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 By Nick Thomas, Partner and Lee Harding, Associate of the London labour & employment practice of global law firm, Morgan Lewis

The politically charged controversy, which continues to surround the debate on zero hours contracts shows no signs of letting up.  A Private Members’ Bill seeking their prohibition is due to have its second parliamentary reading on 28 February 2014.  In one sense, it is perhaps ironic that so many hours have been spent talking or writing about zero hours contracts.  As cited in some UK media, according to Trade Union boss, Dave Prentis, these “contracts hark back to the times when people would stand at the factory gates waiting to be picked for a day’s work”.  Taking umbrage with this sentiment, the Chief Executive of the Chartered Institutive of Personnel & Development (‘CIPD’) has said that their use has been “over estimated, under simplified and unfairly demonised”.  What everyone agrees on is that zero hours contracts cannot be ignored, which is important for all employers including those within the banking & finance industry using these contracts for IT, administrative and support roles.

Lee Harding, Associate of the London labour & employment practice of global law firm, Morgan Lewis
Lee Harding, Associate of the London labour & employment practice of global law firm, Morgan Lewis

As set out below, the legal position of the parties can vary considerably depending upon the type of “zero hours” contract in question.  Legally, there is no such thing as a zero hours contract – this is a colloquial label applied equally to a range of different types of arrangement.  In all cases, a hirer or “employer” is under no obligation to guarantee a minimum number of hours’ work to an individual.  However, in some cases the individual is under no obligation to accept the work offered whereas in other cases, they are required to accept some or all of any work offered.

The trouble with the imprecise and ambiguous label of zero hours contracts and the political rhetoric that has been generated is that this leads to a misinformed debate.  In order for a sensible examination of the issues to take place, the precise employment status of individuals subject to a zero hours contracts and the rights associated with such status firstly needs to be established.

There are three potential categories for those on a zero hours contract: (1) employees; (2) workers; or (3) the genuinely self-employed.  There are a wide range of factors which the Courts take into account in determining a person’s employment status.  No one factor is determinative of the issue.  Typically, an individual who is personally required to provide services, with little or no control of how, what, when, where and on what terms services are to be provided, is more likely to be an employee.  By contrast, someone who is genuinely self-employed will generally be said to be carrying on business and providing services to a customer on their own account.  So, whereas the employer “buys” the individual, the customer “buys” the job.  The intermediate category between these two extremes is the worker.  In most cases, an individual on a zero hours contract will either be a worker or an employee. This is important because only the genuinely self-employed have no employment rights.

Nick Thomas, Partner, Morgan Lewis
Nick Thomas, Partner, Morgan Lewis

All employees automatically count as “workers” but not all “workers” also qualify as employees.  Workers’ rights are extensive, including the right to be paid the National Minimum Wage, as well as the right to 5.6 weeks holiday each year.  For those workers who are also employees there are more rights still.  For employees with a sufficient period of unbroken service, there is, for example, the right to be dismissed only for one of the five permitted “fair” reasons and after a “fair” process has been followed.  It is simply incorrect, as some people have suggested that zero hour contracts provide zero rights.  People employed on zero hours contracts are able to enforce their legal rights before an Employment Tribunal in the same way as any other worker or employee.

Perhaps then the real problem with zero hours contracts is a misunderstanding of the true legal position.  One issue is the practice of employees offering an individual no guarantee of work whilst at the same time requiring that person to accept any work that is offered: an approach allowing employers to sort of “have their cake, and eat it”.  However, as already noted, the Courts will look at substance rather than form in determining the true nature of such a relationship.  This sounds a lot like the “master and servant relationship” viewed by the Courts as being akin to employment and therefore bringing with it the legal protection enjoyed by employees working under more conventional employment arrangements

It might be said that the very nature of the zero hours contracts makes them ripe for abuse.  An unscrupulous employer does not need to unfairly dismiss an employee who has fallen out of favour.  Instead, whilst that person might ostensibly remain an employee, the employer may decline to offer any more hours- achieving the same effect as a dismissal through different means.  Although it may be argued that a very long break in offering any more hours to an employee amounts to a termination of employment, the Courts have yet to opine on this issue.

Clearly, zero hours contracts will not suitable for all employees, at all times, in all circumstances.  These contracts may serve a useful purpose in a free market economy.  However, it ought to be remembered that the economics of supply and demand is a two-way street.  As the economy recovers, the demand for more permanent employees is likely to increase.  This is also likely to reduce the number of employees who feel that they may have no choice but to offer themselves for work through such arrangements.  A reputation for poor employee relations can be difficult to shift.  Employers with the need for highly skilled, specialised labour should be especially careful not to be on the losing side in the impending war for talent.

It remains to be said that since their introduction, zero hours contracts have continued to generate much debate on a number of fronts. Even the current Government is considering regulating their use – quite how and in what way is yet to be determined. However, before a full judgment can be made, it is essential to have a sound understanding of what they actually offer both the employer and the employee, now and in the future. They could in fact provide a solution for both parties, which otherwise may have been impossible.

About the authors:

Nick Thomas is a partner in Morgan Lewis’s Labour and Employment Practice in London. Nick advises on all aspects of employment law, including day-to-day human resources matters, complex restructurings and reorganizations, and employee disputes. He has worked with clients across a wide range of sectors, including finance, private equity, insurance, information technology, transportation, power, facilities management, communications, and manufacturing.

Nick regularly advises on all employment aspects of complex acquisitions and outsourcing projects, often involving several jurisdictions. He has also been involved in a number of high-profile transactions related to distressed businesses.

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Lee Harding is an associate in Morgan Lewis’s Employment Practice in London. Lee has varied experience acting for many clients including FTSE 100 companies, large global multinationals, technology driven and IP rich businesses, banks, and financial services institutions. He also has experience advising on complex pensions law liabilities and compliance issues.

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