on an on-call, as-needed basis. When you contact them to pick up a shift, they can accept or decline the work. You are not obligated to offer them work if you aren’t as busy as you expected.

The term ‘zero-hour contract’ has no legal definition, and the terms of a zero-hour contract will vary per organization. Both employees and workers can be engaged in a zero-hour contract.

What’s the difference between zero-hour contracts and casual contracts?

In regions outside the UK, such as Canada, a zero-hour contract is also known as a casual labor contract. 

Just like a zero-hour contract, a casual contract doesn’t include a guaranteed number of hours for the worker, and the employee doesn’t have to accept the work they’re offered.

The main difference between a zero-hours contract and a casual contract is that casual workers are not typically paid for periods of inactivity. However, this depends on the local employment laws, nature of the work, and details of the employment agreement.

Who uses zero-hour contracts?

Zero-hour contracts are commonly used in industries that need seasonal workers or additional support on short notice. These industries include:

  • Hospitality
  • Retail
  • Academia
  • Banking
  • Education 
  • Gig economy work

Companies that have used zero-hour contracts range from retail and food service companies like McDonald’s and Boots to institutions such as Buckingham Palace and The National Trust. 

Research by the University of Aberdeen found that most zero-hour contract workers are young, female, and in lower-status jobs in the private sector. One-fifth of zero-hour contract workers are full-time students, and 22% have managerial status at their company. 

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When to use a zero-hour contract

Employers use zero-hour contracts when they need additional workforce support for a specific period of time or serve a niche market and don’t need to keep a full-time staff. Zero-hour contracts aren’t always the right hiring solution for a business—consider alternatives such as:

  • Offering part-time employee work
  • Hiring independent contractors
  • Offering paid overtime for existing permanent employees
  • Using a staffing or temp agency
  • Including stipulations in employment agreements that prohibit employees from taking time off during busy periods
  • Holding longer office hours during busy seasons and shorter office hours during slow seasons

What legal rights are zero-hour contract workers entitled to?

There are two types of zero-hours contracts: Those that classify the individual as a worker and those that classify them as an employee. 

In the UK, zero-hour contract workers are entitled to statutory employment rights whether they’re classified as employees or workers. But if the individual meets the criteria of an employee, they’re entitled to additional rights under UK law.

National minimum wage pay

Under the National Minimum Wage Act 1998, zero-hour contract workers must be paid the national minimum wage for hours worked. According to the CIPD, workers must be paid for time spent on standby at a location specified by their employer. Whether a zero-hour worker gets paid for the time they spend on-call or on standby at home depends on their employment contract.

Statutory annual leave

Under UK law, most workers—including zero-hour contract workers—are entitled to the statutory minimum of paid holiday, which is 5.6 weeks per year (20 days of paid time off plus eight public holidays). As an employer, you can decide if paid public holidays are part of the worker’s leave entitlement or in addition. 

Learn more about statutory leave in the UK.

Holiday pay

Zero-hour contract workers are entitled to a week’s pay for each week of statutory leave. To calculate an average week’s pay for a zero-hour worker, add up their gross pay for the last 52 weeks and divide it by 52. If the individual worked zero hours one week, skip it and move to the next week. 

Additional employment rights for workers include:

  • Protection against unlawful wage deductions and unlawful discrimination
  • Statutory minimum length of rest breaks
  • Protection for whistleblowers
  • A cap on working hours that exceed 48 hours on average per week

Eligible individuals may also be entitled to statutory sick pay, maternity/paternity pay, and more, depending on their employment status and agreement with their employer. 

Exclusivity clause

Since zero-hour workers often work fewer hours than full-time employees, they tend to take on second jobs. Previously, employers could include exclusivity clauses in zero-hour contracts that would prevent workers from taking on another job simultaneously. But today, the Small Business, Enterprise and Employment (SBEE) Act prohibits employers from including exclusivity clauses in zero-hour contracts.

Notice periods, unfair dismissal, and redundancy pay

Zero-hour contract workers don’t have rights to statutory notice periods, meaning employers can end their employment relationship with a worker without giving notice. This also means that workers can leave a company without giving notice to their employer. Workers are not typically protected against unfair dismissal or entitled to statutory redundancy pay.

Advantages of a zero-hour contract

Zero-hour contracts can benefit companies and workers as long as the terms of the agreement are clearly defined for both parties.

Advantages for workers

  • Flexible working hours: Workers can accept or deny work when they see fit, providing them with more control over their work-life balance
  • Career opportunities: Workers can easily gain experience in an industry or company of interest, which can potentially lead to more stable work in the future
  • Supplemental income: Workers can keep a full-time job and use zero-hour contract work to make additional income

Advantages for employers

  • Reduced costs: Companies only have to pay for workers when there’s work for them to do and don’t have to cover employment costs for employees, such as benefits
  • Faster response time: By hiring zero-hour contract workers, employers can quickly respond to fluctuating business needs
  • Facilitates growth: Companies can grow their company without taking on the costs of permanent, full-time employees

Disadvantages of a zero-hour contract

In 2020, a campaign called Zero Hours Justice launched with the goal of ending zero-hour contracts due to their negative impacts on workers. The initiative also aims to help companies either eliminate their use of zero-hour contracts or learn how to use them fairly.

Disadvantages for workers

  • Poor mental health: On average, zero-hour workers experience 12.2% worse mental health than other workers due to income insecurity and low job satisfaction
  • Income insecurity: 57% of zero-hour workers find it difficult to budget monthly due to unreliable and unstable income levels
  • Uncertain schedules: Workers often have shifts scheduled at the last minute, and 51% of zero-hour workers have had shifts canceled with less than 24 hours' notice. This makes tasks like arranging childcare especially difficult for working parents
  • Fewer contributions: Workers don’t receive UK pension contributions or severance pay from their employer
  • Fear of retaliation: Workers worry that if they don’t accept the work that’s offered to them, the employer will stop offering them work in retaliation

Disadvantages for employers

  • Higher worker turnover: Since workers aren’t required to give notice, employers can be left in a constant state of last-minute hiring
  • Poor company culture: Building a strong company culture requires connection and consistency, which is difficult to accomplish when you have zero-hour contract workers coming in and out of the workplace
  • Lack of engagement: Zero-hour workers are often less engaged in their work since they’re not there as often and may not receive the same treatment as permanent employees

Hiring zero-hour contract workers? Don’t risk misclassification

A study from 2021 found that employers didn’t know how 7% of their zero-hour contract workers were classified. Though it may seem like an insignificant percentage, misclassifying a worker can lead to legal issues and financial consequences such as fines and jail time. 

Typically, an individual is a worker if they can reject or accept work without being penalized. Individuals may be considered employees if they have set hours they must work (as outlined in their employment contract) and cannot reject work assigned to them so long as it meets their employment agreement.

Want to avoid dealing with employee classification? You can do just that with Deel. We ensure your contracts comply with local labor laws and handle the entire onboarding process for you.

Book a free consultation to see how Deel can help make hiring easier for your team.

Disclaimer: This content is for informational purposes only and does not constitute legal advice. Please consult your legal counsel regarding zero-hour contracts and local employment laws.

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