Uncertain status: Innovation economy workers

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

I am sometimes asked about current trends in labor law and the issues that create the most difficulties for companies. With the exception of the recent furlough scheme in the UK (a laudable initiative but a devilishly moving target), my response has been the same for several years.

The issue of employment and the status of workers continues to cause headaches for organizations of all sizes, and especially those looking for creative and atypical ways to get people to do work for their clients.

This article examines the problem and outlines some ways organizations can work within the existing uncertain framework. In a second article, Status of Worker: Designing Engagement ModelsI explore in more detail some of the options open to entrepreneurial companies seeking to implement flexible work models.

Defend innovation

Often, the clarity of the law on a particular issue can be measured by the number of disputes 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 various other pieces of legislation, although not always consistently). Some 25 years later, a substantial body of judicial interpretation has yet to provide sufficient certainty. This 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 cast an unfavorable impression on certain aspects of the gig economy. With a few notable exceptions, most of them have been decided in favor of individuals claiming worker or employee rights. They have created a perception that individual rights are being sacrificed in favor of maximum flexibility, affordability and convenience for consumers.

For example, Uber and Pimlico Plumbers have both had their business models scrutinized. Both were found to have incorrectly categorized individuals as independent contractors, who therefore did not benefit from basic worker protections such as paid annual leave.

There are certainly examples of unscrupulous practices that lead to precarious, underpaid and unsatisfactory work – as James Bloodworth’s excellent book points out Hired: six months undercover in low-wage Britain. However, I think it paints an unfair picture of the innovation economy as a whole.

Most companies do not deliberately seek to create artificial relationships in order to exploit workers. It is, in any case, an increasingly futile exercise. We have seen that the courts are adept at disentangling such arrangements. This despite the assistance of what a judge called “armies of lawyers inventing documents for the benefit of their clients which only distort the true rights and obligations of both parties”. We have been warned!

The innovators we see have often built sophisticated technology platforms and want to provide flexible, well-paying work for those who provide high-quality, on-demand services to customers. We have helped several clients design such engagement models.

We have also successfully defended clients against claims from bona fide independent contractors who allege employee or worker status. This is usually after the arrangement has ended and they have already enjoyed the freedom and benefits of being an entrepreneur, but are asking for additional rights retrospectively. The frequency of these battles over how individuals should be classified is caused by an unnecessarily murky legal landscape, creating uncertainty for companies and their advisers.

Efforts to address this lack of certainty appear to have lost momentum. The government produced the right work plan in 2018 and committed to clarifying employment status criteria in legislation. This was in response to Taylor’s extensive review of modern working practices (our response to which is available here). However, so far, no concrete legislative action has been taken. Lord Hendy QC (a prominent labor lawyer and Labor peer) has proposed a Workers’ Status Bill in the House of Lords – but its prospects of coming into force are uncertain.

Unfortunately, the law has become increasingly entangled – and it’s harder for innovators to establish new ways of delivering what they do that combine “good work” with “good service”.

The riddle of the “worker”

Taking a simplified approach, the law currently recognizes three categories of individuals performing work:

  • Employees must meet the following three basic minimum criteria: (a) personal service (they must do the work themselves); (b) the mutuality of obligations (the employer must provide work and he must perform the work in exchange for a wage); and (c) employer control (over how, when and where the work is done). It is also important to consider more generally whether they are integrated into the workforce and treated as if they were employees. Employers have substantive rights enshrined in law, including protection against unfair dismissal and family-friendly rights (such as maternity, paternity, adoption and shared parental leave);
  • Workers must meet only two criteria: (a) personalized service; and (b) the organization they work for should not be a client or client of their own profession or business enterprise. Typically, workers are self-employed but provide services as part of someone else’s business, without meeting all of the criteria for employee status. Workers have some of the same rights as employees (such as minimum wage, protection against 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 beyond what they have agreed to in a contract with their client.

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

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

Most gig economy companies I’ve come across clearly don’t hire employees. Reciprocity of obligations would not suit either party. The company does not want to have the burden of guaranteeing minimum amounts of work (and paying for it) during periods of low demand. Similarly, the individual wants to be able to work as much or as little as he wishes, at times he chooses.

It is the line between “worker” and “independent contractor” that causes the most problems. Trade tensions are evident. Private hire taxis and delivery couriers are classic examples. The customer wants an on-demand, cheap and responsive service. The service provider needs a bank of people reliably available to perform work to consistent standards, while managing fluctuating demand and cost base. The main selling point for drivers is flexibility, but they need to be held accountable for the shifts they are committed to and some quality control is required.

Managing the “worker” problem in practice

Unless and until the law becomes clearer, there are three practical ways for an innovation company to address the consequences associated with being a “worker”:

  • Option 1: Avoid requiring the work to be done personally by the contractor
  • Option 2: Set up the arrangements so that you are a client or a client 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 met (thus categorizing those providing labor as independent contractors). This may not be possible for many business models, but there are benefits to being open-minded about how important both are to your philosophy. The third option is to circumscribe a core element of the workforce as workers (or even employees) and factor that into the business model as an acceptable cost of increased certainty/control.

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