The Rise in Popularity of Annualised Hours Contracts

When and how should an annualised contract be used?

What are annualised hours contracts?

Annualised hours contracts are an arrangement where an employee’s total working hours for the year are agreed upon in advance, with the flexibility to vary the number of hours worked in any given week or month. Unlike traditional contracts, where employees work a set number of hours each pay period, annualised hours allow for the hours to be distributed across the year depending on seasonal demand and business need. It is common with annualised hours contracts for the employee to be paid in equal instalments throughout the year, allowing for a more predictable and stable income.

Labour’s Employment Rights Bill

Historically, zero-hours contracts have been popular for businesses with fluctuating demands, such as hospitality, tourism and retail. These contracts provided flexibility for both the employer and employee.

With the introduction of the Employment Rights Bill on the horizon, zero-hour contracts as we know them will soon be changing. Employees will have the right to guaranteed hours, reasonable notice for shifts, and compensation for short notice changes. Employers are now under greater pressure to provide a more predictable working pattern for employees, particularly those on zero-hour contracts.

This is where annualised hours contracts may offer a valuable alternative. By defining the total annual hours in advance and allowing for flexibility in when those hours are worked, employers can offer a level of certainty that aligns with the spirit of the Employment Rights Bill, while still adapting to the needs of the business.

Compliance with National Minimum Wage (NMW)

One of the key benefits of annualised hours contracts, particularly for seasonal workers, is their ability to support compliance with National Minimum Wage (NMW) regulations.

An annualised hours worker paid in equal monthly instalments for an ascertainable number of hours a year is likely to be working salaried hours for NMW purposes. For salaried hours work it does not matter if the pay received in a busy month is less than NMW for the actual hours worked, because the hours are averaged over the year.

In contrast, most other types of contract are drafted by reference to a worker’s total weekly hours of work. It is a common misconception that workers with weekly working hours who are paid an annual salary will be doing salaried hours work for NMW purposes. It is in fact more likely that they would be considered to be doing unmeasured work. A worker doing unmeasured work must be paid the NMW for every hour they actually work in the pay reference period (i.e. per month).

For this reason, for seasonal workers, a salaried annualised hours contract is often a more effective way of ensuring compliance with NMW regulations, rather than the more traditional contract.

Benefits of annualised hours contracts

Key considerations for employers

1. Clear communication

Employers must ensure that the terms of the annualised hours contract are clearly communicated, including the total number of hours to be worked, how those hours will be distributed, and how pay and holiday will be calculated.

2. Monitoring hours

Employers need to track the total number of hours worked to ensure that employees do not exceed the agreed-upon annual hours and that they are paid correctly in line with minimum wage requirements.

3. Working time regulations

While annualised hours offer flexibility, employers must ensure that the distribution of hours is fair and consistent, taking care to avoid overburdening employees during peak periods. In general, a worker’s working time must not exceed an average of 48 hours a week over a 17-week reference period (Working Time Regulations 1998), unless they have agreed and signed an opt-out.

In light of the changing employment landscape, we are finding that annualised hours contracts are becoming an increasingly popular and practical solution for employers, especially in sectors reliant on seasonal work. These contracts offer the flexibility to manage changeable demand while also supporting compliance with Labour’s upcoming Employment Rights Bill, as well as national minimum wage laws. For both employers and employees, annualised hours provide a way to balance flexibility with security, making them a potential win-win for modern workplaces when used correctly.

For further guidance on implementing annualised hours contracts or transitioning from zero-hour contracts please do not hesitate to contact a member of our team.