The Dependent Worker

The thrill of the new, of progress, the advance of technology, can cause us to misascribe to modernity that caused by quite something else. We can, for fear of appearing Canute, accept as inevitable that which can and should be resisted.

Care should be taken.

Many of these problems are evidenced in our analysis of the growth of self-employment.

It is true that technology puts the buyers and sellers of labour together with an efficiency that benefits both – indeed us all. It is true that this has made possible – and desirable – patterns of working that could not previously have existed. But it is not true that it is this alone, or even primarily, that has caused the rise in self-employment. And it is not true that the negative consequences – the creation of a class of worker living precariously on the margins – are inevitable.

Care must be taken.

Put aside those who progress crowns winners. Focus instead on those without bargaining power: the warehouse workers, secretaries, drivers, call-centre workers, the marginal trades. Those who are dependent, very often, on a single relationship. Their status as self-employed stems often not from technology but the law. The law, which creates two compelling disincentives against their employment.

The first is the tax system. As I explain here, putting £100 into the pocket of an employed worker can cost an employer £26 more than putting that same £100 into the pocket of her self-employed equivalent. This difference is profoundly important to the economics of the low margin, high volume businesses in which the precariat are engaged. If you employ a worker you cannot compete.

The second is employment law. We ask employers to provide a safety net for their employees. We ask them, very often, to bear a cost which would otherwise fall on the worker or on the state. But we impose no equivalent burden on engagers of the self-employed.

Think about that.

We use our tax system to incentivise employers to avoid providing a safety net. This – I hardly need say – makes no sense. The incentive should be exactly the other way: not to shirk a safety net. We should not through the tax system subsidise those who transfer costs to others.

But addressing it is not impossible. It requires only political will. The Conservative Party has at least two terms of Government before it. It is insulated from political risk. It should act. And here is how.

First, it must remove the tax incentive for employers to shirk the provision of the safety net. This could be done in a revenue generative fashion – by raising the tax costs of engaging the self-employed to the level of the employed. Or a revenue neutral fashion – by spending some of the tax raised from self-employment on cutting taxes for the employed. It matters not. But the playing field must be leveled.

Second, we must address when that safety net should be provided.

Presently the answer is given by a judge made test – employment or self-employment – that dates back a century or more. The test relies on a range of factors, many of which have no logical relationship to the question when we should place responsibilities on the employer. We must replace it with a statutory test that Parliament can trim to the conditions of the day.

To ask what that test should look like we need to recognise its purpose. That purpose is not to ask of a worker whether he should have a safety net: it is not a substitute for a welfare system. It is, instead, to ask of an employer whether his relationship with his workers is such that it is reasonable for him to provide one. Is the worker ‘dependent’ on the employer?

This is, it seems to me, a function of two factors: first whether the worker has the power to set his own prices and second whether the worker really is in business on his own account.

When I, as a barrister, set my prices I can include within those prices a margin to enable me to provide my own safety net: sick pay, holiday pay, a pension and so on. In those circumstances the law should not compel any other to, for example, make contributions towards my pension. But where an employer dictates the prices at which a worker works, she cannot create that margin. Indeed the logic is to ask: what minimum amount does a worker need to pay for her own safety net. Pay below this rate and the burden of providing the safety net falls upon you.

The other important factor is whether the worker is dependent upon the employer. Our law already knows of the concept of a ‘subordinate’ worker. We could replace it with a simple test based on the number of hours worked for an employer. Use a worker for that number of hours and they become dependent on you; you acquire a commensurate obligation to provide a safety net for them.

These steps would not stem the rising tide of the gig economy. They do not seek to; they recognise the benefits it brings. But they would ensure a level playing field for employers. They would ensure the less generous do not drive out the more. And they would remove the bizarre encouragement our tax system provides for business to transfer costs to the state or the individual. 

18 thoughts on “The Dependent Worker

  1. Surely a typo here?

    “putting £100 into the pocket of an employed worker can cost an employer £26 more than putting that same £26 into the pocket of her self-employed equivalent”

    Not “that same £100”?

  2. What typo? (Thanks).

  3. In theory the self employed gain advantages denied to an employee as a reward for the risks they undertake. If we introduce a safety net then, on the old contributory principle, would that worker not also have to pay something over and above self employed NIC?
    If the relationship is truly that between a worker and an employer then there is existing legislation to cover it, even if it is hard to enforce. Perhaps the easiest way would be to significantly increase the number of people working to enforce the National Minimum Wage, with a remit to expand their work to cover people “engaged” but actually “employed”.

  4. What advantages?

  5. The gig economy is not the same as the current epidemic of self employment. I work in the gig economy, I set my own pay rates, or take what I can get, do the job and it ends. At other times I take a tempoary position for a fixed period of time. Back in the day this used to be called temping, so I am variously self employed or temporaily employed. These distictions are important.

    I have a friend (a surprise to many) who drives for uber and to class him as self employed is a joke. He is employed by any sane definition by the company and I find it hard to believe that a challenge in court would fail.

    Zero hours contracts and self employment have become devices of abuse by employers. They are also self perpetuating because if a rival company company has a 26% wage cost advantage you have to do the same.

    The law needs updating and clarifying as a matter of urgency.

  6. A very good post and I fully agree that the situation with dependent workers is one which needs addressing. I would assume that in most,if not all, cases the workers in question are not making any provision for their old age over and above the state pension and this will become a problem for them (and society) in years to come.

    One point I would make on the idea of using hours worked as a measure of dependency. Would unscrupulous employers not simply use zero hours contracts to spread the job between more employees thus rendering each of them technically not dependent?

  7. Good would be up against the weasely subcontactors who actually employ the workers at places like Sports Direct- zer ohours, rotating sackings,short enough hours etc. Fight needs fighting.
    Also I would note from yr previous Brexit article that MPs and Lords have already had a chance to vote,along with all the rest of usWe voted out and will not welcome any revision by special interest groups

  8. “…with a remit to expand their work to cover people “engaged” but actually “employed”.”

    NMW already covers this – “Worker” covers more ground than “employee”. I’ve seen it addressed in every NMW check I’ve been involved with.

  9. While I agree in principle, I share Mike diMarco’s concern that unscrupulous employers will work out how to evade tests on dependency.

    A related issue is whether those on zero-hours contracts could be helped by legislating for minimum rates of payment for hours spent being available to be called at short notice by an employer.

    The world of finance recognises and prices “put” and “call” options. Employers should similarly be obliged to pay for the “call” options which they impose on their zero-hours staff. This would need to be backed up by legislation outlawing discrimination against staff who aren’t available when they’re not being paid for being “on call”.

    And of course when I refer to “zero-hours” I don’t mean just those on zero-hours contracts. I mean all those with variable-hours contracts where the guaranteed hours are less than, say, half-time employment.

  10. An interesting article.

    Rather than thinking of this in terms of the activity of the worker (do they work regular hours, set their own rates), it might be better to think about it in terms of the activity of the employer.

    For instance, if an employer is consistently paying many people to do what is exactly the same task, as what happens wth Uber, Deliveroo etc then this quite clearly isn’t self employment in the traditional sense whereby the individuals are intended to be a stand alone business.

    As someone who has pretty evenly split my employment in recent years between being an employee and being self employed (often for the same companies) I would suggest that the problem is that the law allows for two categories of employment, employees and self employed, whereas in reality our economy increasingly has three types of employment; employees, not-employed and self employed.

    So I would disagree with your analysis slightly in that you argue that the costs of employment and self-employment should be equalised. The slight difference I would argue is that we should retain self employment for those who are genuinely self employed in the traditional sense – plumbers, ice cream men, london cab drivers, barristers etc, but introduce a middle category that is intended to capture the fact that in between employees and the self employed is a middle category of ‘not-employed’ who are being paid by companies but do not have a safety net.

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  12. Jolyon – You may be able to set your own level of fees but how that could be considered a test usable in deciding employment and self-employment is beyond me. Many self-employed agree fees by way of negotiation, they don’t ‘set’ fees. There are employed people who can ‘name their salary’. So where does that get us?

    You also say that one of the two factors is as above and the other is whether a person is really in business for their own account but then suggest it would only be necessary to look at the number of hours worked to decide if a worker is ‘dependant’ on an employer. What are you thinking here. Number of hours in a day? Week? Lifetime? It would be easy to conceive of a scenario where (say) a building partnership wins a long-term project which will take up all their time. Are they now employed by the contractor? Or a scenario where a contractor is so valued that they could take their skills anywhere. Does that mean they could never be employed because they could never be said to be ‘dependent’ on anyone.

    You referred to a judge made test that dates back a century or more. I think it would be much fairer to say that the test was developed over a century or more and continues to develop.

  13. @adam c

    “For instance, if an employer is consistently paying many people to do what is exactly the same task, as what happens wth Uber…..”

    Uber don’t own taxis and drivers are free to accept or decline the offer of work. Uber don’t pay anything to the driver, although they do collect the fare on behalf of the driver, for which the driver pays them 20% commission.

    I can’t see how they can be thought of as employees. There might be more argument that they are ‘workers’ but even HMRC are confused on the matter as (from their own website) a person is generally classed as a worker if [inter alia]

    “*they have to turn up for work even if they don’t want to”

    Although later on you are told that someone is likely be a worker if [inter alia]

    “they only work when they want to”.

    If a driver wants to work with Uber in the morning and do a bit of private hire in the afternoon, there’s nothing stopping him or her.

    How’s that not standalone?

  14. Thanks Jolyon. Really interesting article.

    Re your tests of whether an employer should provide a safety net, wouldn’t using the number of hours that a worker is engaged incentivise a business (Uber/Deliveroo) to cap the maximum number of hours just below this limit? If we said the limit was 30hrs/week, wouldn’t they just engage lots of drivers at 29 hours? And wouldn’t this risk increasing precarity for these workers as they would then have to seek more hours and income elsewhere?

    Second, if we set a test on whether workers can set their own rates, wouldn’t this just make Uber and Deliveroo introduce this function so that rates are set between drivers and passengers? If this did happen, as long as Uber didn’t artificially restrict the number of drivers, and without any coordination between drivers, wouldn’t competition between drivers keep the cost of a ride very low? While returns for drivers are low using Uber, similar returns are very low on other platforms where workers can set their price, such as TaskRabbit.

    The Government have appointed Matthew Taylor to lead a review into employment practices in the modern economy. One of the issues they’re looking at is how to strike ‘the appropriate balance of rights and responsibilities for new business models’ including looking at whether ‘current definitions of employment status need to be updated to reflect new forms of working created by emerging business models, such as on-demand platforms.’
    Will be interesting to see what the report comes up with, and what (if anything) the Government are prepared to do…

  15. An excellent and thought provoking article. Successive governments have failed to address the issues raised in this article.

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