Empowering the Freelance Economy

What will happen if the UK bans zero-hour contracts?

Keir Starmer and members of his Cabinet seem set on banning zero-hours contracts.. Image source: Labour.org
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In the wake of the Labour Party’s proposal for a “New Deal for Working People,” which includes measures to ban zero-hours contracts and enhance workers’ rights, we analyse how such a policy change might unfold. Could it do more harm than good to freelancers and the companies that rely on them? And what would freelancer contracts even look like under this new policy?

Imagine Ana, a freelance graphic designer who juggles work with caring for her young son. That could mean working for clients when her son attends daycare for a few hours each week. She can’t afford full-time daycare right now, so, when he’s not at daycare or home taking a nap, she completes her work once he’s in bed for the night. It’s not an uncommon routine for freelancers of young children.

Zero-hour contracts offer “working people” like Ana the flexibility to pick up work around her family, but naturally, she’s worried if these contracts go on the chopping block.

We explore the potential ups and downs of banning zero-hour contracts for freelancers and the companies that hire them.

Just as we see a potential ending of contractor blanket bans thanks to new legislation coming into effect this month, could we see another challenge for hiring companies to hire PSC freelancers should zero-hour contracts be banned? And what would freelancer contracts look like should the Labour policy go ahead? We asked some experts for their take on the situation.

The Labour Party has stated that it will ban zero-hours contracts and contracts without a minimum number of guaranteed hours. It is also their intention to ensure anyone working regular hours for twelve weeks or more will gain a right to a regular contract to reflect those hours normally worked.

Dave Chaplin, of IR35 Shield, a contractor insurer and IR35 specialist, tells The Freelance Informer, “It seems highly unlikely that there will be a ban on zero-hours contracts that would apply to business-to-business contracts for services. Being paid only for completed work cannot be banned as a concept.”

Seb Maley of contractor insurer Qdos believes it is time for some workers in the gig space to get protection: “True, some workers operating on zero-hour contracts deserve and ultimately need more protection and security – and so, in many ways, you could argue zero hour contracts aren’t suitable for these workers. However, zero-hour contracts are irrelevant to contractors operating outside of IR35. They are, after all, engaging with their clients on a business-to-business footing, so these contracts don’t come into the equation.”

Darren Newman, an employment lawyer, has expressed in one of his latest newsletters, that Shadow Chancellor of Exchequer Rachel Reeves suggests that the policy aims to ensure workers have a contract guaranteeing their regular working hours, potentially leading to a ban on zero-hours contracts. With other high-ranking members echoing this, it’s possible a policy shift is underway. That’s despite the Labour Party promising a ban on zero-hours contracts for many years and nothing coming to fruition. Their latest proposals might involve merging the ban with a broader right to a contract reflecting actual hours worked. Shadow Deputy Prime Minister Angela Rayner’s opinion on this is awaited as there seems to be mixed messaging from Labour Party speeches over the matter, according to Newman.

Employment law specialists such as Newman, could doubt the effectiveness of banning zero-hours contracts alone. Simply guaranteeing a small number of hours weekly doesn’t solve job insecurity. Defining a minimum guarantee remains unclear. That’s why Labour may reconsider the ban’s implications should they come into power.

Additionally, according to Newman, the proposal to grant regular contracts based on consistent hours worked seems flawed. Workers with irregular hours need more protection. This policy could even incentivise employers to keep hours irregular to avoid permanent contracts. Enforcing contracts based on 12-week averages arguably seems impractical.

Instead, Newman suggests strengthening the Workers (Predictable Terms and Conditions) Act 2023. Currently, it allows workers to request regular hours but lacks teeth since employers can refuse without reason. Amending it to require a compelling business case for refusal would prevent most workers from being stuck in zero-hours contracts against their will.

Here we look at the pros and cons of zero-hours contracts:

Flexibility vs. Security

Zero-hour contracts can offer freelancers control over their schedules, but the income can be unreliable. Certain industries though such as e-commerce can have a certain amount of control when for example delivery drivers deliver based on next-day delivery. This is where things such as IR35 come into play where there is an element of control over a freelancer or self-employed worker.

Either way, the freedom to choose your hours or not does not address the possibility that a ban on these contracts could limit work opportunities, impacting consumer purchasing power, particularly during economic downturns. However, it could also lead to better protections like sick pay and holiday leave should hiring companies play ball.

The Self-Employment Trade-Off

While some argue that freelancers can handle sick leave and holiday pay themselves, zero-hour contracts wouldn’t guarantee these benefits. On the positive side, these contracts might protect workers from unfair dismissal, assuming they qualify as self-employed or fixed-term contractors under the new regulations. But will companies be as willing to hire under these new restrictions? Will they push more workers into the unregulated umbrella company industry?

Impact on Income and the Economy

Freelancers often juggle multiple contracts to make ends meet. Without zero-hour options, they might struggle to find enough work that fits in with their family obligations, especially during economic hardship. This, in turn, could affect a freelancer’s a ability to pay their mortgage, rent and utility bills. With nearly five million people working as independent workers the broader economy could feel a negative impact on consumer spending and financial stability.

Contract options

Traditional freelance contracts work well in many cases, but they can be rigid and might blur the lines between self-employed and employee. Here are a couple of alternative structures to consider but with caution:

Statement of Work (SOW): This is a simpler, project-based agreement. It outlines the specific deliverables, timeline, and payment terms for a single project. This is a good option for well-defined, short-term engagements. Since it’s for a set project, it avoids some of the ongoing control issues that can trip up traditional contracts. However, read the fine print for anything that looks like an employee contract or a remittance document that has you paying client/end-user tax obligations.

Milestone-based agreements: This builds on a traditional contract but breaks down the project into phases or milestones. Payment is tied to completing each successful milestone. This gives the client more confidence that the project will be kept on track and ensures the freelancer gets paid for completed work. However, there could be discrepancies on quality of work, so there is always the risk the client will be going back and forth with additional requests. If these requests are additional to the original agreed milestones then you must renegotiate these tasks and have it agreed in writing the amount you will get paid for these tasks and when.

Here are some additional points to consider that can help ensure your contract avoids disguised employment:

Right to substitute: Include a clause allowing you to subcontract work to others with the client’s approval. This strengthens your position as an independent contractor.

Ownership of work products: Clearly define who owns the intellectual property rights to the work you produce.

Taxes and benefits: As a freelancer, you are responsible for your own taxes and benefits. Make sure the contract reflects this.

These are just alternatives and the best choice will depend on your specific situation and the type of work you do. For complex projects, consulting with a lawyer or IR35 insurance firm to craft a custom agreement might be a wise investment. However, if all zero-hour contracts are banned, how will freelancers providing a service remain independent workers and have all the rights and benefits the Labour Party is promising?

The details are still vague as in many political promises before a general election.

Striking a balance

A mutual goal is to create a fair and simple system that protects workers’ rights while still allowing flexibility. Balancing these needs might be tricky, but it’s important to consider both sides. After all, a happy and secure Ana is more likely to do great work, and companies that can tap into a pool of talented freelancers are more likely to thrive. The key is finding a way to make the system work for everyone, not just big companies and political agendas, but “working people.”

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