Zero hours contracts in Scotland: Interim Report - Scottish Affairs Committee Contents

7  Other types of casual labour

91. So far in this Report we have focused mainly on zero hours contracts, but there are a range of other forms of insecure employment that can also allow vulnerable workers to be exploited. We discuss a number of them below.

Agency workers and the Swedish Derogation

92. In 2011, the Agency Workers Regulations were introduced to increase the employment rights of agency workers. The Regulations implement the EU's 2008 Temporary and Agency Workers Directive. Under the Regulations, agency workers are entitled to the same 'basic working conditions' as equivalent permanent staff after a 12-week qualifying period. The Regulations do not confer on workers the same rights as employees, such as protection against unfair dismissal and redundancy pay, but the equal treatment can be measured against comparable employees in terms of pay, the duration of working time, holiday pay and pay for bank holidays, overtime rates and unsociable hours premiums. We heard that the increase in rights for agency workers as a result of the Regulations was causing some employers to shift from using agencies to employing workers directly on zero hours contracts and thereby avoiding the additional responsibilities and costs.[158]

93. The Agency Workers Regulations include a derogation that allows agency workers to become employees of the agency; in doing so individuals cease to be entitled to equal pay, but instead are entitled to receive at least four weeks' pay between contracts (albeit at a reduced level). Known as the Swedish Derogation, it was included to cover agency workers who would be worse off if they were given pay equal to permanent employees, but evidence suggests that agencies and companies are using it to pay workers less than equal pay. The Communication Workers Union report that when the Regulations were introduced, 90% of 3,000 members employed by an agency to work on a BT contract were placed on a 'pay between assignment' contract which meant the agency could pay them less than permanent employees doing the same job.[159] Agencies can also avoid paying workers between assignments by offering a minimum of one hour's paid work per week.

94. The TUC are campaigning against the use of the Swedish Derogation:

    In Sweden, where these contracts originate, workers still receive equal pay once in post and 90% of normal pay between assignments. However in the UK workers have no equal pay rights and are paid half as much as they received in their last assignment, or minimum wage rates, between assignments. Agencies can also cut their hours, so they may receive as little as one hour of paid work a week.[160]

95. The TUC points to evidence from UK workplaces where agency staff are paid up to £135 a week less than permanent staff, despite working in the same place and doing the same job. Scot Walker, from Unite, told us that such practices were commonplace in the meat processing industry where agency workers, typically from a migrant background, were working alongside permanent employees but for less pay and on poorer terms and conditions.[161] As well as food production, the TUC found that Swedish Derogation contracts were used regularly in UK call centres and logistics firms. The Recruitment and Employment Confederation estimatesaround one in six agency workers to be on Swedish Derogation contracts.[162] In the construction industry, despite a falling number of workers, the number on these types of contracts increased by 30,000 over the last year.[163]

96. The TUC has lodged a formal complaint with the European Commission against the UK Government for failing to implement the Temporary Agency Workers Directive properly - the Agency Workers' Directive states that countries must prevent misuse of the Swedish Derogation. The TUC wish to see the use of the Swedish Derogation banned; however, if implemented fairly, the derogation can give workers greater security and all the benefits that come with permanent work such as protection from unfair dismissal, maternity leave and statutory redundancy pay.

97. The Swedish Derogation, if operated properly, can offer sufficient benefit to workers to justify its continued use, but the UK Government must tighten up the implementing Regulations to ensure that the Derogation can only be used in the spirit in which it was intended and not deliberately to reduce the pay and conditions of workers and increase the margins of employers.

Short hours

98. Under a short hours contract a worker is guaranteed a small number of hours of work each week, typically less than eight hours. Short hours contracts provide individuals with a degree of certainty while allowing them the opportunity to combine work with other commitments such as studying or caring. Short hours contracts can work well for many people but, as with zero hours contracts, they are also open to abuse.[164] According to Usdaw:

    A significant number of workers on short hours contracts are regularly and consistently working additional hours. This can be a problem for several reasons:

·  there is no guaranteed level of regular earnings and this can create uncertainty regarding bills and planning for the future;

·  many employee benefits are based on contractual earnings/hours therefore employees who consistently work additional hours may lose out on holiday pay/entitlement, maternity pay and sick pay and pension provisions;

·  they have no guarantee of any additional hours they regularly work.[165]

99. Out of 2,135 respondents to Usdaw's survey of short hours and zero hours contracts, 1,168 (54.7%) said they regularly worked additional hours each week and, of those, 75% said they wanted their additional hours guaranteed.Figure 3: Additional hours regularly worked per week by workers on short hours contracts

Source: Usdaw survey of zero hours and short hours contracts (figure based on 1,146 responses to this question)

Dave Watson from UNISON told us that, as lead negotiator for the biggest pension scheme in Scotland, "we tackled this issue about council staff [...] where the current rules basically say that if you have a 20-hour contract your pension contributions and your pension payment is based on 20 hours a week, even if you work 30 hours a week regularly."[166]

100. Usdaw propose that workers who regularly exceed their contracted hours should, after a period of 12 weeks, have their contracts changed to reflect their regular working pattern. Karen Whitefield explained "that is important because there are rights that come from that contract around holidays, holiday pay and sickness entitlement. Those are important rights that people have worked hard for and should be given."[167] The case law in this area is, according to BECTU, "somewhat ambiguous and contradictory".[168]

101. Usdaw's proposal has much to recommend it and they have our support in principle. But the introduction of such a measure would require care to prevent the unintended consequences of unscrupulous employers finding means to avoid or manipulate it to the detriment of the worker. For example, following the introduction of the Agency Workers Regulations, Eversheds surveyed 143 end-users of agency staff and 40% reported that they had cut agency roles to less than 12 weeks or had only engaged workers who were self-employed to avoid the impact of the Regulations.[169]We recommend that, where the provision of certain employee benefits can vary, the calculation of those benefits should reflect the number of hours regularly worked rather than a minimum number stipulated in a contract. The Government shouldexplore means to make this clear.

'Bogus self-employment'

102. 'Bogus' or 'false' self-employment refers to the use of employment intermediaries such as payroll companies to disguise employment as self-employment. This practice allows employers to avoid paying Employer's National Insurance contributions of 13.8%and enables them to deny employment rights to their employees. As a result, the workers are substantially cheaper, improving the margins of subcontractors and main contractors.[170] Out of all the forms of casual labour discussed in this report, workers who are bogus self-employed have the least rights - they are not entitled to receive sick pay, holiday pay or the National Minimum Wage and are responsible for their own taxation.
Box 16: Rail worker

The individual was taken on at £9.50 an hour but ended up getting paid the minimum wage.The individual worker had to pay £22 to the payroll company for their services and had to pay the employer national insurance contributions. Network Rail paid the agency about £15 an hour for that activity. The individual raised some serious safety concerns and was stopped from working because the agency felt under pressure not to employ him.

Source: Mick Cash, RMT (Q174)

Jake Molloy told us that workers were deliberately being forced into self-employment:

    It is subcontractors of subcontractors to oil companies. They are not just engineers. They could be any trade from scaffolders through painters to railroad platers to riggers. They are told that the only means of employing them is through self-employment. So they have to set up their own contract. They then provide a service to an agency contractor who provides their services to another contractor who provides a service to the oil company.

    We are seeing agencies that have previously retained staff and used them on a regular basis pushing them into self-employment to get round the agency workers directive because if they are providing those guys to service certain contractors beyond a 12-week period then we can try and push for the same protection, same payments and so on.[171]

103. In the offshore industry 'bogus self-employment' often takes the form of 'daily agreements'. Workers on these types of contract have no employment rights; they are contracted to provide a service, a daily rate is agreed and they are given work as and when required.[172]

104. Figures released by the ONS on 19 March 2014 show a record number of people in self-employment. Since 2010, 40% of new jobs created have been in self-employed roles.[173]The TUC caution against assuming that the rise in numbers of self-employed is a reflection of a surge in entrepreneurial spirit:"rather than running their own businesses, many people could be undertaking false self-employment, doing the same work as contracted employees but on poorer terms and conditions." According to the Treasury around 300,000 workers in the construction sector are in bogus self-employment, costing HMRC more than £380m.[174]ONS figures show that 44% of all construction workers are self-employed.

105. ONS and HMRC data show that incomes of people who are self-employed have dropped markedly over the last 12 years, from an average of £15,000 to just under £10,400, in 2011 prices.[175] Dave Watson explained that "40% of self-employed people fall into the 20% lowest paid, so again there is a perception that somehow self-employment is something for at least middle earnings for trades people and so on, but increasingly these people are falling into the lowest one".[176]

106. Not only do workers who in bogus self-employment have few employment rights but, as we discussed earlier, a reliance on self-employed workers can have consequences for safety. The Office of Rail Regulation found that "the widespread use of notionally 'self-employed' staff [...] has a generally negative effect on the attitudes and behaviour of those involved, which is not conducive to the development of a safe railway."[177]

107. In the 2013 Autumn Statement the Chancellor announced measures to address the problem of 'bogus' or 'false' self-employment:

    the Government is acting now to level the playing field so that companies cannot use employment intermediaries to disguise employment as self-employment and thus avoid employment taxes and deny employment rights to their workforce.[178]

Plans to clampdown on companies using bogus self-employment to avoid taxes were confirmed in the 2014 Budget but the reference to employment rights was absent. The Budget document states:

    The Government will amend existing legislation to prevent employment intermediaries being used to avoid employment taxes by disguising employment as self-employment.[179]

108. The measures are due to take effect from April 2014. We welcome the Government's announcement of plans to clampdown on the use of employment intermediaries to avoid employment taxes. It is disappointing that the clampdown does not extend to the use of these intermediaries to deny employment rights to workers as was suggested in the 2013 Autumn Statement. In response to this Report the Government should set out what other steps it is taking to prevent workers from being pushed into bogus self-employment.

Long hours

109. During our inquiry we met with workers on zero hours contracts to hear directly how their lives were affected by insecure employment. One worker we spoke to gave us a very different perspective of a zero hours contract. In his case, he was employed on a contract that stipulated he work five days per week but with no set number of hours. As a consequence he regularly worked 70 hours a week (three fifteen hour shifts and two thirteen hour shifts-the maximum allowed) whilst permanent employees worked 40 hours per week and got paid time and a half above that. He told us that individuals on these contracts had little time to spend with their families; the company was also able to make them work public holidays, such as Christmas Day, for no extra money.The worker explained that he and his colleagues were 'duped' into the contract, which, because of the benefits to the employer, the company is unwilling to change.

National insurance contributions and pension payments

110. An employer is liable to pay Employer's National Insurance Contributions of 13.8% on earnings of workers or employees above £136 per week. We heard that companies may deliberately employ zero hours workers for less than the £136 per week threshold in order to avoid the obligation to pay Employer's NIC, even if this means employing several workers to fill one position.[180] James Bevan from Unite told us that not only does this impact on the exchequer's tax take but it has an impact on "the competitiveness of those companies, because they could effectively undercut decent employers."[181]


111. An employer can avoid the administrative burden (though not necessarily the cost) of paying NIC if they use an umbrella or 'payroll' company. Under this arrangement, the umbrella company employs the worker and then contracts them out to where work is available. The umbrella company is liable for the NIC which is usually deducted from workers' salaries but, in theory, those salaries should be at least 13.8% higher to accommodate this.Contractor website, Contractor umbrella, warns workers:

    bear in mind that if you were to accept a contract paying the same rate as when you were a permanent member of staff, you would actually take home less money because of the Employer's NIC.[182]

112. Mick Cash gave us the example of a worker on the railways who was told by the umbrella company that their hourly rate was £9.50, but ended up being paid £6.19-part of the deduction was to cover Employer's NIC (as well as Employee's NIC).[183] Umbrella companies have also been found paying part of a worker's salary in the form of expenses even if those expenses have not been incurred. This allows the umbrella company to reduce the amount it needs to pay in Employer's NIC. Where workers cannot provide evidence of the expenses incurred they may be chased for unpaid tax by HMRC.[184]

113. The Low Incomes Tax Reform Group warn that changes to the benefits system as part of the introduction of Universal Creditmay mean workers face being fined if they are found to have been paid expenses on sums which should have been taxed as earnings:

    In the case of Universal Credit, it will be open to the Department for Work and Pensions (DWP) to charge a civil penalty if they think that the overpayment came about as a result of negligence by the claimant.

    Not only does the worker face an unexpected tax bill, he or she would also have to reimburse the DWP for overpaid benefit and possibly pay a penalty.[185]


114. Karen Whitefield from Usdaw cautioned that the introduction of the new automatic enrolment pension scheme, NEST (National Employment Savings Trust) might have an effect similar to NIC on employers:

    The new NEST provisions around pensions will have an impact here, and employers may choose to keep somebody's earnings lower than perhaps necessary.Instead of giving one person more hours, they will keep two or three people on lower hours because if they don't reach that threshold for NEST, which is £9,440 per year, they don't need to be auto enrolled into the pension scheme.[186]

The Government should monitor whether the introduction of the National Employment Savings Trust (NEST) prompts employers to take steps to avoid it and in doing so cause detriment to workers.

158   Employment Lawyers Association (ZHC006); Educational Institute of Scotland (ZHC007); RMT (ZHC004); A survey of 143 end-users conducted by Eversheds found that 17% put their temps on Swedish Derogation contracts - see Back

159   CWU Press Release, CWU Agency Campaign - Securing a fair deal for agency workers, 14 February 2014 Back

160   TUC Press release, TUC lodges complaint against government for failing to give equal pay to agency workers, 2 September 2013  Back

161   Q180 Back

162   Usdaw (ZHC0014) Back

163   UCATT, Rise in construction self-employment reinforces need for urgent action, 7 February 2013 Back

164   Q29 Back

165   Usdaw (ZHC0014) Back

166   Q309 Back

167   Q129 Back

168   BECTU, Response to government zero hours consultation, 14 March 2014 Back

169, Most end-uses avoid agency worker rules, 11 April 2012  Back

170, Osborne confirms clampdown on bogus self-employment, 19 March 2014 Back

171   Qq260-4 Back

172   RMT (ZHC004); Q254 Back

173   TUC press release, Rising job levels since recession driven by surge in self-employment, 22 January 2013 Back

174, Osborne confirms clampdown on bogus self-employment, 19 March 2014 Back

175   Self-employed workers' earnings slump by nearly a third, The Guardian, 3 December 2013  Back

176   Q311 Back

177   RMT (ZHC004) Back

178   HM Government, Autumn Statement 2013, Cm8747, p73 Back

179   HM Government, Budget 2014, HC 1004 Back

180   Q110 Back

181   Unite the Union (ZHC005); Q26 Back

182   See Back

183   Q202 Back

184   BBC News, 'Abusive tax avoidance' affects temporary workers, 21 October 2012  Back

185   BBC News, 'Abusive tax avoidance' affects temporary workers, 21 October 2012 Back

186   Q110 Back

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