Freelancers: a flexible gig or a false economy?

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With major cases decided in favour of holiday and employment rights for freelancers is the gig economy extra cost and no benefit for employers? Can flexibility survive in the employment law climate?

We look at:

When is a worker not a worker?

In some cases, the employee relationship will be clear. But for many others, particularly platform businesses, the lines between employee, worker and self-employed freelancer is blurred. Which factors tip someone onto one side of the line as opposed to the other?

An employee

In a nutshell an employee is an individual who has entered into, or works under, a contract of employment. This includes service contracts for directors as well as apprenticeships for young workers.  The contract does not need to be in writing for an employment to exist. There is a body of employment law available to fill in gaps such as holiday rights.

A worker

A worker tends to be anyone who is not either an employee or genuinely self employed. It covers any individual who has entered into, or works under, a contract of employment which includes verbal agreements. Many sub-contractors are workers if they are required to perform the services personally.

A self-employed individual

So where do self-employed freelancers fit in?  As we explain the question can be difficult to answer…

The start of the journey into work for the gig economy

The driving force behind the latest calls for clarity began with Uber drivers. Uber argued that it was acting as the drivers’ agent when dealing with potential passengers. This would mean that drivers were not entitled to national minimum/living wage nor paid annual holidays, weekly working hours or pension contributions. As ‘workers’ the drivers would be entitled to these rights under UK law.

Outcome – Uber lost

Significant factors included:

  • The drivers could not negotiate terms on which they provided their services to passengers and fees were set by Uber;
  • Drivers had to accept 80% of jobs and could not cancel them;
  • Drivers were not allowed to give passengers their contact details;
  • Uber controlled processes and procedures regulating how jobs were completed.

Uber was not a client or customer of businesses run by the individual drivers. Instead, the driver were ‘workers’ in Uber’s business under UK legislation and were entitled to all rights afforded to workers.

Unpaid financial settlement and appeal

The GMB union who brought the claim on behalf of the Uber drivers calculates the drivers are each owed an estimated £11,000 in wages and more than £8,000 in holiday pay. After Uber’s unsuccessful appeal in the Employment Tribunal and the Court of Appeal it has requested permission to appeal directly to the Supreme Court. So far, Uber has refused to make the holiday pay and minimum wages payments to its drivers.

The latest stepping stone to plug the gap in gig economy work

After a series of attempts to clarify the standing of freelancers and contractors in the gig economy, a case known as Pimlico Plumbers offered the Supreme Court the opportunity to provide much needed clarity.

Mr Smith worked as a plumber for Pimlico for six years. Pimlico maintained that he was a ‘self-employed operative’ and not a worker for the purposes of employment legislation. In order to proceed with his claim for disability discrimination, unlawful deduction from wages and holiday pay, Mr Smith had to be classified as a ‘worker’ under UK employment law.

Outcome – Pimlico the employer lost

Significant factors included:

  • Mr Smith was required to wear a Pimlico branded uniform and to use a Pimlico branded van leased from the company;
  • Mr Smith had to carry a Pimlico ID and closely follow the administrative instructions;
  • The contract referred to ‘wages’, ‘gross misconduct’ and ‘dismissal’ (all common terms in employment contract) and included a suite of restrictive covenants concerning Mr Smith’s working activities following termination;
  • While Mr Smith was able to swap assignments with other plumbers working for Pimlico, this was more akin to swapping a shift between workers than providing a substitute.

Despite the fact that Mr Smith correctly presented himself as self-employed for the purposes of income tax and VAT, was entitled under the written agreement both to reject work and was able to take outside work, the Supreme Court decided that Mr Smith qualified as a ‘worker’. This meant that a claim for disability discrimination could proceed.

Requirement to perform personal services

One of the determining factors that appears to have tipped the balance to a finding worker status was that Mr Smith, despite the ability to swap assignments, was under an overall obligation to perform personally his work for Pimlico. Control over the worker continues to be an important factor. Many contracts include the right to substitute to make the arrangement look as if it is self-employment but the courts will look behind wording to substance.

This does not mean you cannot successfully operate a gig economy business model.

Tips for operating a gig economy business model

Although Pimlico is another step towards protecting workers in the gig economy, it is a decision that will not apply to every situation. So businesses hiring freelancers are still walking the tightrope between genuinely self-employed freelancers and those same freelancers being classified as workers (or occasionally even employees).

Uber now allegedly micro-manages the drivers in order to protect its brand. So how do you minimise the risk to your business without dispensing with the advantages of flexibility innate in the gig economy?

Commercial reality

If you take one tip away, remember this: facts supersede the wording of any contract where employees, workers or the self employed are concerned. You will find it difficult to claim self-employed status if, in practice, a person works, is paid and is under similar restrictions as an employee.

Tax status

Employment status is different to tax status. As Mr Smith showed in Pimlico, you can be classified as a self-employed contractor for income tax and VAT but still be classed as a worker for employment rights legislation.

Personal service

Having no right of substitution is often a key factor tipping a freelance contractor towards worker status but it will not necessarily be fatal. If there is a genuine opportunity to send someone else to do the work, that may indicate a more arms-length relationship.

Consider whether a right of substitution is important for your business. For Deliveroo-type companies customers may not care who delivers their food. But if you are engaging a constant or freelancer for their specialist expertise allowing a replacement would not be commercial so there may be little point in including this in the contract.

Employment Tribunal litigation floodgates are opening

Employment Tribunal claims have recently soared by an estimated 89%. Greater data protection for individuals provided under the General Data Protection Regulations, the introduction of mandatory gender pay gap reporting for larger organisations and the widespread publicity of sexual harassment claims under the #MeToo campaign are contributors.

Reform

There are likely to be statutory changes to marginal employment issues in an attempt to co-ordinate worker rights with tax and maybe provide clarity. The Department of Business, Energy and Industrial Strategy (BEIS) is currently consulting on ideas for a more relevant,  flexible, innovation-driven gig economy.  We will keep you posted.

If you are a gig economy operator not sure how to price the service and protect the brand please do get in touch.  You can call on 0207 438 1060.