Managing Annualised Hours Contracts

Annualised hours are the total number of hours an employee works in one year. It refers to a type of employment contract where the employee commits to working their annualised hours over the course of the year, some on a ‘core’ or ‘rostered’ basis and the rest on an ‘unrostered’ basis or short notice to meet the demands of the organisation.

Use of annualised hours contracts has increased in recent years amongst organisations that have to manage significant peaks and troughs in demand. Using annualised hours means that you can keep a core workforce employed on a regular basis and call upon your employees to work extra hours when you need them. If implemented correctly, moving to an annualised hours structure can save significantly on paying and managing overtime.

 

What is an annualised hours contract?

An annualised hours contract is a contract of employment that has to make particular provision for hours and pay. As such, along with standard employment provisions, it will also contain a number of provisions that you would not expect to see in an employment contract for an employee working a standard ‘9 to 5’.

Most importantly, an annualised hours contract will state the total number of hours that an employee has to work for the employer in the course of a year. This is usually calculated by taking the normal working week of the employer and multiplying it by 52, then deducting the employee’s annual leave entitlement and the statutory bank holidays.

For example, if the working day is 7.5 hours’ long, for five days a week, then the working week is 37.5 hours and the total for one year would be 1,950 (37.5 x 52 weeks).

You would then deduct annual leave of 150 hours (20 days x 7.5 hours) and statutory bank holidays of 60 hours (8 days x 7.5 hours), which leaves you with a total number of hours for the year of 1,740.

You must also specify what percentage of the annualised hours will be core or rostered hours, and what will be unrostered or reserve.

This will vary from business to business. It may also vary within your organisation, as certain sections of the workforce might need greater flexibility than others. For example, in manufacturing, the back-office functions will work more regular hours than those on the production line.

Employers should note that employees on an annualised hours contract must receive their full pay, whether or not there was work available for them to work the unrostered element of their contractual hours.

 

Is an annualised hours scheme right for your business?

An annualised hours scheme is not to be entered into lightly. You should undertake significant research and careful planning in order to identify whether annualised hours would be beneficial for your business, and if so how to implement them.

Possible benefits include:

• Stabilisation of wage costs and a reduction in overtime costs. This is one of the main attractions. If your business has to operate 24/7 and/or has peaks and troughs in demand or activity then you could save money by moving to an annualised hours scheme in order to reduce the overtime costs you would usually have at peak times.
• Retention of employees in industries with significant variations in demand. For example in the tourism, agriculture, manufacturing, hospitals and education sectors employers have the benefit of retaining the employees on an annualised hours contract, guaranteeing quality and expertise from season to season.
• Increasing flexibility for the employer without resorting to zero-hours contracts. This can be beneficial from a corporate social responsibility point of view.
• Being ‘family-friendly’. Parents and carers can choose to work more hours during term-time and less during school holidays, and still cover their hours for the year.

Overall, these benefits amount to employers being able to maximise productivity and efficiency. Managers can use increasingly sophisticated software to help them plan their employees’ working time, maximising their output and the capacity of the organisation as a whole.

However, there are disadvantages to using an annualised hours scheme. These include:

• The employer can end up paying too much or too little to their employees. An employer will pay too much if they underestimate the amount of hours for which they require their employees to work per year and need to top this up with expensive overtime. However, if they overestimate the number of hours for which they require their employees, then they will be stuck with an unmanageable wage bill
• Removal of overtime payments can be unpopular with existing staff. However, this could be mitigated by the increase in pensionable pay for employees, and even by a one-off compensation payment.
• It may be difficult to find staff for unpopular shifts, such as weekends and bank holidays, to the extent that where hours are truly flexible then employees may try to avoid working them.
• Employees may become disengaged or harder to contact if they are away for long periods

 

How to calculate annualised hours holiday entitlement & pay

Holiday

An employee’s entitlement to holiday remains the same as on a weekly employment contract, but it will be stated in terms of hours as opposed to days. It is still possible to run the conventional system whereby employees apply to their line managers with a holiday request.

For employees who work shifts, holidays can be included in the shift pattern some time in advance, allowing the employee time to plan ahead. Employers could also consider whether they could allow employees to swap shifts and how to make that possible.

 

Rolled Up Holiday Pay

Some employers with employees on permanent contracts who are employed throughout the year but only work for part of the year have been used to paying their employees so-called ‘rolled up holiday pay’. This is where an employee is paid for the holiday they would have had, because there are long periods where the employee is not at work in any case. This scenario is common in education, where the employee may work only on a term-time basis, or in other jobs where there is a peak of activity for some weeks or months, then no work for a number of weeks.

The Supreme Court decision in Brazel v Harpur Trust clarified the way that employers must calculate holiday pay for employees with irregular working hours. Mrs Brazel was employed on a permanent, term-time only contract as a visiting music teacher. Under the latest rules, holiday pay must be based on the statutory formula, using average pay over the previous 52 paid weeks, and not a 12.07% uplift on pay.

Up until this case, it was common for employers to pay their employees 12.07% of their annualised hours as holiday pay. This percentage figure was calculated as follows:

• First, find the number of working weeks in the year by deducting 5.6 weeks from 52 weeks to give 46.4 (5.6 weeks is the statutory annual leave entitlement therefore an employee is not at work to accrue leave during this time)
• Next, divide 5.6 weeks by 46.4 to give the percentage of 12.07%

As Mrs Brazel worked for 32 weeks of the year, the Trust applied a calculation of 32/46.4 multiplied by 5.6 to give an annual leave entitlement of 3.86 weeks, paid at 12.07%.

The Court held that under the Working Time Regulations 1998, there was no provision to pro rata the amount of holiday entitlement to which a ‘part-year’ worker such as Mrs Brazel was entitled. It held that she should not receive less than her entitlement simply because she does not work throughout the year. Therefore she should be entitled to the full 28 days (5.6 weeks) per year just as full-year workers are, instead of 3.86 weeks.

Following Harpur v Brazel, the government has stated its intention to correct this problem by legislating to ensure that holiday entitlement remains in proportion to time worked.

 

Pay

You can decide whether to pay your employee in twelve equal monthly instalments or only to pay them for the hours they have actually worked. In the second scenario, the employee may end up receiving a large payment one month and very little the following month. This can create uncertainty and is not helpful for budgeting. However, in the first scenario, where the monthly instalments are the same, you must be careful that in a ‘peak’ month you are not in breach of National Minimum Wage legislation.

 

Annualised hours policy 

It is essential to have an annualised hours policy to set out the way in which employers and employees will manage the annualised hours scheme.

The first consideration is how you would call in members of staff for their non-core hours. You should set out how this will be done, by whom and crucially, what notice must be given. You should also decide what is reasonable if you are attempting to call in a member of staff if they are on a rest day, or it’s very short notice.

You must also consider the circumstances in which your employees can refuse a call-in, if indeed that is allowed. You must also state how many refusals may trigger further action by management or disciplinary action. The policy should clearly set out the consequences of persistent refusals.

You will also have to decide how to treat staff members who are on call or on standby to step in in an emergency.
One view is that these hours should be deducted from the employee’s non-core hours, regardless of whether the employee is in fact called in and actually ‘works’.

If non-core hours are left un-worked at the end of the year, you will have to decide what happens to them.
They could simply be waived, but this could cause resentment among staff if it is apparent to them who has worked their full number of hours and who has not. They could also be reduced or you could take the opportunity to adjust the work schedule.

Other matters to address include:

• Deciding if shift swapping is permitted and how this will work in practice.
• Stating the procedure for calling in sick.
• Deciding the procedure for changing the proportions of core to non-core hours, if this needs adjusting. For example, how much notice will be given and will employees be consulted.
• Taking proactive steps to prevent discrimination, in particular that based on gender. The use of annualised hours could lead to one group of workers receiving less pay or worse conditions than another, without it being immediately obvious that this is happening. This should be considered when your organisation is designing the scheme in the first place.

 

Need assistance?

DavidsonMorris’ employment lawyers can help with all aspects of employment contracts, terms and conditions. For advice on using annualised hours contracts, or if you have a specific issue relating to annualised hours, speak to our experts today for advice.

 

Annualised hours FAQs

How do you calculate annual hours?

The usual method of calculating annual hours is to take the total hours in a normal working week of the employer and multiply it by 52, then deduct the employee’s annual leave entitlement (20 days) and the statutory bank holidays (8 days).

What is an annualised salary?

An annualised salary is one where the employer pays a salary for the whole year, in equal instalments every month, even if the amount worked in one month is less than usual and the amount worked in another month is more than usual.

How do you calculate annual holiday entitlement?

Workers on annualised hours’ contracts are entitled to the same holiday as normal workers - that is 5.6 weeks of holiday per year. It is important to remember that an employee who is on a permanent contract, but who works for part of the year only, for example a term time only employee, is still entitled to the full 5.6 weeks of annual leave.

Can I request to work term time only?

Yes, you can request to work term time only, but you should be aware that you may remain on a continuous permanent contract in which case you still owe obligations to your employer not to bring them into disrepute, and you may need their permission if you want to work for another organisation during the school holidays. Your employer may still want to pay you in equal instalments on a monthly basis too.

Last updated: 17 June 2023