Zero sum game
Are zero hours contracts a flexible solution or a false economy? Graham Richardson considers the key issues and set out some of the traps organisations need to avoid.
The prevalence of zero hours contracts has become a hot topic recently, with press reports suggesting that NHS trusts are increasingly using such contracts for key clinical staff. The use of such contracts also raises a number of practical and legal issues.
What are they?
Typically used for low-level, low-paid work, zero hours contracts provide flexibility to the organisation, which is under no obligation to provide work, and to the worker, who is often under no obligation to accept it.
No obligation
The obvious benefits of such an arrangement for an employer is that they have no obligation to pay their staff when work is not available. The contracts often fit particularly well with seasonal work or where demand is unpredictable. If the work is available, the organisation can simply call in their staff who will be paid in accordance with the amount of work they are required to undertake. On the face of it, this appears to be a cost-effective way of meeting short term staffing needs. However, there are various practical and legal issues associated with zero hours contracts which it is important for organisations to bear in mind.
Practical issues
In many zero hours contracts the flexibility cuts both ways, giving the zero hours worker (referred to in this article as the “individual”) the same level of flexibility as the organisation. So while the organisation is not legally obliged to provide work, similarly the individual is often not obliged to accept work if offered. While this may help in establishing that the individual is not legally an employee, it may also give the organisation practical difficulties if the individual exercises their right to decline work and there is not a suitable alternative available. In particular, this could have consequences in the public sector when it is not just profits that could be hit but the continuity of public services.
Using zero hours contracts can also have negative public relations consequences, as illustrated by the recent negative press reports concerning zero hours staff in the NHS. The offering of zero hours contracts can be perceived by some as exploiting staff who are offered no job security, or lowering the quality of public services.
Legal issues
Legal status
Many of the legal issues relating to zero hours contracts relate to the legal status of the individual. Broadly speaking there are three categories of employment status: an employee, a worker and a self-employed person. Different legal rights attach to the different categories of employment status, and an individual could fall into any one of these categories, depending on the circumstances.
Where an individual is an employee they will (subject to having the necessary continuous service) have the right to claim unfair dismissal, be entitled to redundancy pay and have a statutory right to notice pay. There are various tests of employment status, such as the requirement to provide personal service, the obligation for the employer to provide work and for the employee to perform it, and the level of the employer’s control over the employee.
Workers are a wider category than employees. Broadly speaking, a worker is a person who has entered into or works under a contract of employment, or any other contract where that person undertakes to do or perform personally any work or service to any person who is not a client or customer of any profession or business of the person performing the services. It may be the case that an individual is not an employee but is a worker. Workers have a narrower range of protection than employees, but are entitled to, for example, statutory minimum holiday pay and rest breaks, the National Minimum Wage, and have discrimination and whistleblowing protection.
Genuinely self-employed contractors generally do not have employment protection, although some categories of self-employed contractors will have protection from discrimination.
When engaging an individual as a zero hours worker it is essential for an organisation to be clear on the employment status of the individual – are they an employee, a worker or a self-employed contractor? The contractual documentation entered into with the individual should then be consistent with that employment status, as should the position on the ground, including the rights and benefits provided to the individual.
Organisations can potentially be lulled into a false sense of security by the flexible nature of zero hours contracts into assuming that the individual is not an employee. This is not necessarily the case. The recent case of Pulse Healthcare v Carewatch Care illustrates the importance of the position on the ground being consistent with the contractual documentation. In this case carers engaged under a zero hours contract were found by the Employment Appeal Tribunal to be legally employees. This was despite the fact that the contract stated that there was no obligation on the organisation to provide them with work and that they were free to work for another employer.
The EAT found that the written contract did not reflect the true agreement between the parties, and that in reality the Claimants were obliged personally to perform services, to carry out the work offered to them and the employer was obliged to offer them work. The EAT also found that they were not in reality employed under a succession of individual contracts but under a global contract, which meant that they had sufficient continuity of service to claim unfair dismissal. Given the very challenging nature of the critical care services that the Claimants were providing, the EAT considered it “fanciful” to suppose that the organisation relied on ad hoc arrangements to provide such services.
This case illustrates the fact that just because an individual’s written contract indicates that they are not an employee does not necessarily mean that they do not have employment status. If this is ever challenged an Employment Tribunal will look not only at the written contract but at the position on the ground and will consider whether the written contract reflects the reality of the situation.
If an organisation does not want its zero hours staff to be employees it is essential not only that the contractual documentation is consistent with this, but that this is also reflected in the actual position on the ground. If the individual is not to be an employee then a clear distinction should be kept between casual workers and employees, and casual workers should not be treated as employees.
Part-time/fixed term contracts
It is also important to be aware that casual workers may have protection under the Regulations protecting part-time workers and fixed-term employees. These essentially provide that a part-time worker (or fixed-term employee) should not be treated less favourably than comparable full-time (or permanent) staff at the employer, except where the less favourable treatment is justified on objective grounds. Note that while the part-time protection applies to workers, the fixed-term protection only applies to the narrower category of employees.
These provisions will frequently be relevant as an individual working under a zero hours contract will almost always work part-time, and may also be employed for a fixed term. Where one or both of these Regulations apply, organisations will need to ensure that the individual is not worse off than comparable full term/permanent employees, or that they have a valid objective justification for any less favourable treatment.
Umbrella contracts
It is important for organisations to consider not only the employment status of zero hours workers when they are working, but also their status during periods between working. Sometimes such individuals are engaged under “umbrella” or global contracts which apply throughout the term of the relationship between the individual and the organisation and not just when they are working.
Where the individual is found to be an employee, if there is an umbrella contract in place then continuity of employment may continue between periods of working, leading to the individual obtaining, for example, unfair dismissal protection and redundancy rights.
Holiday rights
The accrual of holiday rights is a particularly difficult area for zero hours contracts. In many cases an individual working under a zero hours contract will legally be a worker and therefore accrue holiday rights, even if they are not an employee. But do they accrue holiday rights during gaps between assignments? If there is an umbrella contract in place then potentially they may do so. The Working Time Regulations 1998 appear to allow for the accrual of holiday rights by virtue of an individual being a worker, whether or not they are actually working. However, if an individual is engaged on series of genuinely discrete contracts and is not legally a worker during the periods between those contracts, then they would only accrue holiday for periods when they were working.
The recent decision of the European Court of Justice in the German case of Heimann and another v Kaiser GmbH considers the issue of holiday accrual under a zero hours contract. In this case the employment contracts of two employees were terminated but they were retained instead under a zero hours contract. When these contracts subsequently came to an end they argued that they had accrued the right to paid annual leave for the whole period of the zero hours contract. Kaiser argued that under national (ie German) law, during the period when they were not working they did not accrue holiday.
The ECJ found that there was nothing in EC law to prevent a national law or practice adjusting the accrual of holiday on a pro-rata basis when staff are working under a zero hours contract.
While on the face it this ECJ decision might seem to give some encouragement to employers, it was decided under German law. Under the UK’s Working Time Regulations the current position appears to be that if an individual is a worker they will accrue holiday whether or not do any work. Case law has now clearly established this to be the position for workers on sick leave, although there are no cases on accrual of holiday under zero hours contracts in UK law. The ECJ’s decision might lead some employers to argue that a different approach should be taken in the case of zero hours contracts, although there is clearly no guarantee that such an argument would be successful. As the Working Time Regulations allow payments in lieu of holiday on termination to be varied by a “relevant agreement” between employer and worker, there may also be scope for such an argument being successful where there is a relevant agreement in place between the organisation and individual making clear that the individual will not on termination be paid in lieu of holiday for periods when they were not contracted to work under the zero hours contract.
Tax treatment
Organisations will need to reach a decision on the appropriate tax treatment of payments to individuals working under zero hours contracts. Whether it is appropriate (and lawful) for the individual to be responsible for his own tax payments or whether the organisation should deduct tax from payments to the individual through PAYE will depend on the individual circumstances of the case. The employment status of an individual will determine tax treatment. In contrast while the tax treatment of payments to individuals may be one factor taken into account where a Tribunal is required to decide on the employment status of an individual, it is unlikely on its own to be conclusive.
In any event it is important that organisations comply with their legal taxation obligations, and HMRC may require backdated tax payments to be made, alongside any other sanctions, where it finds that they have failed to do so.
Conclusion
Zero hours contracts are often introduced as a way of giving an organisation increased flexibility in its staffing arrangements and saving money, and when used carefully they can have this effect. However, zero hours contracts raise various legal issues that it is important to consider, and can create a number of traps for the unwary. It is important for organisations to take legal advice to ensure that any zero hours contracts they are using are appropriately drafted, that the position on the ground is consistent with the contractual documentation, and that their organisation is complying with its legal obligations. When an organisation fails to take these steps it may find itself involved in costly litigation which could make the use of a zero hours contract a false economy.
Graham Richardson is a Director at Dickinson Dees LLP. He can be contacted by This email address is being protected from spambots. You need JavaScript enabled to view it..