Zero-hours contracts have been in the news lately, and hit the headlines again today in the context of Universal Credit. These contracts can tie workers into in-work poverty, through insecure and low paid employment.
The current benefit system
In the context of the benefit system, there are a lot of things wrong with zero-hours contracts.
Dynamic Benefits found that moving off and back onto benefits can create serious cashflow problems, so much so that moving into work can be a cause of debt problems. It is the employee’s responsibility to reporting changes in income, and the combined withdrawal of benefits mean that people are not always better off financially upon entering work and face uncertainty over take home income. This makes it difficult to plan or budget effectively.
A combination of these challenges can put some off work altogether.
However, employment today isn’t always fixed and full-time, having a benefit system that punishes you for taking what work is out there is perverse. This was exactly one of the problems that Universal Credit sought to tackle.
Universal Credit and fluctuating earnings
Universal Credit removes the need to report your income to the DWP, instead taking information from your employer’s payroll, using the new RTI system. This system is working well, confounding expectations and showing that government can do big IT.
High work allowances under UC allow people to enter work without any withdrawal of their benefits. A smooth, simple and lower withdrawal rate at higher earnings leaves people better off financially, and with greater certainty over their income. To see how, use the Universal Benefit Calculator.
However, since Universal Credit will be paid one month in arrears, it won’t remove cashflow issues altogether. The Universal Credit award a household receives one month will be based on their earnings from the previous month.
In this simple example, the out of work Universal Credit award is £700 per month. The household earns £500 in February, but they do not see a reduction in their Universal Credit entitlement until the following month. This means that their take home income is £1,200 in February, but without any earnings in March take home income falls to £447.
Importantly, average take home income across the three months is higher than if there were no earnings, and claims are automatically adjusted for earnings, making it easier for people to take on flexible work. However, fluctuating earnings are exacerbated by the payment of Universal Credit in arrears, and means that though the household is better off, effective budgeting could be a challenge for some families on zero-hours contracts.
Our concerns are, as ever about the practicalities. Firstly, the reports today talk about the use of sanctions, there are serious concerns about the growing use of sanctions under the current benefit regime and uncertainty over how they will be applied under Universal Credit. Sanctions should not be used punitively under Universal Credit, advisors should be able to exercise discretion and claimants should have a right to have them reviewed, particular as they could apply to the larger Universal Credit award. Secondly, as explained above, Universal Credit won’t completely eliminate cash flow problems, and the government will have to show that it is working effectively to convince a sceptical public. The administration of a claim moving into and out of work should be perceived to be simple, straightforward and secure.
Zero-hours contracts are not all bad
Zero-hours contracts help employers to create more jobs and meet peaks in demand without becoming uncompetitive, or demanding more from the existing team. Employers typically don’t use them without good cause, and their existence doesn’t always mean irregular hours. My first job was a zero-hours contract with Woolworths. Though this didn’t save the company, it would no doubt have hit the wall sooner without them.
It isn’t really too controversial for the benefit system to ask people to take work when it is available. People that have been out of work for a while typically want the opportunity to work, even if only a few hours. Though zero-hours contracts are not a long term solution to tackling poverty, they can be an important stepping stone from no job, to full-time, higher paid work.