A ‘guaranteed day’s pay’ to ease the fundamental injustice of zero-hours contracts

There’s less than a week left to respond to the coalition government’s consultation on zero-hours employment contracts (the closing date is next Thursday, 13 March). But you’ll be wasting your time if you propose an outright ban on this controversial and increasingly widespread type of ultra-flexible on-call working which is now used in most sectors of the economy, especially retail, hospitality and public services, and right across the occupational spectrum.

The Office for National Statistics (ONS) estimates that between 2004 and 2012 the proportion of people employed on zero-hours contracts in the UK doubled from 0.4% to 0.8% of total employment. This represents around 250,000 people in the latter year, though the ONS is unsure whether the estimate, obtained from the Labour Force Survey (LFS), fully reflects the incidence of zero-hours contracts because respondents to the LFS may not always be aware of their exact contractual status. The ONS therefore intends to publish estimates based on a broader methodology and will start to publish these in due course. My estimate is that around 750,000 people were employed on zero-hours contracts in 2012, 2.5% of total employment.    

The government consultation, launched last December by the Business Secretary, Vince Cable, is open to the possibility of placing restrictions on the way zero-hours contracts are used.  However, the basic principle at the heart of the controversy over zero-hours contracts – i.e. that employers should be able to hire people on contracts that offer no guarantee of work - has not been questioned. As a result of this limited scope, the consultation process is flawed because it addresses neither the fundamental injustice of a practice which looks suspiciously like a 21^st century version of the master-servant relationship or the various economic drawbacks associated with it.

The Secretary of State it seems is content to accept the argument of the employers lobby that zero-hours contracts have been ‘unfairly demonised’. On this view the contracts are said to be good for jobs and add to the happiness of many people employed in this way who like the flexibility of choosing when they work; the quid pro quo for no guaranteed hours of work is no obligation to accept work offered. For example, the UK Commission for Employment and Skills (UKCES) last week published the findings of a survey of which suggests that two-thirds of people on zero-hours contracts are satisfied with their jobs.   

Supporters of the practice admit that some bosses abuse the contracts, for example by offering work at very short notice and then penalising people unable to meet the request by not offering work on other occasions. The UKCES survey finds that 45% of people on zero-hours contracts have only ‘a little, not very much or no control’ over how many hours they work while 60% have to accept work if their employer offers it. Supporters of zero-hours contracts are therefore not entirely opposed to reform, albeit attributing abuses to poor management practice which a suitable code of conduct or a bit of enlightened leadership and management training would overcome.

Consequently, the employers lobby is fairly relaxed about what might emerge from the current consultation even though Dr Cable is using it to examine whether to legislate against exclusivity clauses in zero-hours contracts which prevent people from working for more than one employer, as well as looking at how best to make these contracts transparent so that people on them are clear about precisely what they have signed up to.

Yet aside from acknowledging some problems, the consultation document adopts a generally favourable stance towards zero-hours contracts, emphasising the flexibility and choice they bestow on labour market participants, without subjecting the practice to proper analytical scrutiny. In particular, the consultation document fails to acknowledge that zero-hours contracts represent a clear departure from what have commonly been found to be more economically efficient and socially just forms of employment relationship.

Ideally employers should employ people on a permanent or temporary basis, at an agreed rate of pay for an agreed usual number of hours subject to the uncertainty of possible short and/or long-run change in economic or market conditions.  Employers implicitly accept they will bear the cost of any very short-run or mild fluctuations in activity by continuing to pay staff even if fewer than usual hours are required. Those employed in turn implicitly accept that they will bear the cost of more prolonged or permanent reductions in required hours, either in the form of job loss, a reduction in usual hours, a lower rate of pay for usual hours, or some combination of these outcomes.

This type of relationship is both just and efficient. The financial burden associated with uncertainty is shared. People in work have the security of knowing they will be paid in the event of short-run or mild fluctuations which reduce the amount of hours their employer can offer. And by ensuring an element of fixed wage cost into the employment relationship employers have a greater incentive to increase the productivity per hour of those they employ. Zero-hours contracts, by contrast, are unjust and inefficient.

Zero-hours contracts are unjust because employers bear none of the cost of uncertainty while those they employ have no guarantee of work and thus no security of income (the UKCES survey cited above finds that 57% of people on zero-hours contracts find it difficult to budget from month to month). Zero-hours contracts also flout the spirit of the National Minimum Wage (NMW). Although people on zero-hours contracts are legally entitled to the NMW for the hours they work, the entitlement is worthless at times when no work is offered. 

Zero-hours contracts are in turn inefficient because productivity suffers from their increased use.  People on these contracts are always nominally in work, adding to employment, but not necessarily always at work, depressing measured productivity. It is no coincidence that the continued rise in zero-hours contracts since the start of the recession has been accompanied by a slump in productivity. Moreover by establishing the employment relationship on as casual a basis as possible it is far less likely that employers will invest in productivity enhancing training and development for people on zero-hours contracts, an outcome also highlighted by the UKCES survey finding that 17% of zero-hours contract workers have to fund their own training if they want to progress in the labour market. Supporters of zero-hours contracts who in the same breath stress the importance of investment in human capital to raise labour productivity thus appear to be suffering from a severe bout of cognitive dissonance.  

The negative impact of zero-hours contracts on productivity clearly places a question mark over the value to the economy of the additional jobs their use has been said to generate. This is especially true when one considers that the impact of zero-hours contracts on unemployment is probably far less than whatever impact they have on jobs. These contracts are most attractive to people without dependents and/or who aren’t reliant on their zero-hours contract job for their entire regular income, notably full-time students, who the UKCES survey finds account for 1 in 4 people on a zero-hours contracts, and also older people who may use the occasional bit of casual work to supplement their pension. But the situation is very different for those unemployed people who need the security of a steady job that pays a regular wage. These are at risk of being effectively blocked out of work if their only alternative to a pitiful but secure welfare cheque is the insecurity of a zero-hours contract job.

All this suggest that the best policy response to the rise of the zero-hours contract is not, as the Business Secretary is proposing, to tackle abuse of the practice but instead to actively discourage it. How might this be done? One approach would be to outlaw zero-hours contracts by requiring all employment contracts to stipulate guaranteed minimum hours. However, this would effectively reduce flexibility and choice both to employers and those they employ. A preferable alternative would be to allow the use of zero-hours contracts but require employers to guarantee a day’s pay per week to people employed in this way.

The statutory guaranteed pay level would normally reflect the agreed rate for the job in question but could be no less than the NMW times 7.5 hours (i.e. the current UK standard statistical definition of a day’s employment). At present this would represent a minimum weekly wage of £47.32 for an adult on a zero-hours contract in any week where no hours are offered. For people on zero hours contracts who usually work fewer than 7.5 hours in a week, the pro-rata equivalent would be a guarantee of 1.5 paid hours per week. HMRC would inspect the payment as part of the normal process of minimum wage inspection, so no significant additional red tape would be imposed on employers.  

The merit of a guaranteed day’s pay is that by adding a small element of fixed wage cost to zero-hours contracts (over and above any non-wage employment costs employers might already incur) it eases the injustice and reduces the inefficiency the contracts cause without harming the flexibility they give to the labour market. In so doing it also removes the fig leaf defence that the rationale for using zero-hours contracts is to maximise flexibility rather than simply to minimise costs by employing people on the cheap.  

Opponents of this idea will doubtless still argue that the proposed increase in wage costs might result in job cuts. But given the minimal size of the cost increase any negative effect on jobs is likely to be negligible, especially when considered alongside the potential offsetting social and economic benefits. A more legitimate concern is that employers might attempt to claw back any increase in wage costs by offering fewer hours to zero-contract workers or lowering pay rates for hours actually worked. However, the ability of employers to behave in this way will, as always, depend on the state of the labour market and the relative bargaining power of workers. Either way, the guaranteed day’s pay at least provides people with some modest degree of wage security and the dignity which goes with that.                

In this respect, one should also remember that ‘it will be bad for jobs and the jobless’ has been the default position of opponents of progressive labour market reform since time immemorial, most recently in the period before introduction of the hourly NMW. The same voices today defending zero-hours contracts were arguing against a statutory wage floor in the 1990s and on very similar grounds. A minimum wage would cost jobs and all we needed were more trained and progressive bosses who would see the business case for ‘doing good’ by their employees. However, in a labour market which at the time included employees on less than £1 per hour it eventually came to be accepted that in a world where not all employers aspire to be good, or are under constant economic pressure not to be, the very last thing you should do is make life easy for the bad employer.

Opponents of the NMW in the 1990s were on the wrong side of history. The same is true of those today who think it right that people can be employed on zero-hours contracts without any guarantee of if or when they will be paid. On the contrary, it is entirely right that zero-hours contracts be demonised in a civilised society. Sadly, Dr Cable’s timid consultation will not lead to the end of the practice but one can but hope that the end will not be too far away.