Previous employer offering zero hour employment contract

[mojax]

First of all, hi to all as this is my first post on the forum. I've been lurking for a while though and have found it to be a great resource, so thanks to everyone who kindly donates their time to help people like me! Apologies in advance for the long post - I've tried to give enough info to help people respond.

For the last few years, I have been working as an engineer/consultant for a small UK firm that provides IT consultancy and support to the SMB market. I am directly employed by the company on a full-time basis.

I recently decided it was time for a change. I always had contracting in the back of my mind as something that I would potentially enjoy. After spending some time considering my options, I came to the conclusion that I am at the right point in both my career and life to take the plunge.

Since resigning, I've been spending as much time as I can reading up on all the things you should have a good grasp on to make a success of contracting. A large part of that is better familiarising myself with IR35, umbrella companies, PSCs, etc. I feel like I now have a fairly good grasp on it, but I still have a way to go.

Like much of the IT industry right now, my employer are struggling to find and retain people with the right skills and experience. As a result, they have been keen to retain me in any form they can. This has spawned discussions about me potentially doing some work for the company on a contract basis. I was open to discussing this as I felt that if it could take a form that I was happy with, it could ease the transition into contracting and reduce risk. I have the opportunity to negotiate an arrangement that includes more of what I want and less of what I don't. There are other reasons for discussing it when you might think that sticking with a clean break would be better, but they are probably not worth going into here. Of course, whether it would be possible or even sensible to continue to do work for them on a regular basis would be heavily dependent on the nature of other contract work I might take up. I have said this to them, and they are still keen to talk as even an additional month or two of support would be very beneficial to them.

Now, getting on to my actual question...

My employer have floated the option of staying on the payroll, but switching my contract to "zero hours". Now, I imagine your initial reaction to this would probably be quite negative for the usual reasons. However, there are a few things worth mentioning (which you may or may not think make much of a difference):

1. This is a small, privately-owned business and the directors are the owners. They have no external shareholders to satisfy. Therefore, the financial politics of cost centres, pay bands, etc that drive some companies down the contract route to get the people they need aren't really an issue. I doubt there would be an issue in setting a pay rate that was equivalent to an inside IR35 contract rate (accounting for difference in benefits/rights). They are also not concerned like some businesses might be about all their staff being employees with all the usual rights.
2. Although they need me more than I need them, they clearly (and understandably) have to think about their own interests and would (at least currently) prefer the zero hour contract route. They have no previous experience engaging contractors, but do have experience of employees on zero hour contracts, so it is more familiar and "comfortable" to them. Also, being a small business, they understandably have to consider whether it is worth them investing the time and money required to gear up to engage contractors in a compliant way (external HR, legal, etc). I appreciate there are lots of arguments as to why this investment would be worth it and may give them an edge in the skill shortage situation in the IT industry. Also, they would be subject to the "small companies exception" to OPW, which may reduce any burden on them. I have yet to make that case to them though as the discussion is still ongoing, but I would definitely do so if/when needed.
3. They have raised the fact that the zero hour contract route would mean my "period of continuous employment" would not be broken, meaning that if I were to come back on a full-time basis in the future (perhaps if contracting didn't work out), as I have been an employee for several years already, I would continue to benefit from the benefits and rights that come from this. However, I don't plan on doing this and don't feel that retaining those increased rights/benefits is important enough to be a major factor. One of the reasons I am looking to move into contracting is because I am the sort of person who would prefer to lose these things in exchange for the benefits that contracting brings.

So, my question is - what do you think about the zero hour employment contract option vs. contracting (probably via PSC) in this specific situation? I'm doing as much research as I can, but as you can probably imagine, I've had a lot to brush up on with only limited time to do it in, so am looking to others for advice as well.

I should mention that we haven't got to the point where we have fully defined what the nature of the work will be, so I can't speak to whether it would be inside or outside IR35 yet. From their point of view, they have been upfront that their ideal would be to have me be able to help wherever needed, but they also understand that that is unlikely as I resigned to get away from that. From my point of view, outside IR35 would be preferable, but we will have to see. In the interest of give and take, it's possible that it may end up being inside in the short term, moving to specific outside engagements after that.

Some of my thoughts:

1. If we can come up with an arrangement that is clearly outside IR35, then there is a clear financial incentive to go down the PSC route. I would likely provide them with a lower outside IR35 rate, which would mean a financial incentive for them, although they may argue their costs to implement it may counteract that. If the arrangement would be inside IR35, then this incentive disappears.
2. If going zero hours, although I would still be an employee, I will still have some "contractor freedom" in practice as I can just turn down work if I don't want to do it. Although in theory I would be an employee on the clock, in practice, this is a small business where I speak directly to the owner/director about my work and can keep it quite focused. It's clear that their intention is to still come to me and say "we need help with X, can you do it?"; it would just be done under a different legal and tax arrangement that they are more familiar with.
3. Although the fact it's a small business with some flexibility to adapt the zero hour contract option to be more appealing for someone is looking for the contractor style relationship, you are ultimately still an employee and there is an "irreducible minimum" that will mean there are some aspects that will always be more of an employment rather than contractor nature. Much of this would be driven by employment law, but also other factors. Does anyone have any thoughts on this? Some specific concerns I have:
   1. Like most employment contracts, my current contract includes a number of clauses that would potentially restrict my freedom to do other work - both during and for a period after the contract finishes (restrictive covenants). It was clear in the discussions that they were suggesting a zero hour contract with the assumption I would be doing other work and so I doubt there would be an issue in practice unless it was in direct competition (in which case you would likely part ways anyway). However, I wouldn't want to rely on an informal understanding and would be looking to make sure I had freedom from a contractual point of view. Is this possible to do with an employment contract, or are there "implied" obligations inherent to an employment contract that can't be "written out" that might be an issue?
   2. In the same vein as the above point, what about intellectual property? If I produce intellectual property at my own cost and in my own time that I use during contracting engagements, I would not want the company to be able to claim ownership over it unless it was something that I had produced specifically for them.
4. I'm not particularly fussed whether I get holiday as a benefit or factor it into my rate. Same goes for pension. Sick pay is less relevant on a zero hour contract, although I am not concerned about this anyway. Same goes for paternity leave.
5. Going down the zero hour employee route means any increase in remuneration would presumably have to be negotiated as a pay-rise (with all the difficulty that can present), whereas contracting via PSC gives me freedom to adjust my rates. It would also mean I couldn't set different rates for different types / amounts of work or bill on a non-hourly basis when appropriate.
6. I may still have to do appraisals, etc and perhaps get sucked into company politics a little more. I would hope this is reduced by the fact I'm being used more on an as "as needed" basis to help with specific things/projects.
7. Going down the contract route would maximise money put through my PSC, which may have benefits, particularly if I wanted to turn the PSC into a traditional business in future.
8. If it would be necessary to put together a custom employment contract to satisfy my requirements and concerns, then they may as well invest that effort into gearing up to be able to engage contractors more easily as this is likely to be more re-usable for the business.

So, what does everyone think? Would you consider it or just steer clear? I encourage people to challenge any of the above as I'm looking to learn. Any other thoughts/advice greatly appreciated. This post is already too long, so I won't give you any more detail for now, but feel free to ask questions.

Thanks in advance!

[cojak]

If you want to be a contractor, be a contractor.

A zero hours contract is terrible, try working for a different client while you’re on it and see how that works out…

[northernladuk]

hey have raised the fact that the zero hour contract route would mean my "period of continuous employment" would not be broken, meaning that if I were to come back on a full-time basis in the future (perhaps if contracting didn't work out), as I have been an employee for several years already, I would continue to benefit from the benefits and rights that come from this

If we can come up with an arrangement that is clearly outside IR35

You see how the top quote means there isn't a cat in hells chance you can do the second? No way you will get an outside setup in your situation. It's inside all day long. IR35 was created for exactly this. Friday to Monday contractors they are called and IR35 was set up to stop this. Same work, some payer, different remuneration method is not an outside gig sorry.

Factor in you are inside so even with an uplift you are paying most of it in tax still and see if it's attractive to you (it won't be).

Cojak has nailed it.

[ladymuck]

I'm with Cojak and NLUK on this.

What your employer is doing is giving you the worst of all worlds and whilst it's nice to be wanted and considered valuable, you had already decided you wanted a change of scenery so what are they offering that gives you the change you're looking for?

It can be scary to leave a job you know inside out and face the world without your comfort blanket. However, that is exactly what you've got to do right now. You'll have many more occurrences of what I like to call 'mis-placed loyalty' to a client. It usually comes around because you get invested in one way or another and forget they don't give a monkey's about you, despite what one or two good people may say to you.

Be bold, be brave, leave!

[hobnob]

Basically, I agree with what the others have said. However, I do see one potential benefit of the OP's plan: what's your current notice period? I.e. if you switch to zero hours, would that allow you to maintain your current income while being available immediately for a proper contract?

[PerfectStorm]

Don't waste years thinking that a job is 'one in a million' - it's not, it's just the one you have the most information about. Seize the unknown.

[mojax]

Thanks everyone for the replies and especially the encouragement - really appreciate it.

I think my post might have made me sound more attached to my current employer than I am. I resigned ready to move on and jump in with both feet into new contract roles. I am still ready to do that, but I honestly felt that it was worth considering what they had to say. I felt that if I could negotiate a new arrangement where they continue to be a good source of work, but I get much of the freedom and other advantages that I decided to move into contracting for, then it was definitely worth considering. I didn't mention it in my original post, but with contracting I am looking to focus more on a few specific areas within IT security. The job I currently do is more general, albeit with a large portion of IT security work in there already. If I can choose which work I take from them, my thinking is that it can be a good source of that kind of work, allowing me to further improve my skills and help bridge the gap between being a new vs. established contractor with a good reputation in that area. They know me already, so they know I'm capable and therefore they could be a "safe" source of work in the early stages when I don't have a long list of previous contract engagements to impress people with. Basically, it might help with any "bootstrap" challenges that I might encounter with becoming an IT security contractor. In turn, that would hopefully lessen the chance of needing to take contracts doing other IT work that aren't really what I want to be doing. What do you think? Am I thinking about a problem that's not likely to happen in the first place? Would love to hear people's thoughts. Happy to talk more about the details on what I want to do, my experience, etc.

Like I said before, my inclination was to say "no thanks" to the zero hour contract (ZHC) suggestion, but I didn't feel I understood the pros & cons well enough to be sure, hence my post. If I go back to them and politely say "no thanks" to the ZHC, I want to be able to talk confidently about why. I appreciate I don't need to explain my decision. However, I might choose to, perhaps just out of courtesy or perhaps if I thought it might help them be less hesitant about engaging me as a real contractor (assuming I haven't decided to just cut loose by that point).

As I said in my original post, they have said that their ideal is that they have me around for as long as possible, doing as close to what I have been doing as possible. However, they were just being honest and stating the obvious with that; they know that I resigned to contract and get away from that, so it's not going to happen. Because of that, they are open to accomodating what I want if it means they can still use my skills in some form. Putting aside for a moment the legal/tax side of things, they know that I am only really interested in something that involves me being more at "arms length", working on specific pieces of work that I choose to take and will definitely expect freedom to do other work without it being any of their business. I might accept a slight compromise on the type of work I'm doing in the short term if I thought it was in my interest, but that's it. As such, you might think "What you're saying is you want to be a contractor. In that case, why is your employer talking about a ZHC? It's the wrong tool for the job". The cynical response might be "because that's the best option for them and the worst one for you". In many cases I'm sure that's exactly what's going on. However, in this case I think it's simply that a ZHC is much more familiar/comfortable to them and they (perhaps due to lack of understanding) can't see any major downsides to it for me, so why not suggest it. Basically, they are willing to treat me more like a contractor, but want to use a ZHC as the legal form. My instinct was that I should stay away from this and just say "thanks, but it's (proper) contractor or nothing I'm afraid", but I wasn't sure. I wanted to make sure I understood what really seperates the two and could speak confidently about my view on it if needed. This is especially true as I could tell that they honestly thought a ZHC seemed like a good option for both sides, so they may need some help to convince them otherwise. As the director put it "I can't see much of a down side for you". Now, not knowing either him or me, you may well think "of course he would say that", but I really don't think that's the case here. I don't think he was playing games; I think it's just simpler for him and he genuinely just hasn't thought of why it might be a bad option for me. I think it's also just the fact they're generally pretty risk averse and are a bit lacking in confidence to try new things. They're in a really tough spot at the moment with resourcing though, so I think they're much more persuadable than they might otherwise be.

So, if you've got the patience and are willing to humour me a bit, I'd love any thoughts people can give on the actual pros/cons of what they're suggesting (mostly cons?... ). It may come in helpful if I do end up attempting to convince them to also be brave. With how the indsutry is right now, I think it would definitely give them an advantage, especially as they would come under the small companies exception of the OPWR.

Having said all that, I'm going to do some thinking over the next couple of days and may well end up just taking your advice and cutting loose regardless. There's a lot to be said for fully seizing the unknown and being bold (to quote PerfectStorm and @cojak). It might not seem like it from my posts, but it was a big part of why I made the decision to contract and I'm ready to do it - I just don't think I need to be single minded about it.

I'll quickly respond to a couple of specific bits people said as well:

what's your current notice period? I.e. if you switch to zero hours, would that allow you to maintain your current income while being available immediately for a proper contract?

Thanks. It's actually something I've considered. I won't go into the details now, but I think there's a good chance I'll be able to get work from them until a contract came up if I wanted it.

You see how the top quote means there isn't a cat in hells chance you can do the second? No way you will get an outside setup in your situation. It's inside all day long. IR35 was created for exactly this. Friday to Monday contractors they are called and IR35 was set up to stop this. Same work, some payer, different remuneration method is not an outside gig sorry.

Thanks. I get why you might have got that impression, but I do understand the difference between inside and outside. Your first quote is just an argument they made for their ZHC suggestion. Don't forget - they are suggesting it as an alternative to me working via a PSC, but still be treated much like a contractor rather than a typical ZHC employee (at least as much as is possible within the confines of employment/tax law). I'm not saying I think it's a good argument and when it comes down to it you're still an employee/worker; I'm just saying that was their argument. They were politely saying "if things don't work out, there's always a job here for you, and if you stay on the payroll (which going ZHC would do) then you won't break your period of employment and so could come back with all your existing rights/benefits." I'm really not fussed about that though as I have no intention of coming back full time. I'm not going to pick a ZHC just so I can keep some pretty minor benefits in the unlikely event I did come back. To be honest, if they really wanted you back that much, you could probably negotiate to get at least the discretionary benefits back anyway.

On the second quote about an outside IR35 arrangement... I think it's perfectly possible that I could negotiate an arrangement (although maybe not straight away) that would be outside if it weren't for the ZHC thing. Don't forget that they are only suggesting ZHC for simplicity/familiarity reasons rather than because they want to maintain control, personal service, MoO, etc. I think I now have a pretty good grasp on what inside vs. outside IR35 really means, and would be even more cautious because of the Fri/Mon aspect you mentioned. I know that if you're on a ZHC, then IR35 is irrelevant as you're PAYE. I also understand that regardless of the fact IR35 doesn't apply, you couldn't even behave like you were completely "outside" because employment and tax law dictate certain things. What I was saying is that if both sides were ready and willing to go for an arrangement that was outside, but the ZHC is preventing that, then at that point it seems like the ZHC is definitely a rubbish option as someone is getting a pretty raw deal financially due to the increased tax. I say "somebody" as it depends on whether your rate/pay is adjusted for the increased tax or not, but I would be adjusting mine for sure. I just wanted to know if I was on the right track with that being a big reason why a ZHC could end up be rubbish for both sides.

A zero hours contract is terrible, try working for a different client while you’re on it and see how that works out…

Thanks. Would you be able to elaborate on why you said that? I'm not arguing at all - in fact, I think I probably agree with you; I just want to hear from other people about why they think a ZHC is a bad option so I can know if I'm thinking about it the right way. Any thoughts on whether a ZHC can be adapted to deal with these issues (especially working for others) or is it just inherent to the nature of an employment contract?

[cojak]

A ZHC should allow you to fit multiple clients in around each contract; if one client doesn’t need you today or this week (or whenever), another client can pick you up. This would give you a continual stream of income.

In reality, that first client will probably want you on standby, ready for them to pick you up when they need you, without giving you any chance to earn anything at all. And the contracts will be written to make sure that this happens.

ZHC’s are just horrible - the client has everything they need whenever they want and you have feck all.