The Government's Good Work Plan, published just before Christmas, was full of gifts for Britain's workers, from a right to request a more predictable contract, to clearer and more transparent information for staff. We recently outlined the key takeaways from the Good Work Plan here. The Plan responds to a number of recommendations of Matthew Taylor's 2017 review of modern working practices.
However, the Plan is short on concrete ideas when it comes to the critical issue of employment status and tax. This is especially conspicuous given the raft of tribunal and court cases in recent years, from Uber to Deliveroo, which have largely found that individuals working in the 'gig economy' are being mislabelled and denied key legal rights.
There are 3 categories of workers in the UK:
However, for tax purposes there are only two categories: employees and the self-employed. So, for example, someone who is a worker for employment rights purposes could be either an employee or self-employed for tax purposes.
The self-employed pay lower rates of National Insurance, and the company they work for pays none at all. In addition, the self-employed may provide their services through 'personal services companies' to minimise the amount of income tax they pay (subject to the IR35 regime). Arguably, their tax treatment is a significant benefit both of being and hiring a self-employed contractor rather than an employee.
The factors to look at in analysing an individual's status are similar for both tax and employment law purposes, and the tests are largely found in an extensive body of case law from courts and tribunals. As evidenced by this body of case law, the situation is confusing for all concerned. Businesses, for example, could suffer a competitive disadvantage where they treat their staff as employees while another company in the same industry treats similar staff as self-employed. Many argue that reform is long overdue.
Back in early 2017, the Government proposed to increase National Insurance contributions for the self-employed, to reduce the gap in contributions between employees and self-employed. Following an outcry, the Government performed a dramatic U-turn. The Good Work Plan acknowledges that "the small differences in contributory benefits no longer justify the scale of differences in rates of NICs" but then simply admits that "we have no plans to revisit this issue".
Following an Employment Tribunal finding that its couriers were workers rather than self-employed for employment rights purposes, the delivery firm Hermes recently negotiated a new 'self-employed plus' status with the GMB union, whereby couriers could elect to receive paid leave and minimum rates of pay in return for agreeing to follow prescribed delivery routes. However, concerns have been raised around whether the new arrangements are more consistent with employment status for tax purposes and therefore whether income tax and National Insurance may be payable by Hermes.
As long as there's such a stark difference in the tax treatment of the two groups, businesses will continue to have a commercial (if perhaps not a legal) justification for treating individuals as self-employed wherever there is uncertainty around their actual status.
The Plan states that the Government "will bring forward detailed proposals on how the tax and rights framework could be aligned". However, there is no indication of how this will be done, given the separate bodies of case law for tax and employment rights, and the fact that for employment rights there is the additional, intermediate category of 'worker'.
It also states "We will legislate to improve the clarity of the employment status tests". Once the new legislation is in place, "We will also improve the guidance and online tools available to help people understand their status". The Plan also states that, following the new legislation, the Government will look into reversing the burden of proof so that the employer has to prove the individual is not entitled to employee or worker rights, rather than the other way round.
The Plan contains a reference to previous recommendations that more emphasis should be placed on the 'control' a would-be employer exerts over its staff, rather than the other factors that have historically been considered, when deciding on employment status. But the Government has given no commitment to implementing (or even considering) this specific proposal. So would the new legislation and associated online tool somehow take into account all of the decades of case law in this area? Or would they involve entirely new tests which better reflect modern working arrangements, and which may also provide more protection for individuals in the gig economy?
Another key area where clarity is still lacking is the right of employees and workers to paid holiday. The types of pay which should be taken into account (such as overtime, bonuses and commission) for the purpose of calculating holiday pay are being probed by courts and tribunals, and this issue requires detailed consideration of precise levels of pay, how the various types of pay are calculated by the employer, and what each element of an individual's remuneration relates to. As with employment status, the case law is extensive and the legal position is unclear in many respects. As things stand, employers face considerable uncertainty around what to take into account when calculating holiday pay and how to make those calculations in practice. To assist, the Plan states "we are exploring the option of a new holiday pay calculator". Once again, the Plan is silent around how this calculator might work in practice. This promises to be just as complex as an employment status tool, so even once an individual is clear on his or her status and entitlement to holiday pay, it may still not be straightforward to determine what that entitlement will be.
The final piece of the jigsaw concerns enforcement. In this area, the Plan states, for example, that the penalties for 'aggravated breaches' of employment obligations, including the law on employment status, will be increased from £5,000 to £20,000, though we note the number of such penalties since their introduction in 2013 has been very low.
Individuals seeking to enforce rights which are dependent on worker or employee status have to go to an Employment Tribunal to get a decision as to their true legal status before the Tribunal will go on to consider their particular claims (e.g. unfair dismissal, or holiday pay). However, Tribunal resources are under significant pressure, partly due to the abolition of tribunal fees. Recent statistics show an average wait of seven months between filing a claim and a hearing. One of Matthew Taylor's recommendations was for "expedited preliminary hearings" to get a determination on employment status before the claim for the right or payment in question is permitted to proceed. However, the Good Work Plan does not deal with this point. At the same time, the Government has separately indicated that a fee system may ultimately be reintroduced in the Employment Tribunals, albeit in a different form. Any legal changes will have far less impact and the proposed penalties will be much less likely to be accessible if individuals and businesses cannot quickly and easily get a determination as to the individual's correct status.
The Good Work Plan is ambitious and presents a positive picture of how the world of work could be improved in the future, while maintaining a flexible labour market that allows businesses to innovate and grow.
However, the issues around employment status and tax have been considered by the Government several times before, including by the Office of Tax Simplification in March 2015. The continued lack of progress raises questions around whether it is in fact realistic to expect any more clarity in this area.
Sep 22 2023
Sep 22 2023