‘Zero hours’ contracts and auto-enrolment

‘Zero hours’ contracts have been a topical issue in the media recently. This article considers employers’ auto-enrolment duties in respect of this category of worker.

19 August 2013

Zero hours contracts have been a topical issue in the media recently. This article considers employers’ auto-enrolment duties in respect of this category of worker.

What is a zero hours contract?
A zero hours contract is a contract for casual working. The worker is not contracted to work a set number of hours and is only paid for the number of hours he actually works. Some zero hours arrangements will require the worker to be available to work when called upon by the employer. Others are more flexible and the worker is free to accept or refuse work when offered.

Zero hours contracts have traditionally been popular in the retail, hospitality and leisure sectors, though recent evidence suggests they are becoming popular in a range of other sectors including health and education. A recent ONS labour force survey indicated that around 250,000 in the UK are employed on zero hours contracts (0.84% of UK workers), although there have been indications that the true figure could be closer to one million.

Automatic enrolment duties
Those on zero hours contracts are likely to be ‘workers’ for the purposes of auto-enrolment and so employers will have to assess their zero hours workers alongside the rest of their workforce. Due to having potentially widely fluctuating earnings, zero hours workers are more likely than others to change eligibility categories for the purposes of the auto-enrolment duties. For example, an increase in earnings in a pay reference period may result in a worker changing from being a non-eligible jobholder (who is entitled to opt into an auto-enrolment scheme) to an eligible jobholder (who must be auto-enrolled). Employers must therefore monitor and assess these workers’ earnings closely, i.e. at each pay reference period.

Contractual enrolment – a solution?
A potential solution to this extensive monitoring duty for employers is contractual enrolment. This involves an employer enrolling their workers into a qualifying scheme under their terms of employment as an alternative to auto-enrolment under the statutory Pensions Act 2008 regime. Contractual enrolment can avoid the need to continually assess a worker’s eligibility for auto-enrolment, although if a worker who has been contractually enrolled into a pension scheme opts out they will fall back into the statutory regime.

Auto-enrolment vehicle
A high volume of short-term members paying low levels of contributions may affect the vehicles providers will make available to employers and often results in an increase in the annual management charge payable by all members of a scheme. As a result, employers with a large number of low paid and/or transient zero hours workers may wish to consider using a different scheme to fulfil their auto-enrolment duties for these workers than for their full time employees. That said, with evidence to suggest that an increasing number of zero hours workers are employed in sectors which will typically have lower staff turnover and higher pay, such a segregated approach may not be appropriate for all employers of zero hours workers.