Memorandum by the Professional Contractors
Group
1. The Professional Contractors Group was
founded in 1999 as the representative body for freelance contractors
and consultants in the UK. Many of its members operate their own
one or two-person limited companies; PCG also represents unincorporated
sole traders and freelancers who operate via umbrella structures.
2. All of PCG's members take on business
risk and supply their services to a range or succession of clients.
They therefore represent the flexible, skilled, knowledge-based
workforce on which the EU's future prosperity depends. They provide
IT, engineering, project management, marketing and other functions
in sectors including financial services, telecoms, oil and gas
and defence.
3. PCG considers the needs of its members
both as workers and as enterprises. As enterprises, PCG's members
represent the very smallest in the UK. As workers, they can be
described as self-employed, freelance, independent or a number
of other terms. Here they will be referred to as freelancers or
contractors for convenience.
4. PCG exists because a large number of
freelancers grouped together to safeguard and protect their way
of working, which they adopted as a positive career choice. We
therefore represent many of the "atypical" workers identified
in the Green Paper. It is relatively unusual for such workers
to have such a representative voice: they sit outside the dichotomy
of "employer and employee" that dominates the policy
discourse and which also provides the structure for the EU's social
dialogue. PCG hopes that the Green Paper will at least highlight
the inadequacy of the social dialogue in its current form, which
excludes so many workers and enterprises.
5. Analysis of ways of working often tends
to focus, wrongly, on the nature of the parties: "employers"
and "employees", "self-employed" and "clients".
It would be far more useful and accurate to focus on the relationships
themselves, of which there are two basic types: employment relationships
and commercial relationships.
6. In UK law, this distinction is expressed
in terms of contracts "of service" (employment—whereby
the employee enters into the service of the employer) and contracts
"for services" (commercial—whereby one party agrees
to provide services to another, but not to enter into their service).
Freelancers and contractors work using contracts for services,
and are therefore not employees.
7. The Green Paper's repeated references
to "contracts" without ever acknowledging that contracts
exist in these two fundamental forms represents one of its chief
weaknesses, as its terminology is often rendered meaningless by
the resulting ambiguity. All working relationships fall into one
of the two camps: PCG recommends that any party wishing to consider
the nature of ways of working should take this fully on board
at the outset, and is baffled that the Green Paper failed to do
so.
8. PCG now offers responses to the questions
posed in the Committee's Call for Evidence of February 2007.
Question One
9. Although "labour market flexibility"
and "flexible working" are much-used phrases in the
current policy discourse, they are seldom adequately defined or
understood. The Government's "Success at Work' strategy paper,
and many other contributions to the debate, have tended to view
"flexibility" as entailing a variation in patterns of
employment, away from the traditional full-time model.
10. PCG believes that a far more significant
and meaningful contributor to flexibility in the labour market
is freelancing or self-employment. Freelancers provide their services
on a commercial basis. They can be engaged and terminated quickly
and straightforwardly, and allow companies to gain easy access
to specialist skills. They take responsibility for their own training,
sick pay and holiday pay. They are highly mobile: many routinely
work considerable distances from home.
11. PCG estimates, using Labour Force Survey
data and data from its own surveys, that freelancers makes a contribution
of approximately £100 billion per annum to the UK's GDP.
This is generated by roughly 990,000 freelancers, out of an estimated
12 to 15 million in the EU15. Freelancers alone therefore offer
a considerable source of flexibility to the UK's economy; no other
EU member state has such a sophisticated model of freelancing.
12. Greater flexibility could enhance the
UK's economy further still by allowing firms to access skills
on a cost-effective basis. Freelancing is also an important way
of keeping older workers economically active: the majority of
PCG's members are over 45. Moving away from the traditional model
of permanent employment must therefore be a key part of our response
to demographic change and the ageing of society in Western Europe.
13. The most pressing change needed in labour
law in the UK is greater clarity, as PCG will set out below. This
will allow freelancing, as well as other forms of working, to
flourish.
Question Two
14. In the UK, employment rights are applied
using a highly successful "targeted" approach: when
new rights or entitlements are introduced, they are made applicable
to "workers" or "employees". Full employment
rights depend on the presence of an employment relationship and
extent only to employees. Workers, who may work as "temps"
or in other relationships that are not employment but do not amount
to being in business, enjoy a smaller range of rights, for instance
relating to the minimum wage. The term "worker" will
however continue to be used in its generic sense in this document
unless specified otherwise.
15. Self-employed people are excluded from
both of these categories: rights are therefore made available
in a sensible balance to those who need them, while self-employed
professionals are unencumbered by them and able to go about their
business. They are within scope of anti-discrimination laws, but
these are of course not employment law—they extend far more
broadly.
16. It is hard to see how there could be
any benefits from changing the current arrangements: the targeted
approach is extremely useful. To depart from the principle that
an employment relationship must exist for employment protection
to apply would be disastrous: this would entail imposing employment
protections on commercial arrangements. Just as it would be ridiculous
for a customer to owe employment rights to the shop from which
they purchase a newspaper, so it would be ridiculous for a customer
to owe employment rights to a contractor from whom they purchase
services: these are commercial scenarios into which employment
law should never intrude.
Question Three
17. Few would disagree that a balance must
be struck between economic flexibility on the one hand and security
for the vulnerable on the other. The Commission's concept of "flexicurity"
is, however, not a helpful articulation of this. It seeks to combine
flexibility and security together, when in fact they are appropriate
in different measures and balances in different types of working
relationship.
18. A self-employed professional who supplies
services to clients on a commercial basis is the archetypal flexible
worker: the UK's freelancers represent a pool of talented and
experienced professionals who are able and willing to work on
a flexible basis to meet their clients' needs.
19. A less skilled worker providing labour
as an employee may well need security in their employment. They
may be able to adopt flexible working patterns involving flexitime,
annualised hours, teleworking or any other number of possible
arrangements. On the other hand, the nature of their work may
preclude this in practice.
20. The Commission's "flexicurity"
concept is extremely vague but does not seem to address any of
these scenarios. The failure of the Green Paper to distinguish
between commercial and employment contracts makes it particularly
unclear to which group of workers it envisages extending "flexicurity".
21. In citing one specific model of flexicurity,
involving relatively light employment protection, generous benefits
and active labour market policies to move people back into work
as swiftly as possible, the Commission highlights one solution
that has worked reasonably well in one member state for a period
of time. This does not for a moment mean that this approach is
apt to be extended to other member states, although for some,
depending on where they are in their economic cycles, it may be
useful.
22. The UK strikes a fair balance between
these two ideals at present. Employment protections are extensive
but rightly extended only to employees. Flexibility is provided
in large measure by individuals who operate in a freelance mode.
If there is room for improvement, it lies in encouraging freelancing
and making the tax and regulatory framework more conducive to
it. Another useful measure would be for better information to
be provided to companies about best practice for introducing flexible
work patterns for their employees, and for engaging suppliers
on a commercial basis.
Question Four
23. "Disguised employment", whereby
a worker adopts a commercial form but continues to work, in practice,
as an employee, is a genuine problem. It can arise for two reasons:
an employee wishing to reduce their tax liability; and an employer
wishing to save on employment costs.
24. Tax-motivated disguised employment has
been addressed in the UK by the intermediaries legislation, more
commonly known as IR35; in cases where there is no corporate form
and IR35 therefore does not apply, HM Revenue and Customs may
deem a worker to be employed for tax purposes. Nevertheless, disguised
employment persists: this indicates that the main drivers of disguised
employment are not employees seeking tax advantages, but employers
seeking to avoid employment obligations. Action is needed to prevent
them from being able to engage disguised employees.
25. Employers often do not understand employment
law: sometimes they oblige commercial operators such as freelancers
to act in an employee-like manner: this risks the freelancer's
status becoming confused. At other times they oblige employees
to forego their employment rights by adopting a commercial form:
this is abusive.
26. Employment status in the UK is governed
by common law, not statute. This is complex and it is impossible
to say with any great ease what makes an individual employed or
self-employed—in practice this is often clear-cut, but it
can in some cases be a problem for both workers and employers.
In the first instance, employers and end-users are able to exploit
the uncertainty in the law for their own gain and to the detriment
of workers; in the second, well-intentioned employers can get
badly tripped up by not understanding the law fully.
27. A trend has recently developed in UK
case law towards granting employment rights to workers who have
not traditionally been thought to have any. The courts' logic
is readily apparent: where an engagement is not commercial in
nature but instead essentially an employment relationship, they
pin employment obligations on the end-client. Unfortunately, while
the logic is discernible, the law itself is not clear: it is impossible
to say exactly what makes an engagement genuinely commercial and
when employment rights are in fact owed.
28. This is deeply worrying for all involved
with freelancing: contractors, agencies and end-users. It is causing
some end-users to hesitate when taking on contractors and to make
perverse decisions such as to terminate contractors at 48 weeks,
irrespective of the amount of work left to be done on the contract.
This commercial uncertainty is therefore increasing costs and
undermining the economic advantages offered by the UK's freelancing
model.
29. The current confusion has arisen mainly
as a result of two employment status disputes, which are briefly
outlined below.
30. In Dacas v. Brook Street (2004),
although Mrs Dacas was unsuccessful in her claim for unfair dismissal
against her agency, Brook Street, obiter remarks by Court
of Appeal judges suggested that she had probably been the employee
of her end-user, Wandsworth Borough Council. The same judgment
set out that in such situations tribunals should consider the
possibility of an implied contract of employment, which they have
since done in several cases. The judgment failed, however, to
set out at what point in her engagement, why, or how, Mrs Dacas
had become an employee, when at the outset she had been a PAYE
agency worker. It is therefore currently impossible for an end-user
to say with any certainty when an implied contract of employment
arises.
31. In Cable and Wireless v. Muscat
(2006), the Court of Appeal found that Mr Muscat had had an implied
contract of employment with Cable and Wireless, despite working
through both a limited company and an agency. This is unprecedented
and the judgment failed to give clear guidance on when it is "necessary"—in
a legal sense—to infer an employment relationship in order
to give "commercial reality"—a term left undefined—to
an engagement.
32. It seems to be the case, therefore,
that disguised employment is technically impossible in the UK:
the courts will award employment rights to genuinely disguised
employees. These cases are not widely understood, however, and
it is difficult for workers to assert their rights in this complex
area of law. It is PCG's recommendation to the Government that
employment status should be brought within statute and the current
position set out unambiguously, for the benefit of all. It will
allow the vulnerable easier access to their rights and self-employed
professionals easier exercise of their freedoms.
33. The Green Paper also discusses "economic
dependency": this is a red herring and does not exist as
an independent phenomenon. It is merely a variety of disguised
employment. If a worker is in business but has only one client
or customer, they are not in any sense economically dependent:
if they lose that client, they will either find a new one or go
out of business. That is the essence of business risk and is not
the slightest bit remarkable. If, by contrast, a worker is obliged
to work in an employee-like manner through superficially commercial
structures and has only one client or customer, they are a disguised
employee.
34. The apparent willingness of the Green Paper
to write off genuine businesses as "economically dependent"
solely because they have only one client and only one member of
staff is an affront to small businesses throughout the EU.
Question Five
35. The International Labour Organisation
passed a Recommendation in 2006 which stated that employment law
should not interfere with commercial relationships.
36. In other words, where an employment
relationship exists between two parties, it is right that employment
protections are available to the employee. But where a commercial
relationship exists between two parties, even if one of them happens
to be a one-person enterprise, employment "protections"
or obligations should not be extended to either party.
37. The UK does not quite have this healthy
situation, but it is not far off. The core of "employment"
rights that applies to "workers" (in the legal sense)
is technically an intrusion into a commercial relationship. However,
the real disjoin between commercial and employment relationships
relates to employment status: the division between workers and
employees, and between the self-employed and the employed, is
unclear; the division between workers and the self-employed is
seldom a matter of dispute. The existence of the category of "worker"
generally allows rights to be extended to the vulnerable without
accidentally entangling professional self-employed people in employment
rights.
38. The only difficulty arises when allocating
an individual to one category or another so that they might access
their rights. As observed above, it seems likely that in cases
of disguised employment (in which an employee may be disguised
either as a "worker" or as self-employed), employment
obligations in theory rest with the end-user—as already
outlined, this is seldom enforced in practice.
Question Six
39. Regulation at EU level would be wholly
inappropriate. Each member state has its own distinct traditions
and legal systems in these matters, and a solution for one should
not be imposed on another, where it will likely do damage. Member
states should of course seek to learn from each others' examples
of best practice: some member states may find a Scandinavian-style
"flexicurity" system helpful; others would perhaps be
well-advised to institute the UK's distinction between "workers"
and "employees". But rolling out a single measure across
the entire EU would disrupt many systems that work tolerably well
in their own contexts.
40. The idea of a "floor of rights"
is unhelpful, for the same reasons. The UK's "targeted"
approach offers a more practical alternative.
41. A Community-wide definition of "worker"
would not be helpful, for the same reasons. It would also be enormously
contentious to implement: it could make the ructions over the
services directive, which played a prominent and controversial
role in the French and Dutch referendums on the EU Constitution,
seem trivial.
March 2007
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