Conclusions and recommendations
The contributory principle
1.Our welfare system, and public support for it, is founded on the contributory principle. The introduction of the New State Pension means the last major difference between the entitlements of employees and self-employed has been removed. It is now difficult objectively to justify the differing rates of contribution. Fairness must be the future direction of travel and, political constraints aside, the equalisation of NICs rates was right. The incoming government should set out a roadmap for equalising the National Insurance contributions made by employees and the self-employed. (Paragraph 10)
The welfare safety net
2.Companies relying on self-employed workforces frequently promote the idea that flexible employment is contingent on self-employed status. But this is a fiction. Self-employment is genuinely flexible and rewarding for many, but people on employment contracts can and do work flexibly; flexibility is not the preserve of poorly paid, unstable contractors. Profit, not flexibility, is the motive for using self-employed labour in these cases. Businesses should of course be expected to seek out opportunities and exploit them. It is incumbent on government to close loopholes that incentivise exploitative behaviour by a minority of companies, not least because bogus self-employment passes the burden of safety net support to the welfare state at the same time as reducing tax revenue. (Paragraph 19)
3.Designating workers as self-employed because their contract offers none of the benefits of employment puts cart before horse. It is clear, though, that this logic has taken hold, enabling companies to propagate a myth of self-employment. This myth frequently fails to stand up in court, but individuals face huge risks in challenging their employment status in that way. Conversely, where there are tax advantages to both workers and businesses in opting for a self-employed contractor arrangement, there is little to stand in the way. It is clear that current ways of categorising workers are creaking under the weight of the changing economy. (Paragraph 20)
4.The apparent freedom companies enjoy to deny workers the rights that come with employee or worker status fails to protect workers from exploitation and poor working conditions. It also leads to substantial tax losses to the public purse, and potentially increases the strain on the welfare state An assumption of the employment status of “worker” by default, rather than “self-employed” by default, would protect both those workers and the public purse and would put the onus on companies to provide basic safety net standards of rights and benefits to their workers. This assumption would entitle workers to employment rights commensurate with “worker” status. As there is no “worker” status in tax law, tax status would be unaffected. Companies wishing to deviate from this model would need to present the case for doing so, in effect placing the burden of proof of employment status on the company. (Paragraph 21)
Self-employment, entrepreneurship and self-reliance
5.Understanding whether an individual is gainfully self-employed requires specialist knowledge and understanding of business development that is beyond the remit of Work Coach training. This stage is vital in ensuring the Department supports potentially successful businesses while not squandering resources on those that have little chance of becoming sustainable. We recommend responsibility for conducting Gateway Interviews is transferred to New Enterprise Advisers, who are specialists in supporting the self-employed. (Paragraph 24)
6.The expansion of the NEA is welcome. Nevertheless, Jobcentre Plus remains heavily focused on getting the unemployed into employee jobs. For many, this will be the right pathway. But the Department must ensure that there is adequate specialist support on offer to help those who could become gainfully self-employed fulfil their potential as self-reliant business owners. Even the expanded NEA can only cater for 7% of JCP’s caseload. This falls a long way short of the level of provision that we would expect to be allocated to supporting self-employment in a modern labour market. (Paragraph 27)
7.The Department should commission research on the extent of unmet need for specialist self-employment support among the JCP caseload. This should consider both unemployed people and those who are currently in low-paid self-employment who might benefit from support in growing their businesses. If the Department can identify significant unmet need then it should expand the NEA, considering a separate specialist self-employment programme and payment structure for the long-term unemployed and for those who experience additional barriers to work, such as disabled people. (Paragraph 28)
8.There are three different categories of employment status in the UK. Universal Credit (UC) takes into account two, but focuses on one—employees. The self-employed are a large and growing component of the UK workforce. Taking urgent action to ensure that UC is appropriate to support them should be a priority for the incoming government. (Paragraph 33)
9.The Department is seeking to support entrepreneurship without subsidising unprofitable self-employment. The existing Minimum Income Floor in UC does not get this balance right and risks stifling viable new businesses. The incoming government should commission an independent review of the MIF with a view to improving its sensitivity to the realities of self-employment. Until this is complete, the MIF should not apply to self-employed UC claimants. (Paragraph 34)
10.Low levels of retirement saving amongst the self-employed risk storing up grave problems of potential hardship and reliance on the welfare state in later life. While auto-enrolment for employees has been a great success, current structures are not encouraging sufficient pension saving by the self-employed. The idea of using an opt-out system on tax returns to encourage greater contribution to pensions is an interesting one that merits further consideration. (Paragraph 38)
29 April 2017