Annualised Hours

Working/shift patterns take a number of forms. These depend on the nature of the industry, the organisation, the local job market – and, of course, the demand for the product/service. All of these common patterns have, to a greater or lesser extent, the same basic disadvantage: they assume a consistent and even demand. Though they can be modified by additional peak time (e.g. seasonal) recruitment, they are essentially inflexible.

The way that manufacturing organisations have traditionally solved this problem is to build for stock in periods of lesser demand. This helps even out demand peaks and troughs and ensures that customer demand can be satisfied but it can be expensive in terms of the cost of holding stock. It also has a negative effect on cashflow – expenses are incurred on material, labour and other costs associated with the manufacturing process – but income cannot be generated until the goods leave the warehouse. It also cannot work for services, and in fact only works for products that have a long(ish) shelf life – it is unsuitable for perishable goods.

All of these deficiencies result from the need to even out production to meet changing demand within the available capacity. This capacity is itself often defined or heavily influenced by the availability of labour – constant within a rigid shift system.

When demand upturn is sudden it may be necessary to use overtime working or temporary additional labour to meet it. This itself has a number of disadvantages.

• Overtime is rarely stable so often the organisation has to rely on the goodwill of the workforce and the incentive offered by the overtime premium to provide the required labour. This raises costs.
• Temporary labour can be expensive in terms of its recruitment, its management, its supervision and its training.

Of course, a downturn in demand is no less problematic. Making for stock does offer many organisations a temporary respite, but is only a short-term solution, and only really feasible if an upturn in demand can be reliably predicted within a foreseeable timescale. Redundancy is often too heavy-handed and imprecise an adjustment tool; natural wastage is too long-term a solution; temporary layoffs are preferable but can have a damaging effect on staff morale – in the short and longer terms. And, of course, if demand is erratic and unpredictable, when the upturn comes (once more), there may be a problem of not enough skill and experience.

Annualised Hours

The system known as Annualised Hours (though it need not be ‘annual’ and is perhaps better regarded as a form of Flexible Working) offers a possible answer to these demand unpredictabilities. It was first used in the UK in the early 1980s in response to increased holidays and reductions in basic working hours agreed within the largely continuous-process based Paper and Board industry. Since then many organisations from a range of industrial sectors have adopted the principles and applied them to their specific needs, with great success.

Many employees will welcome the stability that an annualised hours contract brings. Those most likely to resist its introduction are employees who currently have high overtime earnings.

Trades unions are generally supportive: most trades unions now understand the concept of annualised hours and many of them see it as a means of stabilising the pay of their members. Thus, it is preferable to establish annualised hours working on the basis of a joint management-union examination of how the needs of the organisation can be translated into flexible ways of working to meet the needs of both the organisation and the workforce. The workforce is likely to be suspicious at first (most change is seen as threatening) and an approach that has the prior acceptance of the trades unions is more likely to be successful.

The first stage involves the drawing up of a business plan for the planning period (one year or whatever time horizon might be more appropriate for the specific organisation). Presumably this is not a major problem since most organisations will have some form of annual planning process. However, in this case, the important next step is to calculate approximately the working time required and how it will need to be phased through the year. The aim is obviously to have access to appropriate capacity when it is needed – and to be able to adjust to a lower activity level when the demand is not there. This process also encourages the organisation to review the balance of skills within the workforce – though this takes more time, it is a very useful ‘by-product’ of the annualised hours approach. Also quality often improves as a result of having the right number of properly (multi-) skilled and effectively motivated workers that is the result of a well-planned annualised hours programme.

At this stage, it is usually possible – and perhaps extremely motivating and reassuring – to calculate cost savings which will result from less overtime and idle time, the reduction in temporary labour and lower stock levels.

The next stage is to establish a shift pattern that meets the business needs. This has to balance the number of working hours with the needs of the workforce for a life-work balance which they find acceptable. This working pattern must obviously meet the terms of any specific working time legislation or industry agreements. The pattern may have specific short and long-term breaks built in for each (set of) worker(s). This is of course a ‘contract’ with each worker for those hours. The employee basically gets paid the same pay for each period (normally one month) irrespective of the hours in their particular pattern, but by the end of the year, the time worked and the pay received match up.

The annualised hours system recognises that all plans and budgets are wrong. The world is never going to behave according to the plan. The system allows a flexibility that guarantees that the organisation will still have the hours it requires even though demand changes from that forecast. This is achieved through a Reserved Hours and Enforced Rest process. These are based on the principle that each person has a ‘bank’ of hours which is paid for but not scheduled as part of the standard working pattern. These hours are used to cover unexpected increases in demand. Unlike normal ‘overtime’ working which is used in traditional working arrangements, the organisation has a right to call upon these hours without making additional payment. The ‘quid pro quo’ for this ‘demand’ is that in times of unexpected inactivity, employees can be sent home (for ‘enforced rest’) but their pay remains the same. The cancelled working hours are added, in whole or in part, to the bank, to be called upon at a later date when there is a business need.

There is considerable detail to be worked out before an annualised hours system can be implemented. For example, workers may find it difficult to meet other (e.g. family) commitments if the notice period for calling upon reserve hours is particularly short. There is thus a number of issues that need careful discussion and even negotiation with the workers and their representatives. Key discussions and decisions relate to :

• The weekly basic (normal) rostered working hours
• Calculation of the annual total
• Definition of ‘rostered hours’
• Definition of ‘reserve hours’
• Number of reserve hours
• The process of calling upon reserve hours
• Any premium value attached to reserve hours
• Minimum value of ‘call-ins’ (the minimum number of reservehours that are registered for each call-in)
• Discounting the reserve hours
• Joint monitoring of the working of reserve hours
• The process for establishing enforced rest periods
• Any minimum and maximum limits on enforced rest periods
• The implications for annual pay
• The implications for sick pay, pensions, annual leave pay and other payments

It can be seen that there are complexities both to the process of drawing up an agreement to establish and implement annualised hours, and to the ongoing administration of the system.

Example

Annual hours are a very efficient method of using labour when the numbers are awkward. For example, where employees work a 40 hour week on an 8 hour shift pattern, this works out to 5 shifts per week, or 10 shifts/2 weeks, or 20 shifts/4 weeks, etc. Simple for the organisation – and simple for the employee. However, the 40 hour week (at least in the UK) is now very rare. Negotiation over the last decade or so has resulted in a standard working week much nearer to 37 or 37.5 hours. Nor are shift patterns necessarily even; they are often designed to maximise efficiency and minimise changeover delays. This sometime means that if a production changeover occurs, say, once per day, the shifts on either side of the changeover are of different lengths from the shift actually containing the changeover. The ‘average’ shift may be 8 hours but if different personnel work different patterns (because some, say, prefer to work the night shift) and different shifts need different numbers (to meet different demand/activity levels), then rostering can become a complex activity and pay levels can become both different and variable.

Now, consider the example of a staff contract that requires each employee to work for 37 hours/week, and the standard shift pattern is 3 x 8 hour shifts. We have a problem if we want to maximise production. When using weekly planning periods, we are using too many prime numbers and too many integers for convenience. Here we might have to adopt 4 x 8 hour shifts, plus 1 x 5 hour shift per person to get 37 hours. This could leave one shift unmanned for 3 hours! We could have others manning this period in their 5 hour shift but this would give us a 2 hour overlap! The basic issue here is that we are allowing the staff contract to determine our operating patterns – when the staff contract should serve our operating need. Organising staff working on an annual basis allows much more flexibility – but it is administratively more complex, and it does usually need some computer support to manage the process effectively.

Look at our above example on an annual basis. If we start with the 40 hour working week, then the annualised hours for any employee would be 40 x 52 = 2080 hours per year (ignoring, for simplicity, leap years and that there are 52 weeks and one day in a normal year). If we take off annual holidays and bank (state) holidays of 5 weeks (25 days, or 200 hours), then the annual hours to be worked will be 1880 (2080-200) hours. This equates to 235 x 8 hour shifts, or 188 x 10hour shifts, etc. Part-time staff would work shifts pro rata to their commitment but with holidays properly accounted for.

If the employees subsequently negotiate a 37.5 hour working week, the annual hours simply reduce and we arrive at 220 x 8 hour shifts, a reduction for each employee of 15 shifts over the year.