Pension fund investors should be aware of the risks that ‘workforce flexibility’ can have on investor returns, the Local Authority Pensions Forum (LAPF) has said.

The LAPF’s report, titled Precarious Work, has warned that business models based on zero hour contracts, agency workers, fixed-term contracts and self-employed contractors can jeopardise companies' success and returns.

High profile cases with firms such as Uber, Sports Direct and Ryanair have highlighted the reputational and financial risks placed on the company.

LAPF vice chair, Denise Le Gal, said: “Investors can no longer turn a blind eye to precarious work. This report not only demonstrates the reputational and legal risks, it also highlights a worrying trend of companies seeing workers as a cost to be cut rather than an asset to be invested in to create long-term value.”

According to LAPF, the practice can be a “proxy for poor corporate governance and result in volatile financial performance”.

The business model can also deliver operational and legal risks, with a number of the high-profile cases leading to legal costs and fines for the employer.

The report urges government and regulatory change to stop firms abusing the existing legal categories and greater employment rights for employees.

In addition, the report provides practical guidance for companies, including asking boards whether they have taken cost-benefit analysis of “precarious employment practices”.

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