Select Committee on European Union Minutes of Evidence

Memorandum by the Federation of Small Businesses


  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 part-time staff.

    —  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 conditions—vital 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 by:

    —  loose legislation for employment protection;

    —  a generous social safety net for the unemployed; and

    —  high intensity spending on further training.

  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[1]. Furthermore, this correlates with a wider trend towards self employment, for example in Australia where the number of self-employed outnumbers trade union members.[2]

  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[3]. 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.

Social Dialogue

  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 bargaining system.

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

2   Institute of Public Affairs Review June 2005, John Roskam. Back

3   Lifting the Barriers to Growth in UK Small Businesses, The FSB Biennial Membership Survey, 2004. Back

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