24 Jan 2022

In the first of two articles, Dominic Holmes explores how uncertainties in the law on employee and worker status are a barrier to genuine innovation, to the detriment of both business and individuals seeking flexible work.

I am sometimes asked about current trends in employment law and the issues that create most difficulties for business. With the exception of the recent UK furlough scheme (a laudable initiative but a fiendishly moving target), my answer has been the same for a number of years.

The question of employment and worker status continues to cause headaches for organisations of all sizes – and particularly those who seek creative, atypical ways to engage people to perform work for their customers.

This article considers the problem and outlines some ways in which organisations can work within the existing uncertain framework. In a second article, Worker status: Designing models of engagement, I explore in more detail some of the options open to entrepreneurial businesses seeking to implement flexible models of work. 

Standing up for innovation

Often, the clarity of the law on a particular issue can be gauged by the amount of litigation it generates.

Even before the rise of the gig economy, courts were frequently called upon to interpret who should be an “employee” or a “worker”. These concepts are defined in the Employment Rights Act 1996 (and in various other pieces of legislation, although not always consistently). Some 25 years on, a substantial body of judicial interpretation has yet to provide sufficient certainty. It is a prime example of where the law has failed to keep pace with commerce and innovation.

Some high-profile cases in recent years have resulted in an unfavourable impression of certain aspects of the gig economy. With a few notable exceptions, most of them have been decided in favour of individuals seeking worker or employee rights. They have created a perception that individual rights are sacrificed in favour of maximum flexibility, affordability and convenience for consumers.

For example, Uber and Pimlico Plumbers have both had their business models closely scrutinised. Both have been found to have miscategorised individuals as independent contractors, who have therefore not been provided with basic worker protections such as paid annual leave.

There are certainly examples of unscrupulous practices which drive precarious, underpaid and unfulfilling work – as highlighted by James Bloodworth’s excellent book Hired: Six Months Undercover in Low-Wage Britain. However, I believe this presents an unfair picture of the innovation economy as a whole.

Most businesses do not deliberately set out to create artificial relationships with a view to exploiting workers. It is, in any event, an increasingly futile exercise. We have seen that the courts are adept at unravelling such arrangements. This is despite the assistance of what one judge called “armies of lawyers contriving documents in their clients’ interests which simply misrepresent the true rights and obligations on both sides”. We have been warned!

The innovators we see have often devised sophisticated tech-enabled platforms and want to offer flexible, well-paid work to those delivering high quality, on-demand services to customers. We have helped several clients design such models of engagement.

We have also successfully defended clients against claims from genuine independent contractors who allege employee or worker status. This is usually after the arrangement has terminated and they have already enjoyed the freedom and benefits of being a contractor, but seek additional rights retrospectively. The frequency of these battles over how individuals should be categorised is caused by an unnecessarily murky legal landscape, creating uncertainty for businesses and their advisers.

Efforts to address this lack of certainty appear to have lost steam.  The Government produced the Good Work Plan in 2018 and committed to clarifying employment status tests in legislation. This was in response to the wide-ranging Taylor Review of Modern Working Practices (our response to which is available here). However, so far there has been no concrete legislative action. Lord Hendy QC (a distinguished employment lawyer and Labour peer) has proposed a Status of Workers Bill in the House of Lords – but its prospects of coming into law are uncertain.

Unfortunately, the law has become increasingly tangled – and more difficult for innovators to establish new ways of delivering what they do that combine “good work” and “good service”.

The “worker” conundrum

If we take a simplified approach, the law currently recognises three categories of individual performing work:

  • Employees must satisfy the three basic minimum criteria of: (a) personal service (they must do the work themselves); (b) mutuality of obligation (the employer must provide work and they must do the work in return for pay); and (c) employer control (over how, when and where the work is done). It is also important to look more generally at whether they are integrated into the workforce and treated as if they were employees. Employers have substantial rights enshrined in law, including unfair dismissal protection and family friendly rights (such as maternity, paternity, adoption and shared parental leave);
  • Workers must satisfy only two criteria: (a) personal service; and (b) the organisation for which they work should not be a client or customer of their own profession or business undertaking. Typically, workers are self-employed but provide services as part of someone else’s business, without meeting the full criteria for employee status. Workers have some of the rights available to employees (such as minimum wage, protection from discrimination and paid annual leave) but fewer protections overall; and
  • Independent contractors include anyone who is neither an employee nor a worker. They are self-employed and in business on their own account, with very little legal protection outside what they agree in a contract with their customer.

The system in the UK is more complex than in many other jurisdictions, because of the intermediate “worker” category – a half-way house that blurs an otherwise clear distinction between those who work for someone else and those who work for themselves.

It is complicated further because the tax rules operate similar tests but recognise only two categories: you are either “employed” (and tax must be deducted under PAYE by the employer) or “self-employed” (where you are responsible for your own tax arrangements). Some workers will be “employed” for tax purposes and some will not.

Most gig economy businesses I have come across are quite clearly not taking on employees. Mutuality of obligation would suit neither party. The business does not want the burden of guaranteeing minimum amounts of work (and paying for it) during periods of low demand. Likewise, the individual wants to be able to work as much or as little as they want, at times they choose.

It is the boundary between “worker” and “independent contractor” that causes most issues. The commercial tensions are obvious. Private hire taxis and delivery couriers are classic examples. The customer wants an on-demand service that is cheap and responsive. The service provider needs a bank of reliably available individuals to do the work to a consistent standard, whilst managing fluctuating demand and cost base. The key selling point for drivers is flexibility, but they need to be held accountable for shifts to which they have committed and some quality control is required.

Managing the “worker” issue in practice

Unless and until the law becomes clearer, there are three practical ways that an innovation business can approach the consequences associated with “worker” status:

  • Option 1: Avoid a requirement for the work to be performed personally by the contractor
  • Option 2: Set up the arrangements so that you are a client or customer of the contractor’s own business
  • Option 3: Accept worker status for at least some individuals and adopt a hybrid model

The first two options assume that one of the two minimum criteria for worker status will not be satisfied (thereby categorising those providing work as independent contractors). This may not be possible for many business models, but there are benefits to being open-minded about the extent to which both are important to your ethos. The third option is to ringfence a core element of the workforce as workers (or even employees) and factor this into the business model as an acceptable cost of increased certainty / control.

My second article on Worker status: Designing models of engagement looks at each of the options in more detail and how businesses might weigh up their various merits.

Dominic Holmes is a Partner and Head of the Employment Team at international law firm Taylor Vinters. He writes and presents regularly on a range of strategic employment issues and has a particular interest in the future of work.