Your Complete Guide to Annualised Hours in 2021

With flexible working on the mind of employers and employees alike, we at HR and You Ltd felt it was important to cover some of the options available. For some businesses, it may be worthwhile to consider annualised hours for their employees. But would annualised hours suit your business, and how do you decide if they’re right for you?

What are annualised hours?

Annualised hours are a specific kind of contract that calculates pay based on a whole year of work, as opposed to a week or month. These contracts set forth expectations than an employee will work a specific number of hours a year, but those hours will not be the same month-to-month or even week-to-week. Those hours will be split into ‘core’ or ‘rostered’ hours, and ‘reserve’ hours to give the employer flexibility over the amount of work they require. [1]

These types of flexible working contracts are becoming more popular, especially amongst organisations that experience peaks and troughs in demand. According to the Chartered Institute of Personnel and Development (CIPD), the industries utilising the most annualised workers are:

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• health and social care (320,945 workers);
• education (250,519 workers);
• wholesale, retail, and vehicular repair (238,314 workers);
• public admin and defence (169,268 workers);
• and manufacturing (163,196 workers).

 

Annualised workers as a whole make up 6.4% of the workforce. [2]

Whereas a standard contract may result in the organisation needing to pay their employees large amounts of overtime, annualised hours can cut those costs. They also provide an employee with a great deal more flexibility and promote work-life balance – but more on that later.

When would annualised contracts be appropriate?

 

To answer this question, let’s create a fictional scenario and explore why annualised hours are appropriate for this.

There is a town in the Highlands. It is a popular winter destination for holiday-makers because the slopes there are particularly good for skiing. To capitalise on this, the town has developed into a big tourist destination, with many hotels, cafes, restaurants, attractions, and festive winter events from late October through March. During this time of year, it gets busy, particularly for the transport company that takes skiers, snowboarders, and other snow sports enthusiasts to the top of the mountain.

However, come March, all the snow at the mountaintops has vanished. Whilst there is some interest in the summer months, when hiking and camping in the mountains becomes more popular, the little town is fairly quiet until the following October, and the demand for the transport company’s services plummets.

Annualised hours for the employees of this fictional transport company are appropriate because;

• There is uneven demand throughout the year for their services; more drivers, ticket-checkers, security and maintenance crews will be required through their busy winter period than the rest of the year.
• The times when more employees will be needed throughout the year is predictable – there will be a peak in winter when all hands will be needed on deck, but limited (but not zero) demand for services in summer.

 

This company could utilise zero hour contracts, or pay overtime, or hire temporary staff. The latter two options could prove costly, given both the rate or overtime pay and the cost of hiring, onboarding, and training staff, and the former unstable and unattractive for employees. However, annualised hours may be more appropriate, guaranteeing stability, reducing turnover and reducing costs.

Furthermore, for any employer who would seek to lay off employees at the end of their busy period, considerations such as cost and contractual agreement to do so must be in place before attempting the lay-off, and there can be legal consequences for failing to do so.

Annualised hours can also benefit employees and promote a healthy work-life balance culture within the company. Employers have a duty of care towards their employees, and this extends to preventing overwork and overly long hours. Annualised contracts can codify expectations about work hours, can be used pro-actively alongside robust scheduling systems to prevent any single employee from experiencing overwork, and provide longer breaks in which those employees can recover and avoid burning out.

In quiet periods, employees would also have the freedom to pursue personal interests, like family, travelling, volunteer work, meet other commitments, or pursue education, further training, or self-development, secure in their expected pay and not fearing redundancy in quiet periods.

What are the benefits of annualised hours?

For employers,

• A more predictable and stable distribution of costs throughout the year. Employers know exactly how much their personnel will cost without worrying about overtime pay.
• It may be cheaper than paying overtime to cover shifts that may not be used, or paying an employee who will feel underutilised.
• A more motivated, secure, efficient, and happier workforce.
• A reduction in the overall number of employees, especially temporary employees.
• An opportunity to increase communication and trust of staff by involving them directly in decisions made about their work, by involving workplace reps and unions in the process.
• The ability to extend hours a product or service is available to customers by managing periods of low – but not zero – interest.

 

For employees,

• Secure employment with a fixed salary, despite their requirement being occasionally low.
• A reduction in working hours and an increase in pensionable pay.
• More flexibility in those working hours, allowing employees better opportunities to meet their commitments and expectations out of work.
• Salaries are often enhanced by employers to take into account anomalies that may occur over the year.
• If offered the chance to represent themselves in discussions about worktime and workload, a better sense of communication and care from management.

 

What are the drawbacks of annualised hours?

For employers,

• They can be initially very complex and difficult to set up – it is recommended that an employer seeking to switch to annualised hours seek HR support.
• The requirement for accurate estimates of workloads over the year.
• Some shifts may be difficult to cover, such as over weekends.

For employees,

• Some employees who already work for a company on a regular contract and work regular overtime may find they rely on their overtime payments, which would be taken away with reserved hours.
• Some workers may not appreciate having to work longer hours.
• Employees may be made redundant due to the lowered work requirements.
• Irregular working hours may interfere with non-working life.
• Some employees may be unhappy regarding the company’s definition of ‘reasonable notice’.

How do annualised hours work?

In an employee’s employment contract, an employer would set forth provisions about work hours and payment that deviate from the standard 9-to-5 contract. These provisions will include a calculation for how many hours of work will be expected for the employee to work, and the amount of money the employer guarantees to pay for that work.

To explain how the employee’s work hours and pay are calculated, let’s create a fictional train driver for our fictional Highlands transport company; his name is Gus.

• Gus’ contract is based upon the expectations that he will work ~25 hours a week, at £10 an hour, and will be paid equal amounts for that work per month regardless of how many hours he actually puts in.
• So, first of all, the employer takes the average hours per week Gus will work – 25 – and multiplies it by 52, to get the total for a whole year’s worth of hours. (That’s 1,300 hours).
• Then, they subtract Gus’ annual leave (140 hours – assuming Gus on average is expected to work 5 days a week at 5 hours a week, then 28 days x 5 hours = 140 hours of leave a year) which leaves 1,160 work hours.
• Then repeat the same for statutory bank holidays (8 x 5 = 40 hours) leaving 1,120 work hours.
• So, Gus’ annual salary is 1,120 work hours multiplied by his hourly rate – £10 x 1,120 hours = £11,200 (It’s almost like I picked £10 to make that calculation easy!).
• Since Gus’ employer wants to pay him equal sums every month, his monthly pay before tax and national insurance is equal to his yearly salary divided by twelve months – £11,200 / 12 = £933.33 a month.

 

The important thing to note is that if Gus does not work all the hours his contract lays out – if he only works 1,000 hours in the year – Gus’ employer is still legally required to pay him his full yearly salary of £11,200, with the remaining 120 hours a loss for the company. If he works more than 1,120 hours, then Gus’ employer is also liable for overtime pay.

So that’s how employees pay is calculated – but how do the flexible hours work?

Annualised hours typically split an employee’s hours into ‘rostered hours’ and ‘reserve hours’. Employees on roster would be expected to turn up to their jobs normally and work the hours they are rostered as normal. Typically, roster hours are assigned in a shift pattern, though not always, and is given in advance.

Where annualised contracts allow for flexibility on the employer’s end is the reserve hours. During this time, the employee is expected to be on call to meet demand. However, they are not expected to turn up unless called to do so. This allows an employer to meet a swell in demand with an expanded workforce, whilst not forcing them to come in when demand is lower. So Gus – our fictional train driver – may only work 15 of his hours rostered, with the other 10 hours left in reserve for when demand is high and more trains are needed.

The ratio of rostered to reserved hours may differ from company to company, and contracts can be made up of all or one or all of the other. An employer who is confident they know what demand they will have to meet on any given day may favour rostered hours, whilst one who’s work expectations will be unpredictable may rely more on reserve hours. Regardless, employers might want to build flexibility into their systems to change it, should the need arise.

Things to keep in mind

As part of the annualised hours, you are committing, as an employer, to pay a set amount each year for your employee for a set amount of hours. This requires some planning on your part, as setting the hours you require the employee to work too low or too high can both be costly decisions. If you aim too high, and the employee only works a portion of the hours set out in their contract, you still have to pay them for the hours they were contracted to work. On the other hand, if you aim too low, you will have to pay for overtime, which can become costly.

It can also encourage resentment in your work force. Employees who do not work their entire quota of hours still get paid the same as those that do – so managing employees hours to ensure that everyone works their fair share may be critical for building unity and trust in your workforce.

Moreover, you should be wary of losing touch with employees who spend large stretches of time on reserve and are not called in to work. It is important to ensure these employees are kept up to date and in the loop to ensure they feel like an integral part of the workforce.

Furthermore, the Working Time Regulations continue to apply to the flexible work arrangements, including but not limited to: the requirement of a maximum work week of 48hrs (unless the employee agrees to opt out, which they are not required to do so and cannot suffer retaliation for refusing); At least 11hrs of rest between shifts, and at least 24hrs rest a week; breaks, including at least 20 minutes per 6hrs of consecutive work; and at least 20 days paid leave a year. [3] & [4]

Other concerns include holiday pay, sick pay, and the timing of wage payments. For example, an employer must make a decision in regard to paying for only the hours an employee has worked vs paying regular amounts on a set schedule. The former is less stable for employees, but the latter needs to be managed carefully to ensure that laws regarding the National Minimum Wage are not being violated by underpaying for the hours an employee has worked since their last payday.

These concerns are why annualised hours are only appropriate for companies who can, with relative accuracy, calculate how many man-hours of work a year needs completing.

Transferring to annualised hours

Transferring your workforce to annualised hours is a massive restructure, and as such, requires time, thought, and support to execute.

Before the transfer, it is imperative that a full review of current workloads, working patterns, production targets, working time, and payment systems is done. As an employer you are going to need to be able to estimate how much working time you will actually need in any given month, in line with previous year’s performance and expected growth. It is also helpful to know what workloads each of your current employees has, to be able to plan how to transition them with minimum fuss.

It is also recommended you involve your employees at every stage of this process, to give them a chance to voice their concerns, questions, and head off any problems. Communication between the management and workforce will be critical to ensure the success of a transfer. Allow them to nominate a representative to be present whilst making decisions about the new system, to ask questions, and to pass on the concerns of the other employees.

Also, if employees belong to any specific unions (for instance, teachers in the teaching union), you should try to involve them in the discussion – a union representative with extensive experience in annualised hour schemes may be able to offer their assistance or fact-finding tours to similar companies who have undergone the same move.

The earlier you involve your workforce and unions in negotiations about their future employment, the less problems you are likely to run into from a lack of communication, and the more trust your workforce will have in the move.

All this needs to be done in step with current employees and your current human resources department, to ensure a smooth transition. Pursue advice from external sources, make sure you understand the risks and rewards of making the move, and be ready to work with your human resources department to manage your new contracts.

Annualised hours are more complicated than a standard employment contract, and it is critical to ensure that they are right for your business before transitioning to them. You should discuss and weigh the pros and cons of them with a HR Professional with expertise in employment law before implementing them, but the costs can outweigh the numerous benefits for the right company.

Disclaimer

This article contains a general overview of information only. It does not constitute, and should not be relied upon, as legal advice. You should consult a suitably qualified lawyer on any specific legal problem or matter.

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References and Links

[1] Gov.UK on Flexible Working

[2] Chartered Institute of Personnel and Development (CIPD) Statistics on Annualised Hours

[3] Advisory, Conciliation and Arbitration Service (ACAS) Guidelines on Working Hours

[4] Gov.UK Regulations about Working Hours