Paying for flexibility: Should workers on zero-hours contracts receive a higher minimum wage?

As the demand for flexible working increases from employers, the questions arises as to who should shoulder the cost.

Following the Government’s response to the Employment Review, which I led, the Low Pay Commission is consulting on the proposal that a higher minimum wage be applied to non-guaranteed hours.

My proposal is usually seen to refer to zero-hours contracts but there has also been an increase in what might be called ‘nominal hours’ contracts – ones in which employers guarantee, say, one or two hours a week but customarily require/request much more working time. Indeed, as I will explain later, my proposal has implications for anyone – even if they are guaranteed many more hours than this – who is then expected to work additional hours.  

In this post – which will also act as my submission to the LPC - I’ll explain the reasoning behind the proposal and explore some of the issues the Commission will need to resolve if it decides to go ahead.    

By the way this is only one of the big areas on which I want to see further progress from the Government. There is also worker voice, on which I recommended making it much easier for workers to gain independent representation and rights to information and consultation. And I will post in a few days on employment status, another issue which is currently the subject of consultation.

The case for the proposal

While some people are happy with zero or nominal hours contracts (ZNHCs) for many – particularly those who can’t find other employment - they are a problem. People on such contracts find it harder to get mortgages or loans and to keep up the payments, they are generally more dissatisfied with work and suffer greater economic insecurity. Furthermore, with no redundancy rights or rights to claim unfair dismissal, workers on zero-hours contracts fear ever making a mistake at work, much less raising concerns with management, as this could lead to them being denied the hours they rely upon.      

In many cases ZNHCs are a way for organisations to transfer risk from the employer to the worker. As CEO of the RSA I have every year to propose a budget – of which staff costs are the largest component - to my Trustees. If we’re too cautious we may find ourselves unable to respond to opportunities to expand, but if we aim too high we could end up with too much capacity and ultimately a big deficit (this has only happened once in my eleven years here but it was a chastening experience). If we get this wrong the Board and executive are accountable to RSA Fellows and, ultimately if we really screw up, to the Charity Commission.

But if my employment model was to have lots of staff on ZNHCs I could avoid this risk and transfer it to our staff. Therefore, my Review proposal was that if firms want to operate in this way they should pay a premium in the form of minimum wage top up.               

This proposal aims to achieve two alternative benefits. First, the wage premium for variable time would encourage employers to think a bit harder about whether they need so much work to be through ZNHCs. The consequence should be that more people who are customarily asked to work longer than the time specified in their contract will get more guaranteed hours with consequent benefits for their economic opportunities and security. The second benefit is that those low paid people who continue to be on ZNHCs will get a bit more income to compensate them for the risk and insecurity.  

A final, less direct, aim of the proposal is to address the growing problem of unpaid overtime in the UK economy. A recent Resolution Foundation report found that one in ten UK employees work overtime, that the average pay premium has fallen and that an increasing number of workers get little or no top-up for working time beyond contracted hours. Also, the UK is one of the only developed economies that has no economy-wide framework for mandatory overtime pay. While my proposal applies only to those on minimum wage, the hope is that a premium for the low paid may help to set a wider norm that employers should pay more for additional, non-contracted, hours.

Objections

What about the objections to the proposal? The first and most important is that it might lead to a loss of jobs if employers, facing smaller profit margins as a consequence of higher costs, decide not to undertake economic activity. There are several responses to this concern most obviously that similar gloomy predictions made for the minimum wage itself have not been borne out. Bear in mind that if employers do offer more fixed hours with more notice they won’t have higher costs, and also that firms may find they get more loyalty and greater effort from workers who feel less chronically insecure.  

Nevertheless, there will be a cost for firms and potentially for consumers, particularly in sectors with many low wage ZNHC workers. Yet, even when there is a very good reason for ZNHCs to be used, this flexibility is still an arrangement demanded by the employer and so it is reasonable that they should pay something for it. Having spoken widely about modern work, my sense of public opinion is that people would rather pay a few pence more for goods and services than see workers on low pay exploited.

The converse criticism of my proposal is that it isn’t sufficiently radical. Some people want to ban zero hours contracts entirely. The problem with this is, first, that it would almost certainly lead to some jobs being lost; second, that if zero hours are banned firms may simply shift to one hour or two hour contracts, so the logic of banning is effectively to stop the use of all variable hours contracts. But there are many instances in which variability is justified, and, don’t forget, that many workers on ZNHCs who say they like the flexibility it provides them.

I share the view that people should not have to be on ZNHCs with the same hirer for long periods which is why I proposed - and the Government have accepted - a right to request a full employment contract for people who have been on variable hours or in temporary work for a hirer for more than one year. It will be important to monitor how widely this right is taken up and how many employers respond positively. The right to request is more likely to succeed if the Government makes clear that, if it doesn’t have an impact, it will consider a statutory right to a full contract.

Implementation

The key design issues for the policy are; how long should the notice period be for hours to qualify as fixed and how big should the premium be for variable hours? There are various models around the world of which one of the most comprehensive and generous is Australia where the policy of ‘casual loading’ adds a 25% wage premium for work that is not guaranteed or covered by a normal employment contract. I have no doubt that the LPC will do some modelling of options – and once the system is in place it can, of course, be adjusted - but my starter for ten would be a 15%  hourly minimum wage lift for hours of work which the employer offers/requests with less than seven days’ notice. 

Finally, I want to recognise that there are risks and drawbacks to this proposal. I acknowledge fears about an impacts on jobs, so, I would be very happy if the LPC was to recommend initially trialling my proposal – perhaps for two years - to test whether there are any discernible employment impacts. I understand that champions of the minimum wage worry about complicating it with a new band. I know that by being restricted to people on (or within 15% of) the minimum wage my proposal will only help up to one in five ZNHC workers.

But I still believe, strongly, that we must act to address the one sided-nature of the benefits of ZNHCs and that the best and most realistic plan is to start with something modest and see how it impacts.

If anyone else agrees with me do please send your views in to the Low Pay Commission.