The press is full of stories about flexible working. Normally, flexible working is considered as moving to part-time hours, working from home or perhaps converting to job share. These are all seen as tools used by employees to maximise their own flexible working conditions. But what about other approaches? What about approaches that maximise the employer’s flexibility?

There is one tool that gets overlooked. It’s one that can really benefit both employee and employer – the introduction of annualised hours. Annualised hours contracts have been around for a long time.

Annualised Hours History

Some twenty-five years ago a large manufacturer in the South East attempted to introduce annualised hours in order to manage a predicted slump in business following a period of intense work. In this case, the intense period was expected to generate masses of overtime. The idea was that the overtime should be worked without overtime pay, and this benefit to the firm would be rewarded with normal monthly pay for the slump to come – even though the workers were on holiday, or working a reduced hourly week. The key element of the deal was that in return for no overtime pay in the busy period, there would be normal pay, lots of holiday and no redundancies in the slump.

The unions got involved and squashed the proposed change. They demanded that employees should be paid overtime as normal during the intense work period. For six months, overtime was needed and paid. Overtime was at an all time high. The order book in the following six months could not sustain the workforce. There was no work – 50 employees were made redundant as a result. The unions had taken the short-term view – a parochial view – and 50 of their members suffered.

Annualised hours would have saved the jobs and retained the production capability for the year after. Instead, both the firm and the workers were worse off.

Detailed Functioning

So, how does annualised hours work? Unlike zero hours contracts where employees are paid for the hours they work in a month, employees receive one twelfth of their salary every month. This is irrespective of the number of hours they work in that month.

Annualised hours works like this. Let’s assume the ‘normal’ working week on which annualised hours is based is 35 hours. There are 52.143 working weeks in a year. At 35 hours a week, that means 1895 working hours per year. Assuming employees have 28 days holiday, that equates to 196 hours holiday. Therefore the hours to be worked in a year are 1699 (1895 minus 196).

These 1699 hours can then be used when the effort is needed. Examples of where annualised hours might be applied include seasonal work where the firm may need to take advantage of daylight hours or manufacturing work where there are huge peaks at certain times of the year.

Benefits of Annualised Hours

There are benefits in annualised hours to both employee and employer. The approach means that the employee has a regular income each month. This gives stability when managing their personal finances and applying for mortgages or renting homes. The employer can manage the volume of work without paying overtime or bringing in temporary workers. Periods of low activity can be managed without the need for lay-off and redundancy.

Making Annualised Hours Work

While the benefits are good for both sides, there are challenges in managing an annualised hours regime.

Both parties need to be clear about how hours are to be logged. The system should not allow employees to work significantly more or less hours in any year. More hours will require additional payments to be made to the employees, while fewer hours will require the employee to pay back the overpayment. The associated adjustments will be messy.

Another challenge is how to maintain contact with employees who may be away from work for long periods, paid but effectively on holiday. Annualised hours can create scenarios when employees don’t work for several weeks at a time. This needs to be managed effectively to ensure capability is not lost.

There are also issues over what happens when an employee leaves the firm part way though the year.

Annualised Hours Yields Flexibility

Despite the challenges, the annualised hours approach to flexibility is an excellent way of building capability in a turbulent or seasonal market. It allows firms to effectively manage demand for effort that is not consistent across the year. Annualised hours provide more security for employees. The approach gives employees longer periods of down-time or holiday than they might otherwise have, whilst still enjoying a guaranteed salary each month.

Done properly, annualised hours is a very effective flexible working tool.

If you think annualised hours could be for you, but would like to discuss it with someone who has actually done it, call us now.