An annualised hours contract is an employment contract where the employee’s working hours are calculated on an hourly, rather than daily or weekly, basis and those hours are at times stipulated by the employer during the year. Annualised hours provide greater flexibility of working hours than a standard contract but includes a commitment to a minimum number of overall hours, unlike a zero hours contract.
Why use them?
There are a number of reasons why employers might choose to use annualised hours. They can include:
- Workplaces where there is considerable fluctuation in work demands, such as some manufacturing work, warehouses, retail or highly seasonal work such as tourism. Annualised hours allows employees to be employed year-round while acknowledging there might be significant peaks and troughs in work.
- Reducing costs by limiting or eliminating overtime in workplaces where work demand fluctuates.
- Promoting flexible working for working parents who want to be able to work longer hours during term time so they can have more time off during school holidays.
- Employers who would like greater flexibility but do not want to use zero hours contracts.
When not to use them?
Annualised hours should probably be avoided unless the employer is able to make a fairly good assessment of how many hours an employee might be needed per year. Effectively, the employer is committing to paying a set amount per year. If that figure is set too high, the employer will over pay for the amount of work done. If the figure is set too low, the employer may have to pay costly, unbudgeted overtime payments.
There are two particularly tricky issues that are frequently raised with employees on annualised hours:
- Should the employer pay the employee each week or month based on the hours actually worked or should the employer make regular equal payments? The former means that employees might receive large payments after some pay periods and little or no payments during other pay periods. The latter is technically possible but employers need to be careful to avoid issues over National Minimum Wage and ensure that employees are paid at the correct time if they exceed the total annualised hours.
- How to calculate holiday entitlement and holiday pay. Calculating holiday pay for annualised workers is not straightforward and the position is now more complicated as a result of the decision in Brazel v Harpur Trust (which has just been upheld by the Court of Appeal – see our recent article on it here). Many employers choose to “roll-up” holiday pay, but doing so is technically unlawful (although it is possible to offset compensation claims by the rolled up amounts paid).
If you require further information about anything covered in this blog, please contact your usual contact at the firm on +44 (0)20 3375 7000.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, August 2019