Is UK employment law keeping up with modern working practices? – transcript

The following is a transcript of an interview with Ruth Buchanan, Partner, conducted by Liz Bayliss, Senior Expertise Lawyer.

Hello, welcome to the London episode of our first Ashurst Employment World@Work podcast series.  I'm Liz Bayliss.  I'm a senior expertise lawyer based in our London office and in this episode we're looking at modern working practices and whether employment law is managing to keep up with how the world of work is changing, particularly with the growth of the gig economy.  So, to look at this issue today, I'm joined by Ruth Buchanan, a partner in our London employment team.  

To start with the basics, I think one of the things that is confusing for employers as much as anyone else, is the terminology that we use to describe working people.  We talk about employees, consultants, casual staff, zero hours workers, freelancers and so on. Clearly not everyone in work has the same status or rights.  Can you break this down for us?

You're right, Liz, despite all of the different names we use, there are actually three types of employment status.  First of all we've got an employee, so that's someone who works under a contract of employment or contract of apprenticeship.  Employees have the most protection in terms of statutory employment rights.  Then over 20 years ago now, the Government decided to introduce a new category of people known as "workers".  Slightly confusingly, this term covers those who work under a contract of employment, so all employees are workers.  But the term "worker" also includes people who are not employees who work under some other form of contract and who agree to perform their work or services personally.  And the reason that the concept of "worker" was introduced was that so that they could be given certain protections which they would otherwise miss out on by not being employees, for example, workers are entitled to be paid the national minimum wage and to receive holiday pay. However, only employees are protected against unfair dismissal and can claim redundancy payments.  The third category of people who work are self-employed independent contractors and they work for themselves and so they don't have any employment rights.

Okay, well that sounds straightforward, but it's not as clear as all that, is it Ruth?

No, unfortunately not.  So, as I said, the status of "worker" was created by statute to give protection to individuals without a contract of employment but unfortunately, the definition is not very clear and it also varies across different bits of legislation. This has generated a lot of litigation over the years so we have this whole body of case law about what constitutes a 'worker' and that's great for lawyers but we can't really expect employers or employees to be able to get to grips with all the case law without legal advice.  And the situation has been made even more confusing by the emergence of the gig economy.  This can be great in some respects for individuals who work within it in terms of flexibility and controlling their working hours. However, the downside is that those who work in the gig economy could be missing out on important protection because they're treated as self-employed rather than as workers.  We've seen a whole spate of cases about people such as Uber drivers, motor cycle couriers and plumbers, where the Court has found that these individuals are workers when the company they work for considered them to be self-employed.  

Yes, and the confusion in this area is, of course, one of the reasons the Government asked Matthew Taylor to write a report on modern working practices and, as you know, his report is very lengthy and it's got a lot of proposals in it.  But what did he have to say on this point?

One of the things that he felt was wrong, was the emphasis on personal service, in deciding whether someone was a worker or was self-employed.  When an individual can send someone else along in their place to do their work, that's suggestive but it's not conclusive, that the person is self-employed and so Taylor believes that more weight should be given to how much control the company or the organisation has over the individual rather than whether the individual has to do the work themselves.  He felt that some employers were hiding behind the right of substitution to deny people worker status and the rights that go along with it.

Taylor was also concerned, wasn't he, that individuals might not be able to pursue important claims because first of all they would need to establish their employment status to show that they had a valid claim in principle and that can just be too expensive for some people because of the cost of Tribunal fees, but that problem's gone away, hasn't it?

Yes, that's right.  So, not long after the Taylor Report was published, the Supreme Court in the UK ruled that Employment Tribunal fees are unlawful as they deny access to justice and so fees were cancelled with immediate effect and unless the Government decides to introduce a revised set of fees, that barrier to pursuing a claim in the Employment Tribunal will disappear and I think that we now can expect to see a huge spike in the number of new Tribunal claims.

And, of course, if the company or the organisation has to treat the individual as a worker rather than as an independent, self-employed contractor, then that has cost implications employers, doesn't it?

Yes, absolutely.  So if someone is treated as a worker rather than being self-employed, the employer has to make sure that they are receiving national minimum wage for the hours they work, they get holiday pay and sick pay, for example. And it's important to remember that this isn't just relevant to the gig economy, any company or organisation that uses independent contractors has to consider whether these individuals are genuinely self-employed or whether they can be more properly described as workers.  This is a very important issue for employers.  HMRC has set up a specialist team to focus on employers who they suspect are denying workers their employment protections by classifying them as agency staff or independent contractors and the HMRC Executive Chairman has actually said that if companies are found to have misclassified individuals as self-employed then HMRC will take steps to ensure that they pay appropriate tax, national insurance, interest and penalties.

And HMRC is also focusing on personal service companies too, aren't they?  Can you tell us a bit about this, Ruth?

Yes, sure.  Where someone is self-employed, they can choose to provide their services through a limited company known as a personal services company, and by channelling their earnings through that company, they can reduce the amount of tax they have to pay and it's also cheaper for the company or organisation that they're supplying their services to.  This is a perfectly legitimate course of action but only if you're genuinely self-employed.  And a few years ago, HMRC brought in legislation to tackle tax avoidance through the use of personal service companies, and that's known as the IR35 legislation.  HMRC can conduct a PAYE audit or just a general enquiry and as part of that may raise concerns about the correct treatment of contractors.  They often focus on particular sectors at the time, such as IT.  We've already talked about what's relevant in deciding whether someone's self-employed or not and the same issues apply in the case of personal service companies, for example, how much control does the individual have over the working arrangements, do they have other clients, do they own their own equipment, do they have the right of substitution, and these are the kinds of things that HMRC will look at.

And can the company or the organisation that's engaging the contractors through a personal services company, just sit back and say well, it's up to the individual how they categorise themselves, we don't have to take any responsibility for checking their status…?

Well, interestingly, where a public body takes someone on through a personal services company, new legislation actually puts the onus on that public body or an agency to carry out checks to see if IR35 applies.  If it does, that body has to apply PAYE and NICs before making payments to the contractor.  Although nothing has been said officially, we do expect that that obligation will be extended to the private sector before too long and the private sector employers will then need to be very careful and make all the necessary checks.

Okay, so Ruth, do you have a final message for employers?

I think clearly the Government, HMRC and other bodies are coming at this issue from two different directions.  Firstly, they are keen to protect individuals who they believe aren't receiving the employment rights that they're entitled to because they're not being treated as workers and secondly, they clearly believe too many people are claiming to be self-employed contractors when they're not with a consequent loss of tax revenue.  And that's not to say that there are not genuine cases of self-employment but given the risk of an investigation and the additional costs involved when individuals are found to be workers or even employees, employers must be aware of the consequences in getting it wrong and tread carefully.

Thanks Ruth, I think that's really good advice.  If any of our listeners have any questions about this topic or would like any more information, do feel free to contact Ruth.  

This podcast is part of our Ashurst employment World@Work podcast series.  Do look out for the others in the episodes from our colleagues in Australia, Singapore and France and we'd love to hear any feedback you've got on the new podcast format.  Thank you for listening.