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Could ‘worker’ status creep into tax?

The tax system only recognises two types of employment status, i.e. employee or self-employed, whereas employment law also tips its hat to a hybrid of these two, namely ‘worker’ status. ‘Worker’ entitles the individual to limited employment rights as the table below shows.

 

Employment rights Employee Worker Self-employed
Unfair dismissal
Maternity/Paternity leave
Sick pay
National Minimum Wage
Rest breaks & holiday pay
Whistleblower rights
Discrimination rights
Health & safety protection (LIMITED)

 

Following the recent legal judgements in Pimlico Plumbers, UBER, and City Sprint, as well as the Taylor Review published in July, the ‘Work and Pensions’ and ‘Business, Energy and Industrial Strategy’ Committees have published their report ‘A framework for modern employment’ (PDF). The report contains proposals to stop companies exploiting self-employed workers, particularly in the ‘gig’ economy, and a draft Bill which would treat such personnel as ‘workers’ by default. There would then be an onus on companies to prove otherwise.

The full recommendations, many of which would be enshrined in legislation, are set out below.

Statutory definition of employment status

As many contractors know, employment status is not black and white, and therefore putting the issue on a statutory footing would not entirely eliminate the need for the courts. However, the committee argue that legislation on employment status could help prevent confusion and promote fair competition between businesses. This, in turn, would lessen the courts involvement and, most importantly, protect vulnerable workers.

The committee has recommended that the Government legislates to introduce greater clarity on definitions of employment status, emphasising the importance of control and supervision of workers by an engaging company, rather than a narrow focus on substitution, in order to distinguish between workers and the genuinely self-employed.

The committee’s draft Bill proposes amending S.230 Employment Rights Act 1996 to properly define a ‘worker’ and also an independent contractor.

Worker

In applying the legislation, a tribunal or court may take into account the following factors:

  • whether the contract requires the personal service of the individual;
  • does the engager retain the potential to control, to a substantial degree, how the individual’s work will be carried out in relation to such factors as:
  1. disciplining the individual;
  2. the activities to be carried out;
  3. the order in which activities are to be carried out;
  4. the equipment or products to be used in carrying out the activities;
  5. rate of pay;
  6. location of the work carried out;
  7. how the activities will be carried out; and
  8. the hours during which the work is to be carried out.
  • whether the individual is integrated into the engagers’ business;
  • whether the engager provides the tools and equipment;
  • degree of financial risk undertaken by the individual;
  • if the individual is free to work for others during the contract;
  • whether the worker marketed their business before the contract came into being; and
  • whether any substitution clause is capable of being freely exercised by the individual in practice. A contractual right of substitution itself shall not prevent the individual from being a worker.

Independent contractor

Naturally this will be someone who is neither an employee nor a worker. In deciding this, a tribunal or court may consider such factors as:

  • whether the person assumes responsibility for the success or failure of their business;
  • can the individual hire others at their own expense;
  • does the individual have the ability to determine the manner in which the services are carried out;
  • whether the individual markets their services;
  • if there is any scope for the individual to negotiate and set the fee for their services; or
  • is the person responsible for their own indemnity cover or public liability insurance.

Worker by default

Workers should not have to resort to appealing to the employment tribunal to right the wrongs of companies’ use of questionable self-employment models and it is therefore recommended that legislation be introduced to treat individuals as ‘workers’ by default.

Non-guaranteed hours

Companies benefitting from a flexible workforce must ensure that such flexibility is not one-sided, either by guaranteeing hours that reflect the periods worked each week, or by compensating workers for uncertainty. Here then, the recommendation is that the Government work with the Low Pay Commission to pilot, for workers who work non-contracted hours, a pay premium on the National Minimum Wage (NMW) and National Living Wage. Companies to be included in the pilot should be identified by reference to size of workforce and turnover.

Continuous service

Companies who benefit from a flexible but committed workforce should still guarantee rights when workers reach the necessary qualifying period, even when there has been a gap in service. The Government should therefore extend the time allowance for a break in service while still accruing employment rights for continuous service from one week to one month.

Employment tribunals

Workers have to frequently resort to the employment tribunal system to establish their rights, but because of restrictions on class actions and the absence of penalties for widespread abuses, this may enable engagers to adopt a ‘wait and see’ policy as to whether individuals are willing to risk pursuing their rights. Employment tribunals should be obligated to consider the increased use of higher, punitive fines and costs orders if an employer has already lost a similar case. Furthermore, the Government should take steps to enable greater use of class actions in disputes over wages, status and working time.

Flexibility and the NMW

A flexible workforce can be mutually beneficial to workers and businesses, as well as consumers. Workers plying their trade in the ‘gig’ economy however should not carry all the risks of such flexibility. They should not have to choose between not working and working below the NMW. Legislation that undermines the NMW and National Living Wage should be ruled out by the Government.

Entitlement to a written statement of employment particulars

Workers should be able to identify if they are being treated unfairly at work and to challenge poor practice with confidence. The committee argue that a requirement to set out rights and entitlements will be beneficial to good businesses, helping to root out non-compliant organisations and create a more level playing field. The duty of employers should therefore be extended to provide a clearly written statement of employment conditions to cover workers, as well as employees. This right should apply from day one of a new job, with the statement to be provided within seven days.

Lowering the Information and Consultation of Employees (ICE) threshold

It should be easier for employees and workers to have their voices heard at work but currently some workers are not covered by regulations intended to promote an employee voice. Even employees in organisations that are eligible may be prevented from exercising this right by the prohibitively high threshold for application of the regulations. Eligible organisations must have 50 or more employees; those on worker contracts do not count, and at least 10% of those employees, and a minimum of 15 people, must support the implementation. This threshold should therefore be reduced from 10% to 2% of the workforce.

Ending the Swedish Derogation

The Agency Workers Regulations (AWR) entitle agency workers to get the same basic pay and conditions as comparable employees after a 12-week qualifying period. The Swedish Derogation; so called because it was introduced into the regulations at the request of the Swedish government, provides an exemption from this as far as pay is concerned. This loophole is subject to widespread illegal abuse to the detriment of both agency workers and legitimate agency employers, and its abolition was called for in the Taylor Review also now endorsed by the committee.

Deterrence

Compliance with the law is a minimum standard that any employee or consumer should expect from a business. Those organisations that choose not to comply should therefore face significant penalties to their finances and reputation, as punishment to them and a deterrent to others. Stronger and more deterrent penalties, including punitive fines, for repeat or serious breaches of employment legislation should be imposed, together with an expansion of ‘naming and shaming’ to all deliberate breaches of employment rights by business and supply chains.

Proactive enforcement

In addition to the establishment of the Director of Labour Market Enforcement, the committee would like to understand how the Government intends the Director’s powers and resources to develop over the next five years.

‘Worker’ status for tax?

If the Government adopts some or all of the committee’s recommendations, then would this pave the way for tax legislation to recognise this watered-down version of self-employment known as ‘worker’? This is perhaps unlikely for two reasons.

Firstly, introducing such a category would only add complexity to tax legislation, and secondly, with so much emphasis being placed on control, these workers are ripe for being classified as employees for tax. This then creates a dilemma, as the vast majority of workers in the ‘gig’ economy are sole traders, so it would be the likes of Amazon, Hermes etc. who would then be liable for PAYE tax and NIC. Such organisations are not going to want to pay employers NIC nor will their workers want to suffer deductions at source. Neither party may  have a choice in the matter however, if, as expected, the off-payroll rules are extended to the private sector in the near future.

By Qdos Contractor

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