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Department for Employment and Learning - Response to consultation on Zero Hours Contracts
Response by Thompsons NI Solicitors September 2014
Initial Observations
The debate about zero hours contracts (ZHCs) has become oversimplified. ‘Zero Hours Contract’ is not a legal term. Contracts and clauses may take many forms, but “zero hours contract” is a convenient shorthand for contracts with disparate provisions such as those which provide that a worker is only paid for work actually performed while at other times being available for work, and prohibited from working for other employers, despite there being no guarantee of further work. Employers choose whether to offer work, when and for how much. Employees can only accept the work or decline, and refusal risks not being offered work again.
Although portrayed as a flexible labour solution to short-term problems, the evidence shows the widespread and long-term use of ZHCs as a means of circumventing employment protection and job security. This is an inherently abusive practice.
In order properly to understand the issues involved it’s important that the language used to describe ZHCs is precise. Unfortunately, the language is often unhelpfully muddled.
Language
Annex 1 sets out the legal approach, but does not go far enough. To understand the position it is necessary to understand the context: case law on ZHCs only occurs when cases go to appeal. The cases do not generally involve parties who agree with each other, and in many their factual and legal complexity is a result of deliberate management decisions specifically intended to prevent workers from acquiring the rights which attach to the status of ‘employee’.
The fact is that ZHCs are almost always offered on a ‘take it or leave it’ basis in circumstances where new employees have no realistic option but to accept those terms. This is the exploitation which needs to be tackled. It is a myth that employees welcome these contracts freely and after being fully informed about what they mean for them.
A non-comprehensive summary of the main rights is on page 9 of the consultation document. The value of those rights is a key driver to litigation being pursued at all.
An individual who works under a contract of employment is an ‘employee’. Legally, this is a precise term, which distinguishes that individual from ‘workers’ and the ‘self-employed’. The consultation makes the error of using the terms ‘employee’ and ‘employer’ in circumstances where that does not reflect the proper statuses involved. While this may appear to make the
consultation accessible to the lay person, it has the presumably unintended effect of rendering it legally unintelligible.
In this document we will use the following phrases in the following contexts
Employee - A person engaged to work under a contract of employment[1]
Worker - A person engaged to work but who is not an employee, and so is considered to be self-employed[2]
Law
The consultation observes that “It is likely that the majority of individuals on zero hours contracts are either employees or workers” (para 2.6)
That is not necessarily true, since the legal tests for employment will generally exclude the worker contracted on genuinely zero hours (see for example Carmichael v National Power plc (2000) IRLR 43, House of Lords).
Some forms of ZHC will result in employee or worker status, but many will result in neither.
The Value of Employee-status rights
Employee-status rights give legal force to basic fairness, and grant employees redress where those rights are breached. They are therefore a valuable asset as well as being vital to day-to-day exigencies such as getting a mortgage or tenancy, paying the bills, and reducing reliance on the benefits system. As well as having to show the employment contract relationship, employee rights generally also demand a qualifying period of 1 or 2 years continuous employment. Where the staffing need is genuinely short-term, staff on a ZHC would not accumulate sufficient continuous employment but when research shows that, in fact, 83% of staff on a ZHC have been so engaged for longer than 6 months and 65% for 2 years or more[3], the ZHC looks more like an abusive device to avoid employment responsibilities than a genuine need for flexibility.
Economic Value
Most ZHCs are disadvantageous and unfair. Where they strip away workplace rights workers have the same employment status as the self-employed even though that reflects neither that individual’s wish nor the underlying reality. Workers exploited by ZHCs ‘choose’ to be self-employed only in the sense that a prisoner ‘chooses’ to remain within the prison. The lack of choice debases and distorts the phrase “self-employed”. The flexibility ZHCs offer to employers is generated by transferring some of the risk of running a business onto individuals. A workplace reliant upon ZHCs is necessarily predicated upon a proportion of the workforce being treated as if self-employed. This is not necessarily economically or socially beneficial. According to the Resolution Foundation, the median self-employed salary is now £12,000 a year[4]. A report from the Institute of Fiscal Studies last year estimated that 40% of the self-employed were at or below the minimum wage.[5]
Job security is important for motivation. Research on the psychological contract has suggested that relative security both of employment and of status in the organisation is a fundamental part of the expected rewards for effort and that if it is undermined, there is a disruption of the effort-reward balance. Where employees feel unfairly treated or that the intrinsic quality of their jobs is at risk, they are likely to feel less committed to their organisation and hence may be less likely to put in discretionary effort.[6]
For increasing numbers of people their work reality is reflected in one of the facts below. The divide between those in a work relationship of their choice and those forced to accept what they can get has grown dramatically in the last few years as government policy seeks to undermine the model of secure employment:
- OECD research shows that between 2008 and 2012, the real value of average annual earnings fell in the UK and just five other countries, with only Greece and Hungary seeing larger falls.[7]
- For the first time, there are more people in working families living below the poverty line (6.7 million) than in workless and retired families in poverty combined (6.3 million);[8]
- Over the last decade the incomes of the self-employed have fallen more than the general population;[9]
- 99.9% of private-sector businesses are SMEs, and 75.3% of private businesses employ no-one other than their owner;[10]
- Almost all the recent increase in self-employment has come from people working for themselves and not setting-up in business or self-contracting;[11]
- The rise in business start-ups has been driven by the growth in the numbers of smaller, non-employing businesses;[12]
- 40% of self-employed people are in the bottom 20 per cent of earners;[13]
- Worldwide, high levels of self-employment are associated with low per capita GDP and poorly performing economies;[14] and
- Self-employment increases inequality levels in most major economies.[15]
These facts reflect serious consequences for individuals, their families and the UK economy. They can’t all be laid entirely at the door of ZHCs, but the up to 1 million people on them in GB represent a significant proportion of the self-employed, a large number of citizens and a very large number of households.
[1] The statutory definition is in Article 3(1) Employment Rights (NI) Order 1996
[2] The statutory definition is in Article 3(3) Employment Rights (NI) Order 1996
[3] Table 8, Zero Hours Contracts: Myth and Reality, Chartered Institute of Personnel and Development, November 2013
[4] The State of Living Standards, Resolution Foundation, January 2014
[5] Source : What can wages and employment tell us about the UK’s productivity puzzle? Blundell, Crawford and Jin, Institute of Fiscal Studies, June 2013, available at http://tinyurl.com/pjkd5xa
[6] Gallie, D, Felstead, A, Green, F and Inanc, H (2013) Fear at Work in Britain: First Findings from the Skills and Employment Survey 2012, London: Centre for Learning and Life Chances in Knowledge Economies and Societies, Institute of Education
[7] Reported as Table 14 in CIPD Megatrends Have We Seen the End of the Pay Rise? Available at http://tinyurl.com/qefthqd
[8] Source : p.26 Monitoring Poverty and Social Exclusion 2013, The Joseph Rowntree Foundation, December 2013
[9] Source : Changes in real earnings in the UK and London, 2002 to 2012, Sarah Levy, Office of National Statistics, 13 February 2013
[10] Source : BIS Statistical Release, 23rd October 2013, Business Population estimates for the UK and Regions 2013
[11] Source : Who are the new self employed? New Policy Institute report using figures from the Office of National Statistics, www.npi.org.uk/blog/work-and-pay/who-arenew-self-employed/
[12] Source : BIS Statistical Release, 23rd October 2013, Business Population estimates for the UK and Regions 2013
[13] Source : What can wages and employment tell us about the UK’s productivity puzzle? Blundell, Crawford and Jin, Institute of Fiscal Studies, June 2013 available at
http://tinyurl.com/pjkd5xa
[14] Source : analysis by Gapminder from International Labour Organization statistics, http://tinyurl.com/qyhxded
[15] Source : An Overview of Growing Income Inequalities in OECD Countries: Main Findings, Organisation for Economic Co-operation and Development (OECD) 2011
Specific Responses
Q1 Are there circumstances when it is justifiable to include an exclusivity clause in a zero hours contract? If so, please state what these are.
A1 No. We can envisage no circumstances where this would be justifiable. If an employer is not prepared to commit to an individual then it would be iniquitous to expect that individual to commit to an employer in a manner which potentially prevents them from earning a living.
Q2 Do you think that exclusivity contracts should be banned from zero hours contracts? Please state your reasons.
A2 Yes. ZHCs generally are exploitative as discussed above. The reality of the unequal bargaining power between individuals and employers is the only reason why most individuals would ever willingly ‘agree’ any such one-sided contract. It is incumbent on government to regulate employment relationships to ensure minimum standards of fairness and protect employees against exploitative employment practices.
Q3 Would banning zero hours contracts or exclusivity clauses create any negative impacts for SMEs?
A3 None that could be considered as justifying such an exploitative employment relationship.
Q4 Would you support a restriction on the use of exclusivity clauses in a zero hours contract? For example, banning the use of exclusivity clauses in employment contracts guaranteeing less than a minimum number of hours or a minimum gross pay? If so, could you please suggest what you consider the minimum hours, or minimum gross pay might be set at?
A4. A contract with guaranteed hours is, by definition, not a ZHC. ZHCs should be totally banned.
Q5 Do you think a ban or restriction on the use of exclusivity clauses in employment contracts would discourage employers from creating jobs? Are there any other unintended consequences of such action that should also be considered?
A5 No. We would expect the opposite to happen. Exclusivity clauses allow employers ‘to have their cake and eat it’. They can deny a competitor a skilled resource at no cost to themselves. Were this not possible, it would encourage more traditional and fairer employment relationships.
While the consultation document is correct to note (at para 3.26) that 9% of individuals on ZHCs are locked into exclusivity clauses, it omits to mention that the same CPD research shows that a further 15% are only allowed to seek work elsewhere “sometimes”.
Q6 Do you think the Department should provide more focused guidance on the use of exclusivity clauses, for example setting out commonly accepted circumstances when they are justified and how to ensure both parties are clear on what the clause means? If you answer yes, what information should be included?
A6 No – they should be totally banned.
Q7 Would a Code of Practice setting out fair and reasonable use of exclusivity clauses in zero hours contracts (a) help guide employers in their use, and (b) help individuals understand and challenge unfair practices? Please explain your response.
A7 No – they should be totally banned.
Q8 Do you think that a worker on a zero hours contract should have an automatic right to guaranteed hours if they have worked a regular pattern and number of hours on a zero hours or non-guaranteed hours contract for a given period (e.g. 12 months)? If so, could you suggest how many hours and how long an employee should have worked in order to trigger the automatic right?
A8 Yes. Once they have worked at least 5 hours per week average for 1 year, they should be given a contract for at least that number of hours. This would address the abusive position of long-term use of ZHCs.
Q9 Do you think that a worker on a zero hours contract should have an automatic right to request a fixed term contract if they have worked a regular pattern and number of hours on a zero hours or non-guaranteed hours contract for a given period (e.g. 12 months)? If so, could you suggest how many hours and how long an employee should have worked in order to trigger the right to request?
A9 No. This is a much less acceptable alternative to the right proposed at 8 above. Why would anyone want to apply for a fixed term contract when they could have a right to an open-ended contract? A fixed term contract would only be appropriate if the need for the hours was clearly related to a specific time-limited need.
Q10 Do you think that there would be benefit in introducing a compensatory arrangement similar to that adopted in the Republic of Ireland which would guarantee a minimum payment for workers on zero hours contracts who had an expectation of work, but who were not called to work in a given week? If so, could you suggest 1) what the minimum payment might be based upon; and 2) in what circumstances such a payment might be triggered?
A10 Yes. Consideration should be given to the introduction of the same system as in the RoI in the absence of other fundamental changes as proposed at 8 and 15.
Q11 Should a worker on zero hours contracts have the option to move to an annualised hours contract?
A11 No comment
Q12 We welcome views on whether retaining the current arrangements (or doing nothing) is sufficient and whether taking forward legislation as set out above would undermine business flexibility and individual choice.
A12 There is a clear need for legislation to prevent even greater casualisation and exploitation of the workforce. Our proposals are set out at 15 below.
Q13 If you have sought employment information, advice, or guidance on zero hours contracts before, (a) where did you receive it from, (b) how helpful was it to you in terms of explaining your position in regard to zero hours contracts, and (c) how could it have been improved?
A13 N/A
Q14 Do you think that model clauses for zero hours contracts would assist employers in drawing up zero hours contracts, and support employers and individuals to better understand their employment rights and obligations? If you answer yes, what should the key considerations be in producing model clauses?
A14 We do not believe that this is a problem. The problems are with the use and abuse of ZHCs, not how easily employers can operate them.
Q15 Do you think that existing employment law, combined with greater transparency over the terms of zero hours contracts, is the best way of ensuring individuals on zero hours contracts are making informed choices about the right contract for them to be on?
A15 No. This question gives the impression that potential new staff can somehow choose from a menu of employment relationships, and if they want to choose a ZHC rather than a contract of employment then they can. This is not the case.
Employees or workers very rarely have any choice in what type of contract they choose, or what is contained within it and even less so amongst the group of workers who are vulnerable to being offered a ZHC as their only work option.
Also rejecting a ZHC can create problems with benefits as failing to take up a ZHC can be deemed to be refusal of a reasonable offer of employment leading to benefits being stopped. The notion of an ‘informed choice’ therefore needs to be placed firmly in a real-world context – in which there is actually very little choice at all.
It would be disingenuous to suggest that the current law is sufficiently clear and accessible to be left alone with only the addition of a little non-binding guidance, when the consultation document notes that “there is no legal definition of a zero hours contract…” (para 2.2).
Existing employment law gives no real certainty in this area. This is reflected by the fact that the tests for ascertaining employment status have oscillated over the last 30 years between the control test, the organisational test, the economic reality test and the multiple test, and the fact that it has taken at least 2 separate trips in 11 years to the Supreme Court to consider the issue.
In our view the following practical steps should be introduced:
- All ZHCs could be deemed to be contracts of employment by exercising the existing power contained within Art. 24 of the Employment Relations (NI) Order 1999 to extend the various employment-status rights to those engaged under them. This would remove both the uncertainty that haunts these arrangements, and a key driver for some unscrupulous employers;
- Exclusivity clauses should be banned entirely;
- In addition to the right proposed at 8 above, a more general mechanism should be implemented whereby after a period of employment on a zero hours contract an individual could seek to have it transformed into ‘traditional’ contract of employment. This structure already exists for those employed under fixed-term contracts for a continuous period of 4 years. This would further address the abusive position of long-term use of these contracts;
- The introduction of a right to request a traditional employment contract. The Part-time Workers Directive was based upon an agreement between the European social partners (unions and employer organisations), clause 5(3) of which says, “as far as possible, employers should give consideration to … (b) requests by workers to transfer from part-time to full-time work or to increase their working time should the opportunity arise.” As ZHCs are a form of part-time working this establishes a basis for that approach;
- Regulation 15 of the National Minimum Wage Regulations defines ‘time work’ as not just time when a worker is working but also ‘time when a worker is available at or near a place of work for the purpose of doing timework and is required to be available for work’, except where the worker lives near their place of work and can be at home. This could be modified to include in the definition of ‘work’ time where the worker is required to be available for work and is prohibited by the contract from working for another employer. This would have the effect of those periods being included in the calculation of NMW and would therefore mean the employer would limit those periods when the worker is ‘on call’ (similar to arrangements in the health service) enabling the worker to manage her time and take other work at other periods.
Q16 Do you think there is more employers can do to inform individuals on zero hours contracts what their rights and terms are?
A16 Yes. But this does not address the underlying problems. We refer to our earlier responses.
QS 17-32 N/A
Thompsons NI
September 2014