Employment Status - Is there a silver bullet? (Part 2)

In the second article on employment status, Justine Riccomini asks whether the notions of “employment” or “self-employment” are future-proof.

Technological advances combined with new ways of working and “portfolio” careers make the world of work look completely different to the way it did 30 years ago. Are the notions of employment and self-employment outdated? Should alternative methods to tax income or transactions be sought to ensure the optimum flow of revenues into the Exchequer? If so, what are they?

The reasons people become self-employed vary between wanting independence, autonomy, flexibility over when they work and, in some cases, increased financial reward. In terms of employment status, most individuals would probably say that they want simplicity, transparency and the ability to work and pay the right amount of tax without having to think too much about it - or hire advisers.

However, given the choice of being classified as a ‘worker’ or an ‘employee’, I suspect that many would go for employee, as it carries the important additional rights – workers are entitled to National Living/Minimum Wage and holiday pay, but not much else.

Other aspects such as TUPE and unfair dismissal rights are encased in the employee category – and some workers may decide they are not content to work alongside employees at a “secondary” level with fewer rights. Time will tell whether the abolition of employment tribunal fees will bring this to the fore.

Another consideration for individuals is their pension pot. Being classified as a worker does not confer the right to be automatically enrolled into a pension scheme by the engager.

This comes as latest data from the Office of National Statistics (ONS) revealed a large proportion of self-employed people have no pension. The data shows that 45% of 35-54-year-olds and 30% of those who are 55 and above have no pension savings at all.

What do Employment Agencies want?

For recruiters, the essence of employment status is not as clear cut as it was 20 years ago, since the advent of the Personal Service Company, the Intermediaries legislation commonly known by its press release number “IR35” and its sister legislation, IR35 (Public Sector), Managed Service Companies, Umbrella companies and good old-fashioned sole traders in the mix.

Do they stand a chance of complying when there is so much to navigate?

The IR35 (Public Sector) legislation has proved particularly hard for agencies, in no small part because it is not even the agency that is responsible for deciding whether someone working through an intermediary company is subject to the new rules – the engager or end client makes that decision – and the agency is bound by it.

If IR35(PS) applies, the agency must operate PAYE and deduct employer NICs.  Does this allow Public Authorities to recruit all contractors though an agency, determine on a blanket basis they are all IR35(PS) and pass the employer’s NICs liability on to the agency?

Brexit Looms

The most recent piece of research commissioned by the Resolution Foundation illustrates massive (56%) increases in agency working in the construction sector over the last five years, with other sectors such as wholesale, retail and the motor trade also up at 51%. These sectors are not standalone – the average rise across all sectors was 43% which depicts a high level of dependency on agency-based arrangements. Why is this?

It seems that Brexit has had an influence – uncertainty over the labour market, the order book and financial and economic fluctuation requires a more flexible than ever labour market and therefore, the trend for short term working, contracting and the gig economy may yet increase further, widening the gap between traditional employments and employment for life and a “portfolio” way of working.

Not necessarily what the Government wishes to hear when it is striving to ensure that tax and NICs receipts stay at optimum, stable and predictable levels.

Whilst agency workers may appear to be an expensive route, the research shows that HR managers consider it to be cost effective – you get what you pay for and when the contract ends, there are fewer potential repercussions.

In addition, it seems the perceived skills gaps created by Brexit - influenced decisions by EU migrant workers could further increase the need for agency workers.

What the Labour Market figures tell us

According to the CIPD, there has been an exponential growth in self-employment of around 30% since 2007 and contrary to previous years, when most self-employed people were male, the growth has been in female entrepreneurism. This could also help account for the loss in productivity reported by traditional methods and tied into GDP.

The CIPD relates that rather than the rise in self-employment being a signal of labour market weakness, in fact, only a small proportion of people who become self-employed are doing so because they are unable to find employed work.

There are also a significant number of people who become self-employed in older age – perhaps because they are in a position to consult as an expert or perhaps because they need to continue to earn to supplement unstable retirement incomes.

Conclusion

Some form of answer is bound to emerge eventually – but the way it has evolved over the years has led to many layers and created many unintended consequences. It is probably necessary to strip this back to basics, consider some radical new measures and scrap the old way of going about things.

More importantly, if employment status is to be legislated for, it needs to be capable of successfully interacting with the world of work for at least the next 50 years. This will be difficult to achieve in the short term with major influencing factors such as Brexit sitting over the whole Government agenda. A long-term strategy is required, not a quick fix.