Labour’s Plan to Make Work Pay – The End of Zero-Hour Contracts?

At the core of Labour’s “Plan to Make Work Pay” is a commitment to raise wages, enhance job security, and support working people. The party's key proposals include delivering a genuine living wage, banning ‘exploitative’ zero-hour contracts, and ending the practice of "fire and rehire." Labour has pledged to introduce these reforms through the Employment Rights Bill by 12 October 2024, though this is not necessarily a hard deadline. But will these proposals improve Britain’s economy, or could they pose new challenges?

This article takes a closer look at Labour’s plan to ban so-called exploitative zero-hour contracts, exploring the potential effects and costs to businesses and the likely legislative changes.

Labour’s Case Against Zero-Hour Contracts

Labour’s Plan to Make Work Pay describes zero-hour contracts as a form of “one-sided flexibility” that disproportionately benefit employers by allowing them to schedule workers only when needed, without guaranteeing income stability or predictability for the workers.

Under Labour’s proposal, every worker would be entitled to a contract that reflects their regular working hours, determined by a 12-week reference period. The aim is clear: provide workers with greater job security by banning zero-hour contracts, specifically those deemed ‘exploitative’. Labour’s plan seeks to end the uncertainty that comes with such contracts, where workers often face unpredictable shifts and irregular income.

To mitigate the concerns of businesses, Labour is attempting to strike a balance between protecting workers and maintaining operational flexibility for businesses by assuring them that it will not ban fixed-term contracts or seasonal work. Implicitly, this will mean that businesses will likely have to replace zero-hour contracts with fixed term contracts.

Trade Unions and Labour’s Stance

The proposal to ban zero-hour contracts has not come out of the blue. Labour’s strong ties to trade unions, which have historically opposed such contracts, are well known. Unions argue that zero-hour contracts leave workers vulnerable, exploited, and financially insecure. Mick Lynch, the General Secretary of the RMT union, has gone so far as to call them a “national disgrace,” urging for their outright ban.

It remains unclear whether Labour intends to ban all zero-hour contracts or focus solely on those it deems exploitative. It’s likely the ban would target contracts involving vulnerable workers, providing them with opportunities to move into jobs offering regular hours. However, the government still needs to clarify the extent of the ban and what it deems to be exploitative

The Cost of Banning Zero-Hour Contracts

Banning zero-hour contracts could come with significant financial implications for UK industries. Research by Witan Solicitors suggests the costs could be steep:

• The hospitality sector could face additional costs of up to £1.49 billion.  

  
  

• The construction industry could incur up to £1.65 billion in extra costs.·

  
  

• The financial and business services sector could see an increase of £21.2 billion

These figures highlight the potential burden on businesses, especially those heavily reliant on flexible labour.

The Business Perspective: Flexibility & Costs

For many businesses, particularly in industries like hospitality and retail, zero-hour contracts offer critical flexibility. These contracts allow businesses to quickly scale their workforce up or down in response to fluctuating demand without having to commit to fixed employment costs. This is particularly helpful during seasonal peaks or unexpected surges. Additionally, businesses can optimise their labour costs as they are not obliged to pay for employee benefits, such as health insurance, pensions or overtime. By avoiding these fixed costs, businesses can operate more efficiently and maintain profitability, particularly in sectors where margins are tight and demand is variable.

Despite these contracts’ initial appeal for cost cutting, they can also create considerable unpredictability for businesses. Employers heavily reliant on zero-hour contracts often face the risk of sudden staff shortages or, conversely, overstaffing due to fluctuating labour needs and the difficulty of forecasting labour accurately. Managing constantly changing rotas will add to administrative burdens, and high employee turnover can increase business’ recruitment and training expenses.  

In place of zero-hour contracts, Labour proposes introducing new rights for workers. Under the new rules, employees would be entitled to reasonable notice of shift changes and working hours. If shifts are cancelled or reduced without proper notice, workers could claim compensation.

Case Study: New Zealand

New Zealand serves as a useful comparison as it was one of the first countries to take significant legislative action against the use of zero-hour contracts. Their ban mandated employers to provide contracts with specific, agreed-upon hours and adequate notice of schedule changes, which bear strong similarities to Labour’s current proposals. 

New Zealand’s rules gave flexibility to employers by allowing them to insert ‘availability’ clauses into contracts. These clauses require employees to be available beyond their guaranteed hours, provided certain conditions are met. These conditions include the employers having a genuine reason for the clause, ensuring that the employee has guaranteed working hours and compensating the employee for their availability. The extent of compensation given to workers is influenced by factors such as the number of hours required and restrictions placed on the employee, such as remaining on call.

The primary costs to businesses in New Zealand caused by the banning of zero-hour contracts related to administrative changes, such as adjusting employment contracts and managing new labour practices, including compensating their employees under the ‘availability’ clauses. Additional costs were also borne as a result of businesses having to guarantee a minimum number of working hours.

Businesses were initially faced with clear challenges, particularly those that operated in sectors that were heavily reliant on flexible, casual labour. Some companies were forced to restructure their workforce planning and find new ways to manage demand fluctuation. However, over time many employers were able to maintain operational flexibility within the framework of the new regulations.

A Balancing Act Between Workers and Business

While Labour’s plan aims to improve worker rights, the economic impact of banning zero-hour contracts raises concerns. Such a move could lead to a less flexible job market, driving up costs for businesses and making it harder for them to adjust to changes in consumer demand. 

The case of New Zealand indicates that the costs borne by businesses for banning zero-hour contracts are likely to be administrative costs of updating employment contracts to ensure compliance with the new regulations and managing new labour contracts, as well as additional costs of compensating employees if fixed-term contracts are drafted with availability clauses, which appears to be the approach the Labour government will take.

To minimise these additional costs, employers will need act proactively by updating their employment contracts and explore offering regular working hours to workers where possible. A possible solution is for businesses to offer fixed term contracts containing availability clauses to maintain operational flexibility, as was the case in New Zealand, although other available solutions could include part-time contracts or minimum hour contracts.

While Labour’s proposals align with its mission to create a "new partnership with business and trade unions," the success of these reforms from a business perspective will depend on how effectively the government can balance worker protections with the need to support business flexibility.

However the Labour government chooses to effect its ban on zero-hour contracts, what is clear is that workers’ rights reign supreme over business concerns. The wording on Labour’s policy focuses on worker rights and the unpredictability that workers face under zero-hour contracts, using phrases such as ‘one-sided flexibility’, all of which indicate that Labour wants to re-balance the Labour market in their favour.

Labour’s success in balancing the interest of business against those of workers will in part hinge on how many zero-hour contracts it deems to be exploitative and what terms businesses will be allowed to insert into their fixed term contracts.