Memorandum by the Federation of Small
1. The Federation of Small Businesses is
the UK's leading non-party political lobbying group for UK small
businesses, existing to promote and protect the interests of all
who own and manage their own businesses. With over 200,000 members,
the FSB is the largest organisation representing the self-employed
and small and medium sized businesses in the UK. FSB members together
employ more than 2.5 million people and turn over more than £10
billion a year. About 25 per cent of the membership are self employed,
the others being mainly one or two person companies, which are
owner-managed and one third of our members work from home. The
FSB welcome the opportunity to respond to the Call for Evidence
from the House of Lords Select Committee on the European Union
on the EU Commission Green Paper on Labour Law.
1. Flexibility of the labour market
2. Flexibility is being progressively reduced
in the UK and the FSB considers that this reduction has already
gone too far. The role of small business as employers is huge.
A successful small business provides prosperity, security, and
flexibility to its employees. But the small business employer
is rarely accorded adequate recognition and the FSB would like
to see greater recognition and support for small businesses employers.
Contracts can no longer be freely negotiated between employee
and employer due to "one size fits all" regulation.
3. While flexibility has to be balanced
by essential protection for employees, the FSB believe that the
balance has swung too far in favour of the employee at the expense
of the employer. With the recent increase in employment legislation,
the FSB are concerned that this legislation will result in less
employment opportunities. The following facts support our concern:
In the 2006 FSB Employment Survey,
35 per cent of business owners said they had chosen not to employ
anyone because of the perceived threat of employment legislation.
In the 2006 FSB and FPC Survey, "Burdened
by Brussels or the EU", we found that as a result of the
Part-Time Workers regulations of 2000, nearly a quarter of small
businesses said that new amendments deterred them from employing
These fears are further. demonstrated
to be realistic by the figures from the FSB helpline which compute
a massive 77,000 calls (of a membership of 200,000) in the year
2006 on the subject of employment law.
4. Flexibility in the labour markets has
been accepted as crucial by both the UK Government and the European
Union. It benefits employers by enabling them to adapt rapidly
to changing trading conditionsvital if the EU's small businesses
are to hold their own in a global marketplace. It also benefits
employees in a variety of ways. It can enable them to manage their
family lives and have greater control over their working day.
It gives them greater job security in difficult times and can
enable them to participate in the rewards in prosperous times.
Many workers prefer the traditional informality and convenience
of small businesses.
2. Employment security
5. The FSB believes that there is no need
for any enhanced employment security in the UK. In the UK, employees
already enjoy a network of rights. Some of these derive from EU
law, eg working time including paid holidays and age discrimination
and these are frequently "goldplated" by the UK Government.
Others derive from UK national law, for example national minimum
wage and unfair dismissal. These rights are subject to inspections
and monitoring and are enforceable by Tribunals. Cumulatively
they impose a heavy administrative burden. Workers in the UK are
also entitled to free healthcare under our National Health Service
and are protected by our health and safety legislation.
6. The already protective network of rights
in the UK does not require any further regulation and any such
attempt will seek only to encourage the black economy, a move
we strongly oppose. If the labour market becomes even more formalised,
it will damage the bridge into employment as many people return
to work through these casual flexible means. In the United States,
where businesses suffer from less bureaucracy and regulation,
75 per cent of large firms founded since 1980 grew from small
businesses. By contrast, more than 80 per cent of the large European
firms created since 1980 were the result of mergers of pre-existing
firms. (EU Research Advisory Board (EURAB 04.028-final, EURAB
report on: "SMEs and ERA", 2004)
7. To counter any loss of jobs to the newly
emerging economies, the diversity of the EU labour markets should
be utilised to meet the challenge. This can best be done by application
of the principle of subsidiarity, which enables national labour
markets to respond quickly and experimentally. Each Member State
knows best how to govern its own labour market as it has a closer
and more detailed understanding of its own cultural, demographic
and economic requirements. The FSB would urge the House of Lords
to take a firm stance on the needs of the UK in this issue.
3. The concept of "Flexicurity"
8. The FSB has examined the principles of
Flexicurity, in particular the Danish labour market model characterised
loose legislation for employment
a generous social safety net for
the unemployed; and
high intensity spending on further
9. While Flexicurity has been successful
in Denmark, the FSB considers that it would be unwise to indiscriminately
apply Denmark's system to other Member States who have also evolved
differing Labour Market models to suit their needs and choices.
10. Any such measures would result in unsustainable
tax rises to fund the enhanced security which would cause the
SME community to face additional pressure on cashflow. If the
disparity in income for those who work and those who are out of
work was minimised, there is the risk that there would be less
incentive for workers and employees to return to work. Any tax
rises would also be most likely to result in loss of employment
opportunities and would greatly harm the efficiency of the labour
market, putting a greater financial burden on the State, due to
increased need for more social security.
11. The UK labour market is geared towards
flexibility and has a culturally low tolerance to high taxes.
It is also worth noting that the UK rate of unemployment is already
the same as Denmarks, at around 5 per cent.
4. Other labour market challenges
12. In more recent years the income tax
authorities have administratively narrowed the scope of self-employment.
To counter this, the FSB supported a bill to make provision about
self-employment ordered to be brought in by Mr Mark Prisk MP on
9 January 2002. It provided that when a person makes his/her income
tax return he may make a declaration that he/she is self-employed.
Such a declaration would entitle him/her to be regarded as self-employed.
13. However, if the officer is of the opinion
that the declaration should be disallowed, he may give notice
of disallowance, with reasons. The declarer may then, if he so
wishes, appeal against the disallowance. On such appeal, there
is a presumption in favour of the declarer. The bill includes
provisions to protect workers from being pressurised into making
such a declaration. These provisions would give statutory recognition
to the right and freedom for a worker to be self-employed whilst
at the same time inhibiting the comparatively small number of
employers who seek to "disguise" their employees as
self-employed in order to evade their responsibilities. It would
provide a speedy solution to borderline cases.
5. Groups covered by labour law
14. Small businesses suffer from legislative
attempts to undermine the status of self-employment and the stifling
of self-employment by administrative burden. In the FSB's Employment
Survey 2006, it was found that 40 per cent of small businesses
have at least one casual or seasonal worker per average year.
One third of employers said that they were deterred from creating
jobs because of the burden of employment regulation and further
regulation would only serve to deny these casual workers the opportunity
for the flexible work they seek.
15. Workers who are not employees do not
need regulating. They are recipients of public services which
apply to all whether workers or not, for example, healthcare and
health and safety regulation. Apart from the right to be self-employed,
this sector has the right to "buy in" services as and
when required and the right to provide services in accordance
with commercial contracts, such as computer services. Commercial
contracts take a wide variety of forms and much depends on the
sector. They are tailored to meet the needs of the parties and
as such, flexibility is crucial. Self-employed contractors are
adept at spotting and filling gaps in the market, and make a huge
contribution to the efficiency and productivity of the business
sector which they serve. They do not need a "floor of rights"
which may reduce their flexibility and labour law should be confined
to employment contracts.
16. The FSB doubts that creating a rigid,
EU-wide definition of self-employment would be a helpful way of
competing with other emerging economies as it may hold back enterprise
and innovation. Each Member State's definition of self-employment
has evolved over time to suit their needs. The FSB believes the
fact that different Member States have variations in definitions
of self-employment and employment is a necessary reality which
the EU would be best advised to accept and work with.
17. The FSB would urge the committee to
bear in mind the dangers of standardising the definitions of self-employment
or do anything to limit or undermine this increasingly important
social and economic trend. The majority of EU citizens favour
self-employed over employed status.
Furthermore, this correlates with a wider trend towards self employment,
for example in Australia where the number of self-employed outnumbers
trade union members.
18. The FSB believes that a rigid definition
of self-employed status would hinder the development of socio-economic
trends that are society's natural response to the challenges of
the 21st century. The development of so-called "lifestyle"
businesses is a relatively new but increasingly important phenomenon.
According to an FSB survey, lifestyle or home based businesses
account for over one-quarter of small businesses in the UK. 45
per cent of home-based businesses are registered as sole traders.
Research has demonstrated that operating from home, often in rural
areas, is no barrier to growth. Fuelled by the revolution in information
technology this development is contributing to a renaissance of
local communities, strengthening the social fabric that is perceived
to be under attack from globalisation.
6. Role of EU Regulation
19. In employment regulation, the FSB considers
that harmonisation should not be a general approach. It is at
least as easy to get permanent work in the UK as temporary work,
therefore any employee who seeks- temporary work does so because
it suits his/her needs at the time. We would suggest that the
current system in the UK is more than adequate and provides a
flexibility which is beneficial to both employer and employee.
Any attempt at universal clarification would be likely to attract
unintended consequences. EU legislation in labour law should be
restricted to making provision for posted workers and cross border
workers where the EU can usefully stipulate which laws should
apply, but without attempting to change the substantive law.
20. In cases where collective agreements
are permitted to replace legislation, individual employees of
a small business should also be able to opt out. The principle
could be adopted that wherever a collective agreement (in which
small business is represented) can provide for an opt out of a
regulation for small businesses who employ less than 20 people,
an individual employee in a small business, should be entitled
to do so. Where a legislative remedy is deemed proportionate for
large business and public sector employees, but not for small
businesses, there should be an exemption for small businesses.
21. Small businesses, which are still comparatively
excluded from the social dialogue, should have their own institution
and be given equal weight with the so-called social partners.
The traditional collective bargaining system where agreements
are made between large businesses and trade unions, is increasingly
less relevant and more importantly, less representative of the
current UK labour market. Given the fact that small businesses
account for 99 per cent of all EU companies, (European Commission:
DG Enterprise and Industry) the FSB would urge a realistic
appraisal of the future validity of the traditional collective
30 March 2007
1 Flash Eurobarometer n° 83: Entrepreneurship,
Survey conducted on behalf of The European Commission, Directorate-General
Enterprise by EOS Gallup Europe, September 2000. Back
Institute of Public Affairs Review June 2005, John Roskam. Back
Lifting the Barriers to Growth in UK Small Businesses, The FSB
Biennial Membership Survey, 2004. Back