Good work: the Taylor report on modern working practices

    The long awaited Taylor report on working practices within the UK was released on 11 July 2017, writes David Geldard, a Senior Tax Consultant at Accountax Consulting. It is a hefty document running to 116 pages. The main thrust of the report is clearly aimed at the social welfare aspects of the various models for obtaining labour within the UK. That said it makes a number of recommendations in respect of structural changes to taxation, employment rights and engagement models which would have far reaching impacts on the UK labour market, especially for low paid work.

    Good Work

    The idea of “Good Work” is reflected throughout the report in its focus on providing good work to all individuals. It recognises that the definition of good work will differ for different people and at different times. As a result it focusses on issues such as fairness in the relationship between the individual and the business using their labour.

    First thoughts on the report

    Owing to the length and depth of the report, in this article I have focussed on those aspects of the report which are likely to have an impact on engagement models used and the tax and NIC impacts of the recommendations made.

    Clarity in law

    One of the key issues is the need to create clarity in law as to the employment status of an individual.  The report suggests that there should be clear mechanisms for obtaining a definitive decision on status:
     
    “Government should ensure individuals are able to get an authoritative determination of their employment status without paying any fee and at an expedited preliminary hearing”
     
    The report also comments on the complexity of current definitions of employment status:
     
    “Over time, the courts have tried to provide some clarity by introducing tests or factors for determining whether someone is an employee or worker. However, the relevance and weight given to these varies depending on the circumstances; without an encyclopaedic knowledge of case law, understanding how this might apply to your situation is almost impossible. The legislation must do more and the courts less if we are to improve clarity...”
     
    This is intended to prevent large tribunal fees being charged where the individual is then found not to be within the jurisdiction of an employment tribunal.

    Dependant contractor

    Although the report is broadly in favour of the current UK system of defining employment status, it suggests that the status of “worker” be replaced with that of “dependant contractor” commenting that:
     
    “Worker (or ‘Dependent Contractor’ as we suggest renaming it) status should be maintained but we should be clearer about how to distinguish workers from those who are legitimately self-employed.”
     
    The current test of worker status within the Employment Rights Act uses personal service as the defining test. The report states:
     
    “We therefore think that it is important for Government to ensure that the absence of a requirement to perform work personally is no longer an automatic barrier to accessing basic employment rights”
     
    And that:
     
    “we believe the principle of ‘control’ should be of greater importance when determining dependent contractor status,”

    Employment tribunals

    As well as commenting on the need to have certainty that the tribunal has jurisdiction, the report includes a veiled criticism of the level of fee charged for an individual to bring a claim before the courts. While recognising the barrier to seeking legal redress these fees can create, the report limits its recommendation saying:
     
    “With regret we recognise that it is unlikely that the Government will move to abolish these higher fees but we do ask that the Government continues to keep the level of the fees under review.”
     
    It also comments that:
     
    “The burden of proof in employment tribunal hearings where status is in dispute should be reversed so that the employer has to prove that the individual is not entitled to the relevant employment rights, not the other way round subject to certain safeguards to discourage vexatious claims.”
     
    Finally to reduce the need to go before the courts it is suggested that there is a role for HMRC in policing a wider range of employment rights alongside its current role in respect to National Minimum Wage (NMW).

    Incentives in the system

    Taylor echoes the findings of the recent Office of Tax Simplification (OTS) report on employment status in finding that the system rewards self-employment in a way that could be seen to incentivise “bogus self-employment”.
     
    “Whilst specific tax changes are formally outside the remit of the Review, we believe that treating different forms of employment more equally in the tax system would be fairer, more economically efficient and support better quality work. It would also reflect the reality of the modern UK labour market.”

    Specifically it considers that:
     
    “Currently, the different rates of National Insurance in particular mean that the UK system of taxing labour is not neutral – a self-employed person doing the same work as an employed person can pay a different amount of tax or National Insurance despite receiving similar contributory benefit entitlements in return. The Review considers that this situation is not justified, or sustainable, nor is it conducive to the goal of a good work economy.”

    One-sided flexibility

    Although the review considers flexibility within the UK labour market as a significant positive feature it is critical of the imbalances which can arise.
     
    The report considers unpaid internships and states that: 
     
    “We believe that the law is clear as it currently stands. If a person is obtaining something of value from an internship, they are most likely to be a worker and entitled to the National Minimum or Living Wage.”
     
    The use of agency staff and umbrella companies is looked at very carefully:
     
    “We have heard from some who would like to see umbrella companies removed from the supply chain altogether. However, we do not believe this is a proportionate response to the issues faced. That said, while umbrella companies have played a legitimate role in higher skilled, higher paid sectors for years, at the lower paid, lower skilled end, their role is more questionable for a number of reasons. For instance, agency workers are generally charged between £15-35 per week in admin fees when paid through an umbrella company – something that would be unlawful if these deductions were made by the employment business themselves”
     
    The issue of the costs to lower paid employees of umbrella companies are seen as a problem. As they can:
     
    “….leave individuals taking home as little as half of the money they were receiving before. Many agency workers have also raised concerns that they were not always made aware that it would be an intermediary that would become responsible for paying their wages and making deductions, even though the recruitment agency is required by law to make this clear.”
     
    The good news is that (although there is a but):
     
    “The Review does not want to stop companies using agency staff but we propose to address situations in which companies use agency workers over a longer period of time as a substitute for effective workforce management. As such, we believe as well as a right to equal pay...agency workers should have the right to request a direct employment contract with the hirer when they have been engaged with the same hirer for 12 months.”
     
    The use of rolled up holiday pay by umbrellas gets the thumbs up as an aid to flexibility:
     
    “As a general rule, annual leave entitlement equates to 12.07% of hours worked. We believe individuals should have the choice to be paid for this entitlement in real time – known as “rolled-up” holiday pay.”

    The gig economy

    Although the review was widely spoken of as focussing on the so-called gig economy it does so not as a key issue but as evidence of changing working practices. What it does do is recognise the issues that arise from the irregular working patterns which come from this type of working.
     
    The issue of employment rights would be addresses by the proposed changes to “worker status” and the ensuing right to National Minimum or Living Wage is considered quite carefully. The report suggests that a variation on the existing piece work calculation used for NMW purposes be used in establishing working hours.
     
    “…platforms would be able to compensate workers based on their output (i.e. number of tasks performed), provided they are able to demonstrate through the data that they have available that an average individual, working averagely hard, successfully clears the National Minimum Wage with a 20% margin of error. This type of calculation (using ‘fair piece rates’) can already be used to work out National Minimum Wage payments where it is not possible for the employer to determine the hours worked in respect of “output work”…”
     
    There were immediate comments in the media to ask how waiting time would be dealt with under the proposals. One of the drivers who brought the action against Uber believed that this proposal would actually leave him worse off as it would only pay him once he had accepted an assignment. So clearly there needs to be some further thought on this point.
     
    For workers on zero hours contracts the report considered that the uncertainty of being offered work is a barrier to the principles of good work. One suggestion put forward is that in place of zero hours a small number of guaranteed hours should be offered at NMW rates with additional hours being paid at a higher rate.

    The hidden economy

    The review even has time to look at the hidden economy. There is an interesting suggestion that there should be a cash free payment platform for use with freelance gardeners, child minders and the like so that cash cannot slip through the net. Taylor says:
     
    “Moving over time to cashless Government-accredited platforms for the payment of self-employed labour would shift the default significantly, meaning only those who intended to would participate in the informal economy”
     
    This is a proposal that would suit HMRC as it would provide data for their digital tax platform and for their intelligence gathering software.

    So what happens next?

    Taylor is asking for Government action within 12 months on the key recommendations of the review.  However, it also states that:
     
    “The best way to achieve better work is not national regulation but responsible corporate governance, good management and strong employment relations”
     
    This suggests that a longer period of change should be expected as changing business systems without enforcement by legislation will be a longer process. That is not to say that we should not expect some legislative action to follow as many of the suggestions would involve an increase in revenue for the Treasury. I expect to see a rolling program of increasing NIC for the self-employed over a number of years and some changes to the definition of a worker as the most immediate actions. The review itself seems to expect this to be a long term process as it states that:
     
    “Over the long term, in the interests of innovation, fair competition and sound public finances we need to make the taxation of labour more consistent across employment forms while at the same time improving the rights and entitlements of self-employed people.”
     
    That will not be a quick fix.
     
    The Accountax Consulting team includes specialists in employment status, IR35, labour providers and related disputes with HMRC. If you would like any advice on these matters please call us on 0345 0660 035 or contact us at mail@accountaxconsulting.com