It won’t have escaped your attention that the way in which we work is changing. A number of narratives have sprung up around those changes.
There is an optimistic narrative that celebrates the opportunities for self-actualisation that a more fluid work environment delivers. There is a narrative around how everyone can benefit from the chance to tailor the supply of our labour as we choose. There is a narrative that identifies the negative impact of less secure models on working on individuals whose skills leave them with low bargaining power. And there is a corresponding narrative that decries the exploitation of those individuals.
Each is true – and none is universal.
What I’d like to do is identify some regulatory levers a Labour Government might pull to bring more of us within those positive narratives. But to do that, I need to start by identifying a less common narrative.
The arbitrage advantage
The line between employment and self-employment describes the difference between a contract whereby you provide services to another and a contract of service. Are you in business on your own – or are you in the service of another?
If you are in the service of another, that other must provide you with a safety net, one which corresponds to your service. There are regulatory obligations of minimum pay, of security, to treat you fairly and share risks with you. If you are in business on your own, those burdens fall on you.
So for the employer, an important consequence of employing someone is that you carry the cost of providing that safety net. Contracts for services do not carry those costs.
This same line in the sand – between employment and self-employment – that dictates availability of this safety net also carries profound tax consequences. Putting £100 of pay in the pocket of a basic rate employee can cost an employer (after tax and National Insurance) £167. Putting that same £100 in the pocket of a self-employed worker costs her engager £141.
In a competitive, labour intensive, high volume, low value added industry that £26 represents a saving far more profound than any that might be delivered by a real-life competitive edge. When taken together with additional costs imposed on employers of providing the safety net it is overwhelming.
Disruptive new technologies that enable different modes of working are creating new opportunities for businesses to compete. Sometimes they deliver pure efficiency advantages. But they also create opportunities to arbitrage regulatory weaknesses.
And the successes we celebrate as victories for new technology are very often – usually I would say – the product, in whole or in part, of regulatory arbitrage. Our narratives might ignore it but we live in a world where, as Stephen Sondheim crisply put it, the Princes are Lawyers.
This is an indubitable fact. And it is true not merely of labour intensive businesses – although it is upon those that I focus here.
And arbitraging these advantages channels vast amounts of money – tens of billions of pounds – into the pockets of the arbitrageurs. And it channels that money from the rest of us. From businesses that don’t enjoy those arbitrages and are outcompeted. From individuals denied that safety net who faces lives of financial uncertainty and breadline pay. And from taxpayers and those who rely on public services who together fund that lost £26.
A properly functioning regulatory environment fosters and rewards real innovation. Ours acts actively to reward poor labour practices and burden shifting. By creating market distortions it rewards the very behaviour it should discourage.
How should Labour respond?
The problem of outdated regulatory frameworks extends beyond the workplace. But it is the workplace I want to focus on here.
Sometimes it will be appropriate to impose the burden of providing a safety net on those who use labour. And there are good reasons to encourage entrepreneurial behaviour through the tax system: real entrepreneurs – unlike arbitrageurs – deliver wealth to us all. I start from these principles.
The history of the dividing line – employment or self-employment – is measured in centuries rather than decades. The quality of the safety net that is its consequence ebbs and flows with different Governments. But the line that dictates whether or not it is available has in recent times remained broadly static. It has not moved as the ways in which we work have changed. It derives from the (wrong) question ‘are you in service?’ rather than the (right) question ‘should we impose upon your engager the obligation to provide a safety net?’ It looks to a formal question ‘does this contract look like a contract of employment?’ rather than a functional one ‘how does this relationship actually function?’ And it is found in judge-made law, which Government cannot adjust as circumstances change.
It is not the right line.
If there are circumstances where the burden of providing a safety net should fall on employers those circumstances must be dictated by a principled analysis of when it is appropriate to impose it. You can only conduct that principled analysis by replacing the present test with a statutory test; a statutory test that looks to functional questions rather than legal ones. And which, unlike the ‘in or not in service question’, you can adjust as the world adjusts.
A sensible functional test looks in particular to whether there is an ongoing relationship between an individual and an other. And to the intensity of that relationship (hours a week). And imposes the burden on the counterparty whose business it is financially to profit from that individual’s labour.
Such a test would, of course, disrupt some business models – but it would protect others and create more. Labour should not be afraid of these consequences.
This would not merely be right. It would also enable the manifesto promise that under Labour people who are employees will have a safety net. The class of individuals who continued not to benefit from that safety would shrink. And it would also be composed of individuals whose mode of working was more akin to being, in reality, in business on their own account. The sorts of individuals less in need a safety net.
And there may also be a good case for the State to step in where the test fails to identify a functional employment relationship. In his Conference speech Corbyn indicated Labour might venture down this road. He was right to do so
– indeed Labour might travel further.
I turn next to consider how we use the tax system to encourage entrepreneurial behaviour.
Remember that £26? As things stand, the dividing line between those who pay it and those who do not is, again, the question whether the individual is legally ‘in service’. And we collectively give a multi-billion subsidy – officially around £3bn per annum – to the self-employed and those who engage them.
If you think it odd that we today encourage entrepreneurship by reference to a line drawn in a long ago world; if you are surprised that the engagers we subsidise are those who do not provide safety nets; if you find it a remarkable coincidence that the line we use to encourage entrepreneurship is the same as the line we use to dictate whether there is a safety net then… well, you are in good company.
Labour should abolish the subsidy.
It is poorly targeted and damages legitimate competition. The saving would fund the modest costs of improving the safety net for the self-employed. And a better safety net would itself enable more risk taking. But the saving would also fund the cost of a tax relief, targeted at basic rate taxpayers, and that encouraged entrepreneurs and not arbitrageurs.
I shall not write here about the mechanics of abolition: that is a discussion for another place. Nor shall I further outline what that tax relief might look like. The question how to encourage entrepreneurship through the tax system is a broader conversation but I may later write on the principles which might guide that conversation.Follow @jolyonmaugham
Note: this is the second of the series of pieces stemming from this Manifesto.