What are zero hour contracts?
These are employment contracts that confer minimal rights on employees and place minimal obligations on employers. With these contracts, the employer sets the hours but the employee is only paid for the time spent performing his or her duties. If during the hours set by the employer, the employee is not given any work to perform, then the employee receives no pay. Essentially, a zero hours contract pays on an output basis but requires an employee’s input on a time basis. In short, the employer has bought the employee’s labour time for free.
What is wrong with them?
Frequently, an employee on a zero hours contract may be delivering more hours to the employer than he or she is being paid for. For example, an employment contract may require an employee to be available to the employer for, say, 30 hours per week. The same contract may say the employee will only be paid for time spent on directly producing the product or service. Under this arrangement, an employee may only be paid for, say, 5 hours of work in a week despite being under the employer’s control for 30 hours.
Is this lawful?
Apparently so, although a court of law may deem otherwise should a case ever be presented. Employment law does not require an employer to provide work to employees. Under a standard employment contract, the employer is obliged only to pay the agreed wages, not to provide work. So employees are paid for idle time under a standard employment contract, but not under a zero hours contract.
What is HMRC’s stance?
HMRC enforces the national minimum wage (NMW). At the time of writing, NMW is £6.19 but will increase to £6.31 in October 2013. In enforcing the NMW, HMRC distinguishes between output based systems of employee remuneration and time-based systems. It appears HMRC views zero hours contracts as being output based. Here is a quote from HMRC’s website on the matter:
If an employer sets the working hours and the workers have to clock in and out, this counts as time work, not as output work
Many zero hours contracts do not require an employee to attend the employer’s premises unless specifically called in. The pay of such employees will be viewed by HMRC as output-based.
When an employee is required to clock in, HMRC determines the contract to be time based. Clocking in is a weak differentiator, in my view. An employee who clocks in one morning and is then sent home 5 minutes later due to insufficient work will be paid for 5 minutes at the NMW rate. If so, then the difference between output-based pay and time-based pay will be very small, even insignificant. So even if there is a daily attendance requirement, the vast bulk of the employee’s wages may still arise from output, not time. So HMRC’s attendance criterion appears only to weakly differentiate between the two systems.
Is there a solution?
Despite the pessimism, even defeatism, emanating from HR and employment law practitioners. I suspect feasible and straightforward solutions exist. For example, HMRC could strengthen its distinction between output-based and time-based systems of employee remuneration. If an employer places a requirement on employees to be available and on standby for, say, 30 hours per week then HMRC could mandate the employee be paid at NMW for 30 hours, even if there is no daily attendance requirement.
Enforcing the solution
Employers paying on output when in reality they are benefiting form unpaid employee time could be prosecuted by HMRC under NMW legislation. Additionally, guilty employers could be ordered to make good the difference to HMRC. The employee victims could then receive their due payments, net of NI and income tax , via HMRC, perhaps through Universal Credit, if and when it is ever implemented. The table below provides a rough and ready example of how the underpayment for 10 employees might be calculated in a case where an employer incorrectly pays on output instead of time.
To further deter unscrupulous employers, underpayment of wages could be made dis-allowable for tax purposes.