Where employees work a certain number of hours each year. So, for example, instead of employing workers for 40 hours a week, they are employed for, say, 2,000 hours per year. The hours worked each week will vary throughout the year, according to the needs of the business. Such a system is common, though not limited to, shift workers. It can help to minimise labour costs by cutting working hours and overtime, and provides flexibility for a business to meet fluctuating demand. However, there are complications in introducing such contracts. For example: Making accurate predictions of peaks and troughs in demand to work out the annual hours required can be difficult – especially if a business does not produce a standardised product and every job is different; Overtime may still be required in the case of hard to predict increases in demand; If there is a serious (unpredicted) downturn in demand the business would pay for working hours not used; Keeping track of the number of hours worked by employees can also be an issue. Furthermore, in terms of employee benefits, it is difficult to identify what these are. Not only might it lead to loss of (overtime) earnings, but long working hours at times and few working hours at others, making it difficult to plan and balance home life with work commitments. Not surprisingly, such a change may not be welcomed by staff who prefer a steady number of hours each week. In most situations overtime is optional and annual hours contracts would make long working hours at a time involuntary. Such contracts could, therefore, create difficulties, especially for people with dependents. There is, perhaps, the joint benefit of increased productivity per hour, which would increase the business’s ability to pay out higher wages. This might, in fact, be one way to encourage staff to adopt such practices, ie offer a pay increase in light of the productivity and cost saving benefits such a contract could bring. Clearly, the potential benefits from a cost perspective needs to be estimated.