In the UK, worker status is split into three tiers: employees, other workers and self-employed, each with different rights and responsibilities. Worker status has been a hot topic in recent years with the rise of the gig economy, as under the current framework it can be difficult to assess an individual’s status. This can be confusing for both parties and some employers abuse the system to save employment-related costs and prevent individuals gaining employment rights. On the other hand, some individuals want the flexibility of not being an employee and like working on a “gig” basis.
Worker status is not determined solely by contractual arrangements – it is the reality of the working relationship that is important, such as the employer’s degree of control and the individual’s autonomy, the extent of integration into the employer’s business and the mutual obligations between the parties. This issue was debated in the Supreme Court in 2021 when it held that drivers were workers, not self-employed contractors, entitling them to some employment rights and subjecting their “employer” to related costs.
Prior to the election and thus before it formed a government, the Labour Party published its “Plan to make work pay” in which it proposed to consult on implementing a new single status of worker. The intention is to simplify and strengthen employment rights by transitioning to a framework that only differentiates between the genuinely self-employed and all other workers. Understandably, there have not yet been any further announcements to indicate whether the plan will be implemented – watch this space.
We consider below the benefits and drawbacks that IT contractors could face if the proposal is implemented.
Benefits
The most likely benefit for IT contractors of being considered workers is gaining the rights and protections of employees, such as holiday pay, sick pay, redundancy rights and protection from unfair dismissal. This should provide greater security and benefits.
Contractors could become eligible for statutory benefits such as family leave and the right to request flexible working.
Drawbacks
A major attraction of contracting as a self-employed consultant is flexibility for both sides. The proposal may impose more rigid structures akin to employment, reducing the autonomy contractors enjoy in terms of choosing projects and hours, and the appeal of using contractors for clients.
Changes in status may indirectly affect how contractors engage with multiple clients simultaneously, with clients imposing more restrictions given their greater liabilities.
Contractors and clients may face increased administrative burdens as they have to deal with the legal complexities associated with managing the rights and obligations of consultants.
Businesses may also reconsider their use of contractors if these costs, administrative burdens and potential liabilities increase. They may shift towards agencies or seek alternative ways to manage workload peaks, reducing the demand for contractors.
The proposals may have less effect on the treatment of tax under IR35 which already effectively treats those who are not self-employed as being employed.
Example
An IT contractor provides services through a PSC to multiple clients. Under the current arrangement, they enjoy the flexibility to choose their projects and hours. They pay themselves through dividends and a minimal salary, optimising tax liabilities. They are not entitled to benefits like holiday or sick pay.
Details of the proposed new approach have not yet been announced. However, if a contractor was found to have a relationship more akin to employment than self-employment with the client (and any PSC is to be ignored as it is for tax), the contractor may be treated as the client’s employee or worker. They could gain employment rights such as holiday and sick pay, and protection against unfair dismissal. However, there may also be even more focus on both the terms of contracts and the reality of the ongoing relationship, possibly creating an increased administrative burden.
Summary
If the proposals become government policy and are implemented, IT contractors could experience both benefits and drawbacks. While the proposal aims to provide clarity on worker status and ensure those who should have legal rights and protections have them, this must be balanced against a loss of flexibility, higher tax liabilities and increased administrative burdens.
It is important for contractors to stay informed about the proposals and consider all the potential impacts. As the new government settles in, we expect to receive further information about what these proposals will actually entail.
