Is the flexible market still working for the UK?

The UK's flexible labour market sector stands at a crossroads.

Following a blaze of bad publicity about questionable employment practices by companies such as Sports Direct, and high-profile court cases involving Pimlico Plumbers and Uber, the rights of workers, their taxation and employment status have been thrust into the media spotlight, and are frequently the subject of political debate.

As the so-called ‘gig economy’ has developed, the UK’s flexible workforce – so long the jewel in the UK’s economic crown, giving it a competitive advantage over rule-bound and rigid Continentals – is under threat. Prime Minister Theresa May has weighed in by personally backing two reviews. One is being conducted by Matthew Taylor, CEO of RSA, about modernising employment practices in the UK, and it has heightened concerns among many in the sector that the government doesn’t really understand the benefits and the value of a flexible workforce.

Announcing the Taylor Review in October 2016, the prime minister herself gave an indication of the direction of travel she would like to see. May said: “Improving the security and rights of ordinary working people is a key part of building a country and an economy that works for everyone, not just the privileged few. 

“Flexibility and innovation are a vital part of what makes our economy strong, but it is essential that these virtues are combined with the right support and protections for workers.”

Barry Roback, director of accountancy solutions provider Anderson Group, says that while clearly “there is a baseline that we as a civilised nation recognise”, citing decent working conditions as an example, there is a risk that the pendulum in favour of job security and employment rights could swing too far, and the benefits of the UK’s flexible workforce could be lost.

“There is no doubt that one of the major reasons for the UK’s success over the last 10 years through the 2008 recession and post-Brexit vote period has been the attraction to both UK-based and more importantly overseas organisations of setting up businesses in the UK because of its flexible workforce, so whatever happens that must remain,” Roback says.

“What does flexible workforce mean?” Roback continues. “At its essence employers shouldn’t be handicapped within reason by legislative demands when wanting to expand the workforce.” 

However, according to Roback, “the jury is out” on whether that flexibility will continue. The country is at a turning point in the road, Roback agrees. “It could go either way,” he says, adding that employment rights “are up for grabs”. Roback cites the spread of spread of EU legislation such as The Working Time Directive, but also mentions as particular concerns taxes on employing people, and rules that make it more difficult to lay off workers.

While these policies are superficially attractive, Roback argues there is an “inevitable trade-off”.

“The more rights and protection you give to employees,” he says, “the greater the barrier to an employer to enlarge their workforce, and the greater the incentive to look for cheaper solutions overseas or technology.”

Shaun Critchley, managing director of contractor and recruiter services provider Advance, agrees that at first glance, ideas such as giving more benefits – for example, maternity pay – to freelancers and the self-employed look attractive.

“In principle it’s a great idea but the mechanics and fine details will need to be worked out. How will it actually work?” One option is an Agency Worker Regulations (AWR)-style approach [where certain rights kick-in after 12 weeks], he suggests. 

However, he continues: “I do think it would be wrong to automatically assume that everyone who is self-employed wants more rights, protections and benefits – particularly if in gaining more rights they are hit in the pocket in some way. There should be an element of choice for the individual.”

Julia Kermode, CEO of The Freelancer & Contractor Services Association (FCSA), a trade body for freelance and contractor services providers, says the government needs to take a nuanced approach to the sector, one that strikes a balance between addressing exploitation “in some parts of the workforce” but doing so “without penalising the growing number of professional self-employed workers who chose to work in this way”.

Rather than a ‘one-size-fits-all’ approach, legislation must be targeted. “We need to see appropriate legislation being considered that will protect the workers who do not have much choice or say in their employment status and how they are engaged by hirers.”

Kermode warns against exaggerating the extent of self-employment in the UK, pointing out that the overall proportion of the workforce that is self-employed “has not grown significantly in recent years and since 2014 has, in fact, remained static at around 15%”.

However, she warns: “If changes make it unattractive for businesses to engage a workforce in the UK, then ultimately I fear that the UK’s competitiveness in the global marketplace could be put at risk.” This is especially important, “just at a time when Britain needs to be seen to be very much open for business”, she adds, alluding to Brexit.

Roback agrees that with Brexit a reality, a flexible workforce is even more vital. But while arguing that leaving the EU is an opportunity to shape legislation to suit the specific needs of the UK economy, he questions whether the country will take advantage to forge a more flexible approach. “I suspect that it is in our psychic and our DNA that we do want to move to a more social approach to employment,” he says.

Louise Rayner, CEO of NumberMill, an accountancy service provider to contractors and agencies, is scathing in her criticism of the government’s approach to the flexible workforce.  

“The legislation introduced over the last few years [particularly taking away the right of many agency workers to claim travel & subsistence expenses]. Well, to me they are stealth taxes,” she says.

According to Rayner, while there has been “a lot of song and dance about being fair to the lower paid, Uber and Sports Direct, these are small fry compared to what they have done with the removal of T&S”.

Changes to the Intermediaries Legislation (IR35) that came into effect in April have made things even worse, she says. According to Rayner, “a typical contractor” on £50k a year is going to be £15k a year worse off, while agency nurses who are contractors are going to be 20-25% worse off. “Yet this is not even being discussed,” she says. Moreover, this recent change wasn’t even necessary, she claims. “There is very little tax dodging that could go on in the public sector. You have to raise an invoice, there is VAT on that invoice and it has to be properly processed,” she says. 

Instead of policing existing legislation properly, not only is the government’s approach of hitting contractors in the pocket unfair, all it has done is to spawn the growth of schemes to get around the new legislation, says Rayner.

Crawford Temple, CEO at Prism, a trade body for service providers, says the government needs to take a long-term approach rather than a reactionary piecemeal one, characterised by frequent changes of direction. He cites last year’s introduction of new rules on T&S as a prime example. “It put the screws on the umbrellas by saying if you are outside of IR35 you can still claim those expenses, thereby creating a mass exodus to PSCs [personal service companies] and then [the government] changed all the rules again [in April, when it made changes to the Intermediaries Legislation in the public sector], which is going to mean a mass exodus the other way.” He adds: “It is not healthy for the sector.”

Rather than “moving the deckchairs”, says Temple, “there is a need for proper enforcement”. He has consistently called for a five-year plan that “would give people a proper basis on which to make their decisions”.

Whether the government will take any heed of this and other advice from the sector, and finally decide on a long-term strategy that promotes and sustains the UK’s flexible workforce and with it the health of the UK economy, or whether it goes down the road of eroding that flexibility in the name of greater worker rights, benefits and fairness, remains to be seen.  

Could the third way be the right way? 

Balancing the rights of and protections of workers against the need for labour force flexibility, and combining this with a tax system that is both fair and incentivises risk-taking and entrepreneurship is a hot topic at the moment.

To strike the middle ground, Matthew Taylor, CEO of the Royal Society of Arts, who is leading a wide-ranging review of employment practice in the UK, voiced his personal opinion that there is a need for a third category of worker. 

Coined ‘dependent contractor’ by Taylor himself, this new category would sit somewhere between a bona fide contractor and an employee. In essence, such workers would trade off having more flexibility and control over their work than employees, for fewer employment rights and benefits. Conversely, those classified as self-employed contractors now would gain employment rights and benefits, but lose some control over their work, giving up some of it to the engager.

This new category would also give employers a halfway house option of engaging workers at less cost than a full-blown employee, and with fewer legal responsibilities.

Some MPs on the Work and Pensions Select Committee into Self-Employment and the Gig Economy that was launched in December have also voiced their support for this new category of worker.

However, Matthew Huddleston, MD at umbrella company solutions provider FPS Group, argues that such a change isn’t necessary. “With umbrella companies there are opportunities already for people to engage people without taking on all the full employment responsibilities themselves,” he says.

Huddleston says he also fears such a change would only lead to further complications in determining a worker’s tax status. “Currently there is IR35, but if you draw another line there will be another debate about which side of that line you sit,” he says.

Deciding what rights and benefits this new category of worker should have would also be fraught with difficulty, says Huddleston. For example, will they be allowed to apply to Employment Tribunals, receive statutory sick pay (SSP), and will the engager have to contribute to their pension pots?

“I think the government needs to step back and take a full view of the full picture and try to simplify how the full spectrum of arrangements are taxed rather than simply go from a binary to a tertiary view of things,” says Huddleston.

“Legislation is always chopping and changing ever since I entered the recruitment industry, and what constitutes self-employed, employed and freelance has never been clear,” adds Mike Bowler, MD of recruitment agency start-up service provider 3R. “That is what the industry needs more than anything else: clarity.”

• See more in Recruiter’s Managing Agency Workers and Contractors 2017 out now. For your copy, contact Josh Hannagan at [email protected]

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