Annualised Hours Summary

Annualised Hours could help you deliver significant productivity and wellbeing gains

Annualised Hours

With established resourcing approaches being disrupted by the pandemic and broader social and economic change, many industries are focusing on how to organise working time more flexibly.

This often leads to interest in Annualised Hours, a system which can make it easier to create shift patterns that respond to changing demand, legislation and employee preferences.

It’s worth nothing that Annualised Hours can mean different things to different people and it might not be the right solution for your specific organisation or workforce.

Our experts have designed, implemented and improved countless tailored Annualised Hours systems over the last three decades, often combining it with other resourcing models to create the optimal solutions.

This article provides a summary of Annualised Hours, the benefits it can deliver and…if it is the right fit for your organisation…how to make it a success.

Annualised Hours - What is it?

Annualised Hours is a resourcing model which sees shift workers’ hours calculated over the course of a year rather than on a daily, weekly or monthly basis.

It’s one of many flexible approaches that are suited to industries and organisations where demand profiles vary over the year.

In these environments, operating with shift patterns that provide a static amount of cover creates undercapacity during times of peak demand…leading to overtime, overworking and quality issues.

In periods when demand is lower, these shift patterns generate unneeded capacity…and therefore underutilisation and huge inefficiencies.

Annualised Hours enables you to adopt mechanisms that help align your supply of labour to the peaks and troughs in forecast demand.

This Annualised Hours ‘toolkit’ can include seasonal shift patterns and suites of different patterns, reserve or bank hours, flex/call-in shifts, rostered holidays and other processes that support more targeted deployment of hours.

Ensuring shift workers’ contracted hours are used when they are most needed generates huge gains across cost control, productivity, efficiency, service levels and a host of other performance metrics.

For shift workers it provides more certainty around earnings, working hours and job security and is a framework that’s better suited to their overall health and wellbeing.

Executed well, Annualised Hours can also be a powerful way to underpin your recruitment, retention and workforce diversity and inclusion strategies.

Calculating Annualised Hours

Detailed labour demand planning is vital to calculating Annualised Hours and arriving at the optimal structure of an Annualised Hours contract.

Firstly you must establish the total number of hours needed throughout the year to provide enough capacity to meet forecast demand.

Dividing total hours by the optimal annualised contract size will provide an indication of the number of shift workers and teams that will be required.

Calculating Annualised Hours then requires you to model how demand is likely to vary across the days, weeks and months of the year.

This will allow you to work out how best to deploy the available hours to ensure cover matches anticipated demand at any given point within the year.

Calculating Annualised Hours in this way enables you to design optimised shift patterns and identify rules around reserve hours and annual leave that meet the specific needs of your organisation and workforce.

For more detail you can read our article on Shift Pattern Design Fundamentals.

Shift Patterns

Finding shift patterns that balance the needs of your organisation and shift workers can be a slow and painful process.

optashift’s Shift Pattern Design service combines data science, expert insight and collaboration to create shift patterns that are fully optimised for your performance and people.

Reserve hours Vs banked hours Vs overtime

Before you look at developing an Annualised Hours contract it’s important to consider whether you will include reserve hours or if an alternative mechanism, such as banked hours or overtime, are more appropriate.

Reserve hours are effectively a proportion of employees hours which are not rostered and held back to be deployed when they are required.

It’s worth noting that this ‘call-in’ process can create issues as it needs to be managed appropriately with adequate notice provided to shift workers and strong governance to ensure it is optimised, compliant and fair.

In many instances reserve hours have become unpopular with shift workers as it can upset the employee-employer relationship dynamic.

Many shift workers feel a sense of uncertainty, that they constantly ‘in debt’ and that their employers have too much control over their work-life balance.

An alternative to consider is banked hours. This system sees each employee starting the year with a balanced number of hours or a small number of hours held back.

When the employee works additional hours the bank is debited, but when they are stood down it is credited.

When managed well, banked hours systems can be balanced effectively over the course of a year providing maximum flexibility and minimal disruption.

One common issue with both reserve and bank hours is that they require careful management so sometimes this overhead can offset the benefit.

It’s worth noting that if the annual shift pattern is more closely aligned to demand at the outset, this should reduce the need for additional measures to increase flexibility.

Of course overtime remains an option. A seasonal shift pattern may average 4 hours per week, with some periods of 36 hours and others at 44 hours.

Overtime on top of the hours scheduled can be paid as normal. However care should be taken (especially during peak periods) regarding long hours, fatigue and potential compliance breaches.

Annualised Hours contracts

Adopting Annualised Hours requires you to provide shift workers with an Annualised Hours contract that sets out the total number of hours they will need to work across a year.

Often calculating Annualised Hours is done by taking an average working week, multiplying it by the number of weeks in the year and then deducting shift workers’ entitlement to annual leave and statutory bank holidays.

Below is a simplified example of how to calculate an Annualised Hours contract within a holidays on request system:

Length of working day = 7.5 hours
Average hours worked across a five-day week: (7.5 hours X 5 days) = 37.5 hours
Average number of hours worked across a year: (37.5 hours X 52 weeks) = 1,950 hours

Within a rostered holidays system, annual leave would need to be deducted from the target Annualised Hours to be rostered:

Total number of annual leave (20 days X 7.5 hours) and bank holidays (8 days X 7.5 hours) = 210 hours
Average number of hours worked (1,950 hours) minus annual leave and bank holidays (210 hours) = 1,740 hours

As referenced in the previous section, Annualised Hours contracts need to reflect any operating rules you have identified.

If you have elected to include reserve hours, it’s important to define the ratio of rostered hours to reserve hours across the year and identify what policies will be required to manage this aspect of Annualised Hours.

Given the dynamic nature of many operating environments, you might want to consider embedding a mechanism for regular review, consultation and potential adjustment of the proportion of rostered hours to reserve hours.

Like any standard employment agreement, Annualised Hours contracts also need to define your approach to pay, annual leave, holiday pay, sickness, benefits and any other considerations.

Annualised Hours policy

A robust Annualised Hours policy is central to the successful management of Annualised Hours.

Your Annualised Hours policy needs to set out the rules and expectations around how the system is managed, so that it is clear and understood by all stakeholders.

Every Annualised Hours policy needs to be tailored to your specific organisation and workforce, but some considerations include:

Annualised Hours, exceptions and reference periods:

Your Annualised Hours policy must clearly set out how it manages and reconciles hours when it comes to exceptions.

These can be how new starters, leavers and transferees’ hours are balanced and paid, or how reserve hours are handled if it goes beyond the average hours within a given reference period.

It’s also important to think about when this reference period starts within your Annualised Hours policy.

Commencing in the middle of a period of peak demand can be poorly received by shift workers and mean that you get well ahead of hours pro rata…which can cause issues at other times of the year.

Likewise introducing Annualised Hours during a period of lower demand can mean you start well below pro rata hours and create a false first impression for shift workers and managers.

Annualised Hours use of reserve hours:

The ratio of rostered hours to reserve hours needs to be defined within your Annualised Hours contract.

Your Annualised Hours policy needs to clearly communicate how these hours will be deployed in a way that is compliant and fair.

Elements that you might want to think about are:

Who has responsibility for identifying cover requirements and planning call-in/standby shifts?
What notice period will be given to shift workers of requirement to work a standby shift?
When and how will call-in be communicated to shift workers?
How will compliance (including working time regulations) and wellbeing factors be monitored and managed within Annualised Hours?
What is your Annualised Hours policy around refusals to work reserve hours shifts (e.g. what circumstances are deemed legitimate and how continuing refusal will be managed)?
What are the rules for write-off or carry over of hours and over and what is the reference period?

For Annualised Hours to generate the benefits it’s capable of delivering, your Annualised Hours policy must ensure rostered and reserve hours are managed effectively, and ideally, fully utilised.

You may want to maintain capacity headroom by keeping back some reserve hours. Your Annualised Hours policy must be clear on how these are treated if they are left un-worked at the end of the year.

Writing them off is an option, but you must be careful this approach is balanced fairly across the workforce to avoid potential employee relations issues.

Annualised hours and shift swapping:

Shift swaps can be an important mechanism to provide shift workers with additional flexibility.

Being able to swap shifts with a colleague is often the simplest and most effective way to secure time off should a need arise at short notice, if there are no available slots within a holiday-on-demand system, or there is a requirement that falls outside rostered holiday periods.

Your Annualised Hours policy should set out:

If shift swaps are allowed and for what purposes.
Why shift swaps might be denied (skills incompatibility, compliance with working time regulations etc).
The process for requesting, approving, actioning and reconciling shift swaps with the systems used to administer and monitor Annualised Hours.

Annualised Hours and avoiding discrimination:

Your Annualised Hours policy should be designed to ensure that the use of reserve hours does not lead to any indirect discrimination.

It’s important your Annualised Hours policy sets out how you will balance the aims of your organisation against the potential detrimental impact the use of reserve hours could have on certain groups of shift workers with ‘protected status’ (such as parents and carers).

This could include detailing additional or alternative mechanisms that aim to reduce the impact and provide a ‘proportionate means of achieving a legitimate aim’ (as defined in the Equality Act 2010).

It’s important to ensure your Annualised Hours policy avoids discrimination both within your current workforce and anticipates or responds to emerging demographic and lifestyle requirements.

Shift Work Assessment

Optimising shift patterns and shift work delivers huge benefits…but complexity and competing priorities sees many organisations leave things as they are.

Our Shift Work Assessment is a streamlined process which quickly analyses all relevant operational and HR factors to give you a tailored plan for immediate improvement.

Annualised hours - benefits for shift workers

It’s fair to say that Annualised Hours doesn’t always have the best reputation amongst employees and Trade Unions.

A big part of this stems from the high-profile use of Annualised Hours during the early 1990s recession, when it was frequently implemented alongside significant redundancies.

Negativity can also be linked to personal experience of failed systems, which are often the result of poor design and management rather than Annualised Hours itself.

Abuse of reserve hours by both management and employees has been a particularly common factor that impacts the perception and success of Annualised Hours systems.

In fact on many occasions we’ve seen the term misapplied to resourcing models that don’t even remotely resemble a true Annualised Hours system.

When executed correctly, Annualised Hours can become popular with shift workers because it delivers:

Regular, predictable income:

Annualised Hours contracts pay a guaranteed regular salary even though the hours worked may vary month-on-month.

Creating stable pay helps shift workers with financial planning and can put them in a better position to secure loans and mortgages.

Often the savings made by introducing Annualised Hours and cutting overtime and agency use can be re-invested in higher base salaries, pensions and other benefits.

Certainty over hours:

Shift workers on Annualised Hours contracts have good visibility over their shift schedule.

Better shift planning should mean employees benefit from reduced last-minute requests for overtime or to pick up additional shifts to cover capacity gaps.

Annualised Hours helps make advanced identification of requirements for additional cover easier.

This means shift workers can be given adequate notice of any changes, meaning they can minimise disruption to their personal lives.

Wellbeing and work-life balance support:

The potential flexibility enabled by Annualised Hours creates more opportunities for employers to deliver fairness and equity across shift pattern types.

This can mean an appropriate sharing of the burden of night shifts and weekend working, both of which can impact shift workers’ work-life balance and wellbeing.

It also provides the possibility to accommodate more diverse flexible working requirements (e.g. introducing term-time shift patterns and longer breaks during school holidays).

Crucially using Annualised Hours to reduce overtime can help reduce the risk of shift work fatigue and well-being issues linked to working long hours.

Benefits of Annualised Hours for employers

From an organisational planning perspective, Annualised Hours is one of the resourcing models that open considerable opportunities for you to create demand-led, responsive yet predictable shift patterns.

These shift patterns can help effectively balance the often-competing pressures of demand volatility, compliance and employee preferences.

Executed well and combined with optimised shift patterns and shift work best practice it can be truly transformative…delivering significant and quantifiable benefits immediately and over the long term.

Annualised Hours and other flexible resourcing models are coming to the fore as changing legislation, the battle for talent and ongoing technological disruption drive organisations to search for solutions.

The benefits of Annualised Hours will be specific to your organisation…however, well designed and administered systems typically help:

Manage costs:

Annualised Hours can remove unnecessary overtime and agency use as demand should be covered within the contracted hours of the core workforce.

This can dramatically reduce your annual labour costs but also provide much more budgetary stability and certainty.

In some cases where overtime has become embedded, the savings optashift has helped generate by optimising shift work run into millions of pounds every year.

Improve productivity and efficiency:

Using Annualised Hours to align shift patterns to demand can remove over-staffing and increase asset utilisation.

The reduction in agency use also helps boost performance as full-time shift workers on Annualised Hours contracts are usually more productive and require less management and training support than contingent labour.

Reduced complexity and improved flexibility:

Many organisations operate with a range of legacy T&Cs and working arrangements which limit options and create administrative challenges.

Annualised Hours standardises contracts and can dramatically reduce the burden of managing overtime, agency labour and payroll.

Annualised Hours is also a fundamentally flexible way of working, providing organisations with options to adapt working patterns to respond to changing demand and the evolving preferences of shift workers.

Support recruitment and retention:

Annualised Hours can help organisations in competitive labour markets as shift workers are retained on an Annualised Hours contract rather than called in adhoc (and at short notice) to respond to varying demand.

Annualised Hours also enables shift patterns to be designed that appeal to different demographics…deepening your labour pool, bolstering your employer brand and creating a powerful differentiator.

Disadvantages of Annualised Hours

As mentioned earlier, most of the disadvantages relating to Annualised Hours typically come from poor design, implementation and management of the system.

This is often the root cause of operational issues and unpopularity with shift workers.

For some organisations a key issue stems from inaccurate labour demand planning which leads to them Calculating Annualised Hours incorrectly.

If total hours are set too low in an Annualised Hours contract then the employer will still have to resort to overtime to meet demand.

Conversely if the number of hours in an Annualised Hours contract are too high, there is huge underutilisation that is both expensive and morale-sapping.

It’s worth bearing in mind that the reduction of overtime can prove unpopular with some shift workers, particularly for those who have built their lifestyle around the additional payments.

However these concerns can often be overridden by the more stable (and often higher) basic pay and the significant wellbeing and work-life balance benefits of removing unpredictable shift patterns and long hours working.

It’s important that shift workers understand the rationale, processes and benefits of Annualised Hours for it to be a success.

Be warned! What to look out for when considering Annualised Hours

Poor design:

No two organisations are alike. Taking a template approach to Annualised Hours often doesn’t work.

The system needs to be tailored to the requirements of your specific organisation and your shift workers.

This includes communicating and engaging with shift workers throughout the planning, design, implementation and management of Annualised Hours.

An Annualised Hours system that is forced on them with little or no input is likely to be divisive, unpopular and ultimately unsuccessful.

Misalignment:

Demand rarely stays static. If shift patterns within an Annualised Hours system don’t remain aligned to demand then you will see increased capacity gaps, overtime short notice working and shift work fatigue.

Demand and shift patterns therefore need to be regularly reviewed and updated appropriately.

Likewise employee needs and preferences change, so it’s important to understand shift worker sentiment and ensure your Annualised Hours system continues to reflect it.

Bad management:

Some negative perceptions of annualised hours stem from poor management of the Annualised Hours policy and systems that underpin it.

Unfair use of reserve hours is a major bugbear of shift workers.

The issue often lies with inadequate rostering practices and poorly configured workforce management systems reducing short term visibility over cover requirements, creating errors and undermining trust.

Help with Annualised Hours and alternative shift work systems

By enabling a precise alignment of demand and labour supply Annualised Hours is an efficient way to organising working time.

But it is also a complex and sensitive area of shift planning which sees many organisations put adoption and improvement of Annualised Hours and other flexible resourcing models in the ‘too difficult’ pile.

If you are looking for help with any aspect of Annualised Hours then get in touch.

Over the last 30 years optashift experts have seen the good, the bad (and the ugly) and will be able to help you find the right solution for your organisation and shift workers.