Bookkeeping: what are the implications of zero hour contracts?

The latest ONS figures suggest there are now 901,000 people on zero hours contracts, a huge increase from 190,000 just seven years ago.

The seemingly unstoppable rise of the “gig economy” is having considerable impacts on employers and the trend looks set to continue. So what are the impacts for bookkeepers of zero hours contracts (ZHCs)? What do employers need to bear in mind – and what do the employees themselves need to think about?

ZHCs can work well for both employer and employee because they offer flexibility to the worker (they don’t have to work hours they don’t want to), and cost savings for the employer (they don’t have to pay if the demand is not there). However, the benefits for the employer mostly stop there. ZHCs are not, as they are often widely misconceived, a way for employers to skirt the obligations they have to their employees, like holiday pay, sick pay and access to pension schemes.

Worker, employee or self-employed?

The key for the bookkeeper is to know the difference in law between the three kinds of worker – Worker, Employee, and Self-employed – and be aware of the different rules that apply to each category. Then, you can work out entitlements and how ZHC workers will appear on the payroll. “Zero hours doesn’t haven’t a specific meaning in law,” says Steve Griffiths, Managing Partner of DWA Accountants. “So employers need to ensure that written contracts set out employment status, rights and obligations of their zero hours staff.”

There are some additional advantages for the employer; “gig economy workers are seen as self-employed and therefore entitled to the lower National Insurance rates, thus becoming a more favourable option than employment with the lower rates,” says Griffiths, and also for the employee; “it allows you the flexibility of being able to turn down work, which may be suited better to students or parents of young children; and you don’t have to do work even when asked if you don’t want to.” There are some knock-on benefits too. “Accepting a zero hour contract can allow you the opportunity to make yourself known and available to the company should a more permanent role become available.”

However, bookkeepers need to be on top of the fact that “zero hour workers are entitled to Statutory Annual Leave and the National Minimum Wage in the same way as regular workers; they are also entitled to the National Living Wage or the National Minimum Wage,” Griffiths says. The scenario is different if the company is using a self-employed person for additional work on a zero hours contract.

Use it when it’s right for you, but with caution

“These contracts are useful for casual staff or short seasonal work,” says Nicky Larkin, Founder of Goringe Accountants. “However, if the role is essentially a regular full-time or part-time job then an appropriate contract should be given to an employee.”

Steve Griffiths adds, “employers with more seasonal demand can make use of this contract type, and when an employer needs to cover sickness it can also be of use. As there’s no obligation on the employer’s part to provide work, employers can take on individuals on zero hour contracts as and when they need them.”

Whether this benefits the employee very much depends on their individual circumstances. Whereas some will enjoy the freedom ZHCs offer, “you don’t have guaranteed hours, the hours can be unpredictable which can impact on your social life, and/or it can leave you feeling demoralised in your work.” The biggest impact is likely to be financial. By their very nature, zero hours mean that “your weekly/monthly wage is not guaranteed.”

Zero hours doesn’t haven’t a specific meaning in law

A continuing trend

What are the wider implications of the gig economy? “Employees are less likely to feel motivated whilst they are employed on a ZHC compared to those employees on a full/part time contact,” says Griffiths. “As they may see fewer opportunities to progress within the firm, the employee may feel less invested in the company’s future.” This, Griffiths believes, “will ultimately impact upon morale and productivity of the work force.”

The prevalence of the gig economy is likely to increase as workers see the advantages of flexibility – being able to work when they want to, being able to take on more varied and interesting work, creating more of a work-life balance, and juggling family commitments. But the longer-term implications (particularly pension arrangements) are something that as a society, we are still coming to terms with. And are employees ‘choosing’ zero-hours contracts if there are so many of them that they have to take ZHCs in order to get the job they want?

Employees need to know that by agreeing to zero-term contracts they may be eroding some of their security and benefits in the long run – and employers need to know that zero hours contracts are not a way to save money wholesale or avoid their commitments to employees’ rights and benefits. “As an employer, don’t just think short term,” says Larkin. “You want loyalty from your staff.”

Changing perceptions

Is the bad press that ZHCs have received in the past being resolved? To an extent, yes. The image problem generally lies in the way that some very large companies have imposed ZHCs on their employees, and in some cases, where guidelines haven’t been followed. But is this enough? “The government could consider introducing a limit on zero hours contracts,” Larkin suggests. “For example if someone has been an employee for more than 6 months with an average of 16 hours per week, a minimum hour contract should be introduced.”

The rights of those on zero-hours contracts were strengthened to an extent in 2015 (in the Small Business, Enterprise and Employment Act) when exclusivity clauses were made illegal – meaning that if a company wants to prevent the worker taking work elsewhere, they will need to be employed. As HR consultant Claire Healy points out, however, that there are exceptions to this: “workers earning £20 per hour and above are exempt from the ban on exclusivity clauses.”

The government does offer advice on the circumstances where zero hours contracts are appropriate, suggests best practice and offers alternatives. Those circumstances are most likely to be:

  • New businesses, where demand can fluctuate and be unpredictable
  • Seasonal work, such as Christmas or in agriculture
  • Needing cover for unexpected sickness in critical roles
  • Spikes in demand, such as special events in catering
  • Testing a new service that may or may not be rolled out long-term.

Mark Blayney Stuart is Business Journalist of the Year, Wales Media Awards 2017 and Former Head of Research at the Chartered Institute of Marketing.

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