WHY EVEN CONTEMPLATE CHANGING EMPLOYMENT STATUS

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WHY EVEN CONTEMPLATE CHANGING EMPLOYMENT STATUS?

I hope that both the ICAEW and the CIOT are going to strongly oppose the proposals in the government recent issued “Employment Status Consultation”.  This has ostensibly been issued to work out how to give effect to the proposals made by the Taylor Review of Modern Working Practices.  The government have said that they accept all of the Review’s recommendations except in relation to tax.  Tax was actually specifically excluded from Mr Taylor’s terms of reference but he considered it just the same.  The consultation document was issued by the Department for Business etc, but is jointly badged by them with H M Treasury and HMRC.

It says very little about tax – two pages on Alignment between tax and rights – but that is why it is so dangerous.  The likelihood is that HMRC will piggy-back onto its conclusions.

The real problem is that it starts from the wrong place, so its conclusions are bound to be flawed.  It suggests giving statutory effect to the principle laid down by the Courts.  While acknowledging that will result in a loss of flexibility, it suggests that is a fair trade off against clarity and certainty.  That may be right, but it should not be overlooked that inflexibility can, and often does, result in unfairness, so it is not reasonable to ignore (as the consultation does) that certainty and fairness rarely make good bedfellows.  Certainty caters for the norm.  The unfairnesses arise from abnormal cases.  Furthermore, Courts do not “lay down principles”.  They interpret the law in the context of the specific facts before them.  The Courts are accordingly fundamentally flexible in the sense that a different set of facts may well produce a different nuance on the principles discerned by the Court.

But that is not my real concern.  It starts, as any test of employment status must do, with the statement by MacKenna J in the 1968 Ready Mixed Concrete Social Security case.  “The servant agrees that, in consideration of a wage or other remuneration, he will provide his own work and skill in the performance of some service for his master.  He agrees, expressly or impliedly, that in the performance of that service he will be subject to the other’s control in a sufficient degree to make that other master.  The other provisions of the contract are consistent with its being a contract of service”.  (The underlining is from the consultation document; note particularly that nothing in the third sentence is underlined).

It there infers “This has developed into the following main characteristics –

·         Mutuality of obligation …

·         Control …

·         Personal service …

If these three characteristics are present, the Courts will then consider other criteria relevant to the case that are consistent with a contract of employment or service”.

Tax specialists will know that this is indeed how HMRC like to interpret the cases.  Can we find control and personal service (mutuality of obligation means no more than there is consideration so as to make the arrangement a contract)?  If we can, it is an employment unless you can show a good reason why it is not.  But MacKenna J’s test is not “control”; it is “control in a sufficient degree to make that other master”.  In other words it is looking for a master/servant relationship.

The way the two Courts seem nowadays to be interpreting MacKenna J is that there is a two-part test.  Is there mutuality of obligation, a master/servant relationship and an obligation to personally perform the service?  If so, the arrangement is capable of being an employment; if not, it cannot be an employment.  If the arrangement passes test 1, test 2 is to look at the facts, untramelled by test 1, and ask whether or not the facts are consistent with employment.

This is not hair-splitting.  It is fundamental.  The consultation document test does not clarify Court decisions; it usurps them.  Before looking more closely at why control per se is the wrong test, it is helpful to pose the question as to why does the distinction between employment and self-employment matter.  The answer is that it doesn’t for most of us.  I do not care whether my dentist’s receptionist is employed or self-employed; I only care that she makes my appointments.  I do not care whether my gardener is employed or self-employed; I only care that he keeps my garden trim.  I do not care if my electrician is employed or self-employed; I only care that he procures that my electricity supply functions.

The only reason it matters is that the State has created a distinction – or rather, a number of different distinctions.  The question therefore ought to be whether those distinctions, most of them created the best part of a century or more ago, are either still necessary or the right distinctions in modern society.  To look at how to define the distinction is treating the symptoms, not the disease.

The State has drawn a distinction in three distinct areas, employment rights, welfare rights and tax.  But in all three it has drawn the dividing line in a different place, so it is unsurprising that the categories of people who are not self-employed should differ between the three.  Introducing a common test of employment cannot therefore work unless the line is drawn in the same place for all three, which requires the State to revisit the reason why the line is where it is.

I am not an historian (albeit that I know a fair amount about the history of tax) but I think it is fairly clear why the lines were drawn as they are.  In the 19^th and early 20^th century some employers exploited their workers mercilessly.  The State cannot let people starve on the street.  Accordingly if a worker can be dismissed peremptorily or is not paid or paid a pittance, the State has to pick up the slack.  Workers’ rights ensure that workers are treated fairly and that the costs of doing so are borne by the employer, not the State.  Social Security in the Beveridge era was insurance based.  Everyone would pay into a common fund and be paid out of that fund when in need.  The problem with that is that the self-employed do not have regular income so cannot be expected to make regular contributions.  Accordingly for an insurance-based system to work, they could insure for long-term benefits (pensions and health) but had to be excluded from short-term benefits (unemployment, maternity, etc) where Beveridge based entitlement to benefit on short-term insurance contributions.  Tax started from capacity.  Initially employees were not taxed.  Only the self-employed and, later, office holders paid tax.  It was only when an effective way could be found to tax employees that they were brought into the tax net.

It is therefore unsurprising that the tax line was drawn between the employed and the self-employed but when it came to welfare, it was accepted that was the wrong place to draw the line.  The Employment Rights Act 1996 confers rights not only on employees but also on workers, which it defines as “the individual undertakes to do or perform personally any work or services for another party to the contract whose status is not by virtue of the contract that of a client or customer of any profession or undertaking carried on by the individual”.  This recognises that a person can perform personal services for another and yet be neither an employee nor a business owner.  It assimilates the worker with an employee whereas the tax law assimilates the worker with the self-employed.  Again, unsurprising, as the employment laws wants to pass responsibilities to others so as to prevent workers having to be supported by the State.

The impetus for both the consultation document and the Taylor review is of course the growth of the “gig economy”.  This creates self-employed workers whose business is limited by reference to the needs of their major (or generally only) customer.  This generally means that the worker/businessman does not need a business organisation as his customer carries out his business for him.  Even that is not new.  The aspiring pop singer of the 1960s or 1980s who signed a record contract was in a similar position.

What is new is that people are today telling self-employed people that they are being exploited by not being offered employment.  But being treated differently is not exploitation.  No one is forced to be self-employed.  Of course if one wants to cycle around London all Summer the chances of getting employed to do so are very limited.  Self-employment as a courier is the only real option.  But no-one is forced to be a courier either.  A person who does not want to be self-employed can find employment in the retail food industry fairly readily.  Why should a person who chooses an occupation that entails self-employment expect to be treated differently to any other self-employed person?

Even that is perhaps the wrong question.  A better one is probably that if the State wishes to provide benefits to a large number of self-employed persons who work mainly for a single customer, why should that prompt a change in the definition of employment?  It is far more sensible to create a category of quasi-self-employed people and to decide what rights that category should be entitled to and legislate to provide such rights.  This has never been a problem in the past.  For example, at one stage the then government decided that actors ought to have the National Insurance benefit applicable to employees.  They did so by deeming actors to be employees for NIC purposes; they did not change the definition of employment but left actors accepting the remaining disadvantages of self-employment.

Of course every status has both advantages and disadvantages.  The Taylor Committee looked almost wholly at the disadvantages of the gig economy.  But for many workers in it the advantages – in particular flexibility – are far more important than Mr Taylor’s perceived disadvantages.  Re-drawing the line to turn such people into either employees or workers could well result in a loss of those disadvantages, as the administrative costs of calculating employment or workers’ rights for flexible workers may well make the use of such people uneconomic.

ROBERT MAAS