The Government’s overhaul of zero-hours contracts is set to cost businesses £2.9bn a year, and small businesses will be impacted more than others, Government analysis shows.
The Department for Business and Trade’s options assessment for the right to guaranteed hours outlines that “micro and small businesses will face greater relative impacts” than larger ones, with sectors like hospitality, education and health and social care, which disproportionately use these contracts, set to face the brunt of that pressure.
The Government’s assessment also breaks down costs across guaranteed hours, reasonable notice of shifts, and compensation for cancelled shifts, with guaranteed hours alone estimated to cost businesses between £100m and £450m a year, depending on the Government’s yet-to-be-confirmed eligibility threshold of between 8 and 20 hours a week, though it’s also consulting on other options up to 48 hours.
That means facing additional costs on top of the employer National Insurance and Employment Allowance changes that have already squeezed SME budgets since last November’s Budget. It also means navigating another regulatory layer introduced under the Employment Rights Act, details of which could change depending on the outcome of the Government’s consultation on the measure, which closes on 25 August.
What SMEs Should Do Now, According to a Lawyer
Specialist Employment Solicitor Elissa Thursfield tells Employment Hero that businesses shouldn’t sit tight and wait for clarity while the consultation runs its course.
“This is a difficult one to draft our way out of, as we still don’t have the rules of the game yet”, she says.
“The best thing that businesses can do is make sure you are ready for when the detail does arrive, so that you are up to date with who in your business is exposed as a result of the changes.”
Elissa also recommends that businesses consider whether these contracts are the best fit in the first place.
“A key point that I always come back to is to really scrutinise where, why and how zero-hours contracts are being used, is it just habit? Do we really need to be using them in this part of the business?”
The Reference-Period Timing Trap
Before the rules land, she points out the importance of getting timing right when it comes to calculating reference periods for employees. While the Government currently has a preference for 12 weeks, the results of its consultation could mean that timeframe adjusts.
As such, Elissa advises small businesses to “get your data and understand how many workers you have, what the hours are that they have been working, and look at reference periods of 12, 26 and 52 weeks so you can really understand the trends in your business.”
“If the reference period is considered to be 12 weeks, the initial period when the data will be gathered is likely to be 12 weeks retrospective from when the actual duty starts,” Elissa says, “so it will be important to ensure that in the reference period before the actual duty commences, you are ready for the changes.”
Fix Record-Keeping Gaps Before The Rules Bite
Poor record-keeping, she adds, “is just another problem you don’t need to have.” She also stresses the importance of weighing up whether fixed-term or temporary contracts would suit certain roles better than zero-hours, “as there is more scope for them to be carved out of the guaranteed hours.”
Make Sure Your Voice Is Heard In The Consultation
In addition to taking precautionary steps, she also urges more small and micro-sized businesses to speak up about their concerns.
“Small businesses can be under-represented in these sorts of discussions, so it is important to get your view across. Model what the next 6, 9 and 12 months would look like for you from a staffing and cost perspective if you had zero-hours staff on a minimum of 8, 16, 20 and 48 hours so you can see the difference between the thresholds and get an understanding of what could be workable and what absolutely isn’t, based on different combinations of headcounts and hour thresholds.”
What Not To Do Before The Rules Land
Research from RSM UK’s Workforce survey found that 78% of businesses are already making changes to their zero-hours contracts, with 21% planning to reduce their use and 17% planning to drop them altogether. But Elissa says that instinct to cut back now could be risky.
“Avoid the temptation to reduce hours now. You could end up in breach of contract if you do it without having the arrangements checked, and the tripwire in the legislation anticipates detriments around guaranteed hours protection, so if you do this too close to the law becoming live you run the risk of litigation.”
What Employers Will Need to Do Once the Rules Land
Once zero-hours reforms come into force (expected in the second half of 2027) employers will be required to give advance warning before a shift is confirmed, cancelled or changed, rather than telling workers at the last minute, and to pay compensation when they don’t.
Employers will also need a documented process for identifying which workers qualify at the end of each reference period, a method for calculating the offer, and a way of making it in whatever format the regulations eventually set out.
Running through what that looks like in practice, Elissa adds: “You should anticipate needing a newly drafted contract, policy and process around guaranteed hours, a calculation method, an offer letter, diary reminders for the offer period, and closing communication for offers accepted, lapsed or rejected.”
On top of the guaranteed-hours paperwork, Elissa says businesses will also need “a policy on shift notice and cancellation terms, a review of agency and supplier contracts, updated rota and scheduling practices, and manager training.”
What Non-Compliance Could Cost Businesses
For businesses that fall foul of the rules once they land, the repercussions may go further than a fine. “The remedy exposure is not yet fully clear, it being what is ‘just and equitable for the financial loss suffered’, but we are expecting compensation for failure to offer guaranteed hours, likely to be linked to the hours that should have been guaranteed as some sort of financial loss,” Elissa says.
She expects further routes too: “a detriment-related claim, similar to current detriment claims already in employment law and not requiring a qualifying period, and automatic unfair dismissal in line with current award calculations.” And then there’s the matter of answering to the Fair Work Agency, “which will also be running in parallel and will be able to bring proceedings on behalf of workers and issue penalties,” she says. “The penalty regime is currently 200% of arrears with a maximum of £20,000 per worker.”
The Rights Zero-Hours Workers Have Today
Reform or no reform, Elissa says most businesses underestimate what zero-hours workers can enforce already. She recommends checking the following list:
- Exclusivity clauses are unenforceable
Zero-hours exclusivity clauses have been unenforceable since 2015, and dismissing an employee for working elsewhere while on a zero-hours contract is automatically unfair. - Statutory sick pay from day one
Zero-hours workers are eligible for SSP with no three-day waiting period, and the lower earnings limit has been removed, which previously excluded lower-earning zero-hours workers (now receiving the standard rate of 80% of their normal weekly earnings, whichever is lower). - Holiday pay
For irregular-hours workers, holiday builds up at 12.07% of the hours worked in each pay period and rolled up holiday pay at 12.07% uplift paid with each payslip now being lawful for these workers. - A written statement of terms
Employers must provide this, covering the section 1 statement of particulars, by the worker’s first day of work. - National minimum wage and statutory annual leave entitlements
- Employment status and a shorter route to unfair dismissal protection
There is no qualifying period for arguing employee status, it turns on the reality of the relationship, not on time served, so a zero hours worker with a settled pattern of regular shifts could have a legitimate argument that they are in fact an employee. Where such a worker can form that argument, they would have the ability to claim unfair dismissal after just six months from 1 January 2027. - Whistleblowing protection
Protection from detriment and dismissal for whistleblowing - The right to be accompanied to disciplinary or grievance hearings
- Protection under the Part-Time Workers Regulations 2000
As Elissa points out, many of these protections already apply, regardless of how the consultation ends. Whatever ministers settle on once the consultation closes will decide how many of the UK’s 2.6 million zero-hours workers move onto guaranteed contracts, and how much of that bill lands on the businesses least able to absorb it.
