Employment status and the gig economy: taking stock

Published on
6 min read

As legislation and case law continues to emerge about how individuals should be classified for employment and tax purposes, we take stock of where we are now and suggest how employers can respond.

The uncertainty problem: a quick reminder

There has always been a degree of uncertainty about how relationships between organisations and the individuals they engage to work for them should be classified. For employment law purposes there are three possible categories:

  • Employees, who have the full range of employment protection rights.
  • Workers, who form an intermediate category, and can broadly be defined as non-self-employed individuals who work under a contract to perform work personally.
  • The self-employed, who work in business on their own account.

The growth of the gig economy and the steady expansion of workers’ rights has magnified the problem. That is because the opportunities for ad hoc and casual work have expanded while the risks to employers of applying the wrong classification have increased.

The uncertainty has been compounded by the fact that our tax system doesn’t recognise worker status. That means the tax rules for determining employment status are slightly different. So, for example an individual could be a worker for employment rights purposes, but taxed as a self-employed person. It is even possible for someone who has been taxed as a self-employed person to obtain a ruling that they are an employee for employment law purposes.

The significance of the gig economy cases

Sophisticated platforms operated by tech companies like Uber have opened up new opportunities for working flexibly, but have also increased the ability of businesses to control and monitor how the individuals they engage do their work. There is nothing new about casual working, so the question is whether the gig economy is a game changer and calls for a significantly different approach, or whether the tried and tested criteria for establishing employment status can be dusted off and applied to these new ways of working.

Over the last few years many individuals working on a “gig by gig” basis for companies like Uber, City Sprint and Addison Lee have been successful in establishing worker status in the employment tribunal. In the case of Uber and Addison Lee, decisions in the workers’ favour by the employment tribunal have also been upheld by the Employment Appeal Tribunal.

The latest significant development was the decision of the Court of Appeal in the Uber litigation at the end of last year. Although the drivers were successful, it was not a unanimous decision. One of the three judges, who was the employment specialist on the panel, thought that the employment tribunal had not given sufficient weight to the contractual documentation, or indeed to earlier case law about traditional mini cab companies. He thought this pointed to the conclusion that the drivers should be classified as self-employed.

The Uber case will now go the Supreme Court for a definitive ruling, probably early next year. Although the odds still remain in the drivers’ favour, the minority judgment has reminded us all that broad generalisations about the gig economy are unwise and each decision on employment status is likely to depend on exactly what arrangements have been adopted in that particular case.

What about other case law?

The latest decision from the Supreme Court on employment status comes not from the gig economy world, but from the plumbing sector, a trade that has had a tradition of self-employment for generations. For that reason it might have been thought that Mr Smith would face an uphill task in his claim to establish worker status against Pimlico Plumbers. The Supreme Court finally ruled in his favour in July 2018 not because of the broad sector picture, but because of the precise arrangements that had been adopted in his particular case, and in particular the provisions that limited his ability to take time off and to provide a substitute.

Since then we have had a number of other decisions from the employment tribunal addressing a wide variety of working arrangements. These have included a group of “educators” at the National Gallery who succeeded in establishing worker status, and a visiting music teacher at a private school in Essex whose application was also upheld. On the other hand the former Olympic cyclist Jess Varnish was unsuccessful in her claim against British Cycling.

Stepping back and looking at these cases as a whole, it is probably most helpful to see employment status as a continuous spectrum. Broadly speaking, assuming that there is some kind of legal relationship, the more closely the individual is integrated into the organisation they work for, and the more limited the rights of substitution, the more likely it is that they will be able establish worker status even if their work pattern is sporadic. However, other factors will also determine where an individual sits on the spectrum. These include the degree of control exercised by the employer and the degree of risk assumed by the individual, but the importance of these other factors is probably more dependent on the nature of the work involved.

What is the Government doing?

In its “Good Work” plan published at the end of last year the Government identified increasing certainty about employment status as one of its key priorities. However it has yet to identity what steps it will be taking to achieve this.

One step that would certainly help would be to align the tax and employment test for employment status, or, if that is not possible, align the tax treatment so that there is not such a big difference in the way that employees and the self-employed are taxed. However reforming the tax system in this way is likely to be a complex and long-term project, if indeed it is politically feasible.

There is however one significant step the Government has been taking, which is to shift responsibility for making the correct assessment of an individual’s tax status to the organisations that are ultimately paying for these services. As from April 2020, revised “IR35” rules, which were introduced in the public sector in April 2017, will be extended to medium and large companies in the private sector. That will mean that where an individual is engaged via a personal service company, not only will they be treated for tax purposes as if they had been engaged direct, but the primary responsibility for making appropriate tax and national insurance deductions will rest with the end user, not the intermediate company.

To help employers assess their liability under the new rules, the Inland Revenue has published an online status calculator. While not legally definitive, it can be a helpful way of ascertaining its view on a particular set of arrangements, and it is possible that the Government will develop a similar tool for employment rights purposes.

How should employers respond?

In a climate where there is increased public concern and press publicity about the rights of workers in the gig economy and of other casual and atypical workers, now would be a good time for employers to revisit their standard terms of engagement for these workers. That is particularly so for employers who are likely to be affected by the new IR35 rules.

A good starting point is to define the kind of arrangements that best reflect your organisation’s aims and objectives. Once that is clear, it is easier to make a robust assessment of where those arrangements are likely to fall on the self-employed/worker/employee spectrum, and the extent to which the risk of a wrong classification can sensibly be reduced.

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