A combination of high profile cases and policy announcements about the so-called “gig economy” has a particular resonance for technology companies. Technological change has transformed the labour market, which has given added urgency to finding better solutions to three much older problems:
- How should we best draw the line between the independent contractors, workers and employees?
- Should the self-employed and employees be taxed differently?
- How should personal service companies be treated for tax purposes?
Employees, workers and the rest: the case law
Originally UK employment law (like our current tax law) recognised only two categories of individual – employees and the self-employed. However since the 1970s the new category of “worker” has emerged. Workers sit halfway between employment and self-employment. They are not entitled to core employment protection provisions (such as the right not to be unfairly dismissed) but, along with employees, benefit from a number of important statutory rights. These include all anti-discrimination legislation, the National Minimum Wage and working time protection, including the right to paid holidays.
Most of the recent litigation about employment status in recent years has focused on the dividing line between worker and the self-employed. Most notably, last month the Employment Appeal Tribunal upheld an employment tribunal's ruling that drivers engaged by Uber in London were workers, not self-employed.
However, rather than being able to offer general guidance, the EAT said that the distinction always depended on the precise relationship between the company and the people it engaged in each particular case. It said there were a number of important pointers, including the degree of true independence in the provision of the service and the degree of integration into the customer's business, but nothing that could be regarded as definitive. This case will now go to the Court of Appeal, which may be bolder about the guidance it feels able to offer. Early next year another employment status case will reach the Supreme Court, though this time it does not involve a technology company as employer.
Certainty or flexibility?
The Taylor Review, which reported over the Summer, placed particular emphasis on the advantages of greater certainty when it came to determining employment status. However, there are worries that implementing his proposals would come at the expense of the flexibility that has enabled our courts adapt the way they apply the law on employment status to accommodate successive changes in the world of work.
That may be why in the Autumn Budget the Government stopped short of endorsing the Review's recommendations, but instead announced a discussion paper which would look at “options for longer-term reform to make the employment status tests for both employment rights and tax clearer.” So far it has been non-committal about what options it will be exploring or when the paper will be published.
Wider tax reform: personal service companies
One way round all this uncertainty, as far as businesses are concerned, has been to engage individuals via personal service companies If these arrangements are properly set up and applied, it means that there can be no direct contractual relationship between individuals and the users of their services. That means that no employment rights can be acquired by the individual actually performing the service against the end user.
Traditionally the use of personal service companies has also meant a more favourable tax regime, both for the individual and for the business paying for the services. These advantages have been much reduced since legislation (now known as “IR35”) was first introduced in 2000. Very broadly, this legislation aimed “to ensure individuals who effectively work as employees are taxed as employees even if they choose to structure their work through a company”.
In April this year the rules were further tightened up for contractors working in the public sector, by introducing new rules that in effect put the responsibility on the purchasing organisation to account for any tax and national insurance due under the IR35 rules, rather than it being the individual's primary responsibility to ensure compliance. In many cases this has meant contractors have been faced with two unattractive options: either go on the payroll and accept an immediate reduction in income, or give up working in the public sector.
Next year the Government will be consulting about introducing similar rules for contractors operating in the private sector.
Getting employment status right is more important than ever, particularly for companies operating in relatively new sectors of the economy without a body of historic case law to guide them. Not only has there been a considerable expansion of workers' rights in recent years, but changes to the tax rules have placed an increasing regulatory burden on businesses.
There are signs that the Government is increasingly alive to the burdens that our complex rules on employment and tax status place on business. In addition, as more gig economy cases reach the appeal courts, these are bound to shed more light on how the familiar employment status test works in a new context.
This is all in the future. For now, recent developments will prompt technology companies to look more closely at their arrangements for engaging or supplying workers off the payroll, whether directly or via service companies. Where any grey areas are identified, it would be as well to re-asses the way these individuals are categorised, and to seek professional advice where appropriate.