How could zero hours contract reform create unexpected problems for contractors?

Contractors working through umbrella companies could face new complications as a result of the government's zero-hours reforms — and, ironically, the changes might end up making traditional limited company contracting more attractive to hirers instead, despite the ongoing challenges posed by IR35.

The government's proposed reforms to zero-hours contracts are designed to give workers greater security and more predictable income. On paper, that's a reasonable aim. But the unintended consequences for the contractor and umbrella-company market could be significant.

Whether that shift back toward limited company working actually happens remains to be seen, but the proposals in "Make Work Pay: Ending One-Sided Flexibility — Reforms of Zero Hours and Similar Contracts" have the potential to reshape parts of the flexible labour market.

Here, exclusively for ContractorUK, I’ll explain that reshaping in more detail and outline how contractors using umbrella companies and recruitment agencies can have their say on the zero hours shake-up, writes Andy Chamberlain, head of strategic policy and advocacy at the Freelancer & Contractor Services Association (FCSA).

What are the new rules on zero-hour contracts going to be?

One of the headline measures in the Employment Rights Act 2025 is a requirement for workers on zero hours or certain low hours contracts to be offered a contract that reflects the hours they actually work.

While the Department for Business & Trade (DBT )consultation signals that the finer details are still being consulted on, the government’s preferred approach is for employers to assess a worker's hours over a 12-week "reference period".

If, during that time, someone has consistently worked significantly more hours than their contract guarantees, they must be offered a new contract that reflects those regular working hours.

Can the worker decline a new contract containing their regular hours?

Importantly, the worker will be free to accept or decline the offer of a new contract reflecting their regular working hours.

On paper, that gives workers greater choice and security. However, the proposal becomes much more complicated when agency workers and umbrella companies are involved.

If I’m an umbrella/agency contractor, who offers the guaranteed-hours contract?

Perhaps the most significant aspect of the proposals — in the agency/ umbrella contractor setting — is that the guaranteed-hours contract would be offered directly by the end-client. So the end-client, not the agency, becomes responsible.

If the worker accepts, they would effectively leave the agency/umbrella supply chain and become directly engaged by the client.

That represents a major shift from the current contracting model.

Many organisations deliberately use agencies and umbrella companies because they need temporary expertise without increasing permanent headcount. Being required — as an end-user of umbrella contractors — to offer direct employment after a relatively short period could fundamentally change how UK employers approach temporary staffing.

What’s an example of how umbrella contracting could be hit?

This potential but fundamental change is particularly relevant because many umbrella companies use employment contracts that guarantee only 336 hours of work a year. It’s an annual total of hours that works out at around seven hours per week.

This arrangement has existed for many years and serves various employment law purposes. But under the government's zero hours proposals, it could have an unintended consequence.

Imagine an umbrella worker takes on a contract requiring 40 hours a week. After completing the proposed 12-week reference period, the end-client may be required to offer that individual a contract guaranteeing 40 hours each week, because that reflects the hours they have actually been working.

The worker could choose whether or not to accept the offer.

What does the guaranteed-hours risk mean for end-clients using umbrella contractors?

From the end-client's perspective, this creates an administrative and commercial challenge that they simply didn't anticipate when hiring a temporary staffing resource.

Indeed, some end-clients may think twice about engaging contractors this way if it means moving from a 336-hour annual guarantee to, ultimately, having to formalise a temporary hire into a permanent-style commitment — with all the added employment obligations that potentially brings.

Why are zero hours changes a potential headache for UK hirers?

Most organisations engaging contractors through umbrella companies are not looking to recruit permanent employees. They're hiring experienced professionals to deliver a specific project, provide specialist expertise or cover a temporary resource gap.

Being required to monitor workers' hours, calculate reference periods and potentially offer permanent guaranteed-hours contracts — all upshots of the proposed zero hours rules — introduces additional complexity into what has traditionally been a straightforward temporary staffing arrangement.

How might employers respond to new zero hours rules?

Some hirers may conclude that the easiest way to avoid triggering their new obligations under the zero hours rule changes is simply to end assignments before the reference period expires.

If the qualifying period remains at 12 weeks, could we start seeing more contracts ending at 10 or 11 weeks?

No one knows for certain.

However, in the absence of a steer from DBT officials, it is certainly one possible unintended consequence of the proposed zero hours framework that businesses will likely consider. The result could be fewer opportunities for umbrella company workers rather than greater job security.

Could the zero hours changes benefit limited company contractors?

There may be an upside to the zero-hour contract reforms for some contractors. The guaranteed-hours provisions will not apply to genuine limited company contractors who operate on a business-to-business basis. This exclusion of B2B ‘PSC’ contractors, at a time when umbrella contractors could become less appealing, potentially makes traditional contracting via a Personal Service Company (PSC) a more attractive engagement model.

Put another way, if hiring through an umbrella company in the age of zero hours contract regulation brings with it the possibility of future guaranteed-hours obligations around umbrella worker roles, some organisations may decide that engaging contractors through their own limited companies is the simpler option.

In effect, businesses would be encouraged by the new zero hours rules to revisit the cautious approaches they adopted following the off-payroll working reforms.

Will zero hours reform reverse the risk aversion IR35 triggered?

Ever since those reforms applied (in the public sector since April 6th 2017, and in the private sector since April 6th 2021), many organisations have imposed blanket bans on limited company contractors. And even where there’s no PSC ban, it’s often still a highly risk-averse IR35 policy in place at organisations with the same intent — to minimise potential exposure to HMRC and tax compliance risks.

The new employment law proposals affecting zero hours ‘gigs’ introduce a different type of risk into the umbrella contracting model.

Whether that is enough to prompt a change in contractor hiring strategy remains uncertain. Many sectors, particularly financial services, continue to operate blanket restrictions on outside IR35 engagements and currently (July 2026) show little appetite for reversing those policies.

Are zero-hours reforms a double-edged sword for contractors?

Ultimately, then, the proposed zero hours reforms to “end one-sided flexibility and ensure all jobs provide a baseline of security and predictability” could prove to be a double-edged sword for contractors.

Workers who genuinely want the opportunity to move into permanent employment with an end-client may welcome the zero hours measures. But other workers deliberately choose contracting because they value flexibility, variety and independence. This latter contingent of workers might have little interest in becoming an employee of their current client.

If clients become reluctant to hire umbrella company workers because of these additional obligations triggered by zero hours contract reforms, the number of available ‘umbrella’ assignments could fall.At the same time, contractors who prefer to operate through their own limited companies may find that new opportunities emerge if hirers begin reassessing the balance between employment law obligations and IR35 compliance.

Much will depend on the final legislation to implement these zero hours reforms and how businesses respond once the details are confirmed.

Can contractors have their say on zero hours contract changes?

The consulting process is underway, and there is still an opportunity for contractors' voices on zero hours to be heard, with the Make Work Pay consultation response page open until August 25th 2026.

But here at the FCSA, we’d like to understand directly from umbrella company workers how they feelabout the government’s zero hours contract proposals.

1. Would you welcome the option of being offered a permanent role directly by the end client?
2. Would you welcome the option of ‘going permanent’ as early as three months into your umbrella company role for the client?
3. Are you concerned that the reforms could reduce the number of temporary assignments available?
4. Have your contractual partners, such as recruitment agencies and end-clients, already started responding to the government plans for zero hours jobs?  

We've put together a short survey that should take no more than three minutes to complete. Take part here: https://www.surveymonkey.com/r/NVY5PCF