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Risk, Reward And The Zero Hours Contract

10/11/2016 12:54

When corporations share business risk with their employees, they should also be required to give employees a share in the rewards.

The zero-hours contract has become emblematic of the wider tussle between workers' rights and labour market flexibility. In a nutshell, the contracts provide useful flexibility for employers by allowing them to provide work - and pay - only when they have the consumer demand to warrant it. In effect, the contracts shift business risk from the bottom line onto the employee's bank balance.

To many, this smells of worker exploitation. To others, it is the secret ingredient that allowed businesses to keep employment up during the Great Recession. Either way, their use is sky-rocketing, stories of abuse are stacking up, and quite a few policy papers are being published suggesting potential reforms.

Two basic approaches have been advocated so far: an outright ban, and efforts to eliminate the most egregious abuses. For example, exclusivity clauses (where workers are required to be available at all times despite having no guaranteed work) were outlawed last year. Similarly, restrictions could be put in place to prevent the extended use of the contracts over many years.

But crucially, none of these approaches addresses the basic premise behind the contract. In essence, some employers argue that an uncertain business climate means they need to share the risk of a dip in demand with employees, otherwise they wouldn't be able to employ them at all. If we accept this premise, then the quid pro quo should be that where risk is shared, so is reward. This is the standard trade-off in business and economics: taking a risk is typically associated with the prospect of return.

This approach would not expose businesses to greater risk of bankruptcy (if there's no profit, then there is no reward to be shared). But where they are able to reap significant profits off the back of zero-hours contracts, they would be required to share this. One way to put this into practice might be to require employers who use zero hours contracts to set up a bonus scheme for these employees, where a proportion of a firm's profits is divided amongst these employees, corresponding to the proportion of a firm's workforce employed using zero-hours.

This suggestion has been completely absent from debates about reform thus far, and provides a way to give workers a fairer deal, whilst preserving the flexibility that employers value.

This blog should not be interpreted as the official view of either Tearfund or Foresight Economics

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