24 Jan 2022

In the second of two articles, Dominic Holmes looks at how innovators can approach the uncertainties surrounding worker status with confidence, when designing models of engagement that suit their business and those working for it.

In Uncertain status: Workers in the innovation economy, I looked at how a confusing legal landscape relating to employee and worker status was inhibiting genuine innovation and creating, in my view, an often unfair perception of the gig economy.

In particular, I suggested three possible approaches to assist employers (and I use that term loosely!) in striking an appropriate balance between the multiple competing elements of individual flexibility, good work, fair pay, quality control, delivering great customer service and managing peaks and troughs in demand:

  • 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 some individuals and adopt a hybrid model

Let’s look at each of these options in more detail.

Option 1: Let go of personal service

If the individual does not have to do the work themselves, they will not be a worker (or an employee). This is the easiest way to mitigate the risk of unwanted worker status.

In practice, it will usually involve considering the extent to which you would be comfortable with the individual sending someone else to do the work for them.

We will often see a right to substitute in contractor agreements, which is used to demonstrate that the business does not require personal service. However, this will not get you far if it is not intended to be exercised in practice.

Any court scrutinising the arrangement has considerable leeway to look behind the contract and determine what actually happens on the ground. They will be robust in sniffing out contractual provisions that do not reflect reality (because, for example, no-one seriously expects that the contractor will seek to provide a substitute or refuse the work offered). We also know from the recent Uber case that the written contract is no longer the starting point for determining the reality of the relationship.

The law is very clear that if there is a genuine, unconditional right for an individual to send a substitute, this is inconsistent with personal service (and they will not be a worker). However, this approach will not be a viable option for many platform models of offering work.  Understandably, most businesses will want to know who is servicing their customers and conduct at least some form of vetting process on them.

It is possible to place certain conditions on any right to substitute which, depending on their nature, may still bring a contractor outside the personal service requirement. Again, we have some useful guidance from recent cases. A right to substitute only where: (a) the contractor is unable (rather than simply unwilling) to carry out the work; or (b) the business has absolute discretion to veto anyone else, is likely to mean that there is personal service. Conversely, if the contractor only needs to show that their replacement is suitably qualified to do the work, this points towards a genuine right to substitute.

These are useful guiding principles, but do not provide the complete answer. If we take some real-life cases, we can see more clearly where the line is drawn. In a recent case concerning bicycle couriers, an individual who accepted a shift could change their mind and release it back onto the central system for other approved couriers to accept. However, if there were no takers, the original courier had to honour the shift or pay a financial penalty. The result:  no right to substitute and the couriers were workers.

There was a similar outcome in the well-publicised Pimlico Plumbers case a few years ago. A plumber could re-allocate work, but only to another operative on an approved roster who had gone through the same vetting process. It was, in effect, a right to swap shifts with another pre-authorised worker. Again, this was not enough to bypass the personal service requirement.

Conversely, Deliveroo riders were considered not to be providing personal service because any substitute who did the work did not need prior approval. The only restriction was that they could not be an ex-rider whose contract had been terminated by Deliveroo.

And in a more recent case decided last month, DPD couriers were held not to be workers. They could do the work themselves or send a substitute driver of their choice, provided that they took responsibility for ensuring that any driver had received the requisite training, performed the services appropriately and was available to perform them when requested by DPD. There was no evidence to suggest that a choice of substitute had ever been vetoed. In other words, it was a genuine franchise model (and, in practice, some franchisees operated with several drivers and vehicles).

There will be shades of grey, of course, but this is a relatively clear framework. Ultimately, there is unlikely to be personal service if the business is genuinely uninterested in who does the work (provided it actually gets done).

Option 2: Be the customer

Even if an individual does provide personal service, they will not be a “worker” if the business contracting for their services is “a client or customer of any profession or business undertaking carried on by them”.

Over the years, this has proved a difficult concept to define precisely. It has caused much debate amongst lawyers and, consequently, much uncertainty for business. In our experience, it is rarely clear that an individual is serving their own client / customer base. One key indicator is whether they actively market their services to the world (rather than being “recruited” by a business for a specific purpose). This is tricky in practice, particularly when we look at various gig economy models.

Most established platform operators will have quite rigid “onboarding” processes, under which those interested in working for them can apply, be assessed / approved and receive training. They tend not to be proactive in approaching individuals who are advertising their services and expertise to the wider market. Even if someone is available to work for multiple gig businesses simultaneously (known as “multi-platforming”), on this analysis it is difficult for them to say that they are in business on their own account.

This “client / customer exception” has become more nuanced over the years. It is now important to look at the degree of integration at a more granular level. Relevant factors might include whether the contractor: (a) is under the direction of the business for which they are working; (b) has genuine bargaining power to negotiate commercial terms; (c) bears financial risk (which is, I think, subtly different to whether they are penalised for a “no-show”); and (d) is held out as representing the business.

Recently, it has been suggested that mutuality of obligation should also be considered as part of the overall matrix (whereas this had previously been understood as relevant to employee status only).  The constant evolution of this shifting landscape has resulted in boundaries between the various categories becoming blurred.  Overall, the opportunity for innovator businesses to be seen as genuine clients or customers of the contractors who work for them seems narrow.

There are exceptions, of course. A recent case involving a black cab driver who used the MyTaxi app determined that he was not a “worker”. Although he provided personal service, MyTaxi was deemed to be a client of his own business. It was relevant that he operated independently alongside the app, which accounted for only 15% of the passenger trips he undertook. More generally, he could use the app as much or as little as he wanted and was not subject to any control by MyTaxi. However, this is not say that other drivers using the app would not be considered workers, if there is the relevant degree of dependency.

Therefore, our advice is simple: unless it is plainly obvious that an individual is running their own independent undertaking, advertising their skills to the market and not integrated into (and beholden to) your business, relying on this “client / customer exception” is risky.

Option 3: Accept worker status for some and consider a hybrid model

The final option is to accept that at least some of the individuals performing services for you will satisfy the test for “worker status” and factor this into your financial model from the outset.

It can be tempting to fall into the trap of trying to bend your business out of shape to avoid worker or employee status. Case law is littered with examples of businesses who have gone to extraordinary (and ultimately unsuccessful) lengths to create a perception of independent contractor relationship, when that does not reflect reality.

Therefore, if you consider you will need some element of personal service or integration to ensure high standards of service, worker status may be a price worth paying. In reality, the day-to-day costs may not be prohibitive, when compared to the benefit of maintaining a consistent, reliable source of labour.

As a minimum, a worker will be entitled to:

  • National living wage (for those aged 23 and above): This is currently £8.91 per hour (rising to £9.50 in April 2022). A lower national minimum wage applies to those under 23;
  • Paid holiday: 28 days per annum for a full-time worker (including bank holidays), but likely to be much lower in practice for those who work flexible, part-time hours. The rules around holiday entitlement (and the applicable rate of holiday pay) can be complex, but they are navigable with a little advance planning.  Some businesses calculate holiday entitlement as 12.07% of hours worked, although there are other ways to deal with it;
  • Working time protection: This includes daily / weekly rest breaks and limits on working time and night-working.  In practice, these are not onerous (and a worker can opt-out of the 48-hour maximum working week);
  • Auto-enrolment pension rights: This requires a minimum contribution of 3% on “qualifying earnings” (currently, between £10,000 and £50,270 per annum), provided the worker contributes 5%. There are exceptions and a worker can opt out altogether (for example, if they do not want to make employee contributions); and
  • Minimum information: A written statement of employment particulars and an itemised pay statement.

A separate question arises as to whether a worker may be “employed” for tax purposes, requiring you to operate PAYE and make employer’s National Insurance contributions. HMRC’s Check Employment Status for Tax (or “CEST”) tool is a good starting point for assessing the risk.

Of course, you may not need to engage everyone on the same basis. Having a hybrid or multi-tiered workforce could allow you to maintain a good balance between flexibility and quality control, or resource different elements of your business in different ways.

You may have a core group of workers who cover certain types of work or hours that you know will need covering, with the ability to work more (and be incentivised accordingly) if it suits both them and the business. This could be supplemented by a roster of contractors who can be drafted in on a more casual basis, perhaps to manage peaks in demand or to perform tasks where you are less concerned about who does the work.

As an alternative example, a business might operate a platform which offers on-demand services to the public using a genuine gig model, with a separate operation servicing commercial contracts resourced by a more permanent workforce.

Conclusion

In summary, although the law is unclear, there is still significant scope for innovative businesses to be creative in how they engage people to perform work and take practical steps to stay nimble.

The starting point is to work out where the overall balance should sit between flexibility, control, cost and customer experience. Ultimately, the degree of importance you place on who does the work and how much oversight you need to provide consistency or quality of service will likely dictate the correct model of engagement for any particular type of activity.

It is not to say that any of these solutions is optimal, from a commercial perspective. However, we think they provide the most realistic avenues for ensuring that businesses can operate confidently within the existing legal framework, delivering on the twin objectives of good service and good work to which most entrepreneurial enterprises aspire.

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.