Since we published this article, the Labour party has updated its plans for reforming workers’ rights. For the latest position on what Labour is pledging to do if it wins the general election on 4 July 2024, see our UK election 2024 employment law reform tracker.

The Labour Party’s 2021 Green Paper set out a wide-ranging reform agenda, including a range of proposed changes to employment law. Many of the Green Paper proposals were reflected more recently in a policy programme shared by the LabourList and, if signed off by the party’s national policy forum over the summer, will likely form part of the party’s election manifesto.

What are Labour’s proposals to reform employment status?

Labour’s proposals in relation to employment status are in line with its stated mission to strengthen individual and collective rights and protections to “create more and better jobs” and improve job security. Labour aims to end what it describes as “bogus self-employment” by preventing “unscrupulous” employers falsely putting individuals into a category with fewer rights “undercutting good employers”. The proposals included in the Green Paper include:

• creating a single status of “worker” for all but the “genuinely self-employed”; and
• ensuring all workers, regardless of sector, wage or contract type, will be afforded the same basic rights and protections (including sick pay, holiday pay, parental leave, protection against unfair dismissal).

As employment law (save for some matters) is devolved for the Northern Ireland Assembly to legislate on, these proposals related to employment law in Great Britain. The current lack of a functioning Assembly and Government makes it impossible to predict with confidence what may happen in Northern Ireland regarding these proposals, but previous experience suggests that the status quo will likely remain, with the law in Northern Ireland being different in some respects to the law in Great Britain referred to in this article. For example, minimum service requirements for bringing a claim in Northern Ireland remains at one year, not the two years currently in Great Britain.

What are the current employment status categories in the UK?

People working in the UK currently benefit from different employment rights depending on whether they are classed as self-employed contractors, a worker or an employee. The statutory definitions for employee and worker are not comprehensive and the current position is substantially defined by case law. Determining the line between employees, workers and self-employed contractors can be difficult.

Those individuals who are self-employed contractors have fewer employment rights compared with employees who benefit from the fullest protections. The status of worker acts as the intermediary category benefiting from some rights (such as holiday pay, national minimum wage, protection against discrimination and whistleblowing protections), but not all rights.

Key legal protections for employees in Great Britain that are not available to workers include:

How have the employment status categories evolved in the UK?

As employment practices evolved in the late 20^th century, the binary distinction between “employee” and “self-employed” was blurred by the introduction of the term “worker” in the Employment Rights Act 1996 (often referred to as “limb (b) workers”). The purpose of the new “worker” status was to recognise a broader category of individuals who were not traditional employees but still justified some level of protection.

However, for tax purposes, there is no third category of worker. An individual will either be an “employee” or “self-employed” and workers are treated as self-employed for tax purposes. Confusingly, the tax position may, on occasion, be different from the employment law position. Although the tests are similar, the fact that an individual has been found to have one status for tax law does not mean they will necessarily have the same status for employment law purposes.

Determining worker status is a fact sensitive matter which often involves considering a number of factors including how the relationship operates in practice. Various factors can influence if the individual is an employee, a self-employed contractor or has some other status. These include: the right of substitution; the obligation to provide or accept work; the use of intermediary companies; and who provides equipment and pays expenses.

Over recent years, the combined impact of technology and globalisation has driven the need for greater flexibility in the workforce, and new business models and ways of working have emerged in response. Having a worker category arguably better reflects economic trends in work and is often heralded by trade unions and worker representatives as a solution to the significant growth of the “gig” economy where a traditional “employment” model may not suit either the business or the individual. However, the gig economy, typically reliant on ad hoc and flexible labour, does not often fit neatly within a particular status category and has presented particular challenges. This has led to a significant amount of litigation to determine the employment status (and associated rights) of individuals engaged via these platforms and calls to reform the employment status legal framework to bring clarity and end what many perceive to be “one-sided flexibility” in emerging business models.

In the UK and in many other countries, evolving models of work have put legal frameworks under pressure and have given rise to a plethora of legal disputes to determine the status of an individual.

How do other countries approach employment status?

Country

Two-tier or three-tier status category?

Categories and details

France

Two-tier

Employee and self-employed contractors.

Since 2016, platform workers have gained additional protections. Although they remain self-employed they benefit from more protection than “traditional” self-employed workers (including protection against work-related accident, mandatory training, right to strike, right to form a trade union).

New legislation was adopted in 2019 which, in part, further regulates platform work by preserving the self-employed status of drivers whilst addressing perceived shortcomings of working conditions and protections by allowing platforms to introduce a social responsibility charter.

Discussions are ongoing in France for the adoption of an intermediary status similar to the existing “worker” status in the UK.

Italy

Three-tier

Employee, self-employed workers, and independent contractors.

A sub-type of independent contractor exists called a collaboration contract (or co-co-co) where work is done under the direction of another (similar to worker status in the UK). There are two types of co-co-co:

• “Co-ordinated and Continuous Collaborations”: activities are executed personally by the collaborators autonomously in a continuative and coordinated way. The self-employed rules apply.

• “Organised Collaborations”: the execution of the activities are organised by the employer (even through digital platforms). In this case, employment rules apply.

Spain

Two-tier

Dependent employee and independent contractor.

A sub-type of independent contractor called dependent self-employed exists which provides enhanced rights to self-employed individuals who may be dependent on one client (at least a 75% of their income), much like the control aspect of the UK’s current worker test.

Australia

Two-tier

Employee and independent contractor.

Australia does not have a third tier but arrangements for casual employees are another alternative to that of UK worker status. They are classed as employees, but do not benefit from the same rights. For instance, they are not entitled to unfair dismissal rights and most forms of unpaid leave but their national minimum wage is uplifted (a “loading”) to accommodate for the lack of rights.

Germany

Three-tier

Employee, employee-like person (similar to UK worker category) and freelancer/self-employed

Employment law recognises the concept of mini and midi jobs:

• Mini job: a casual arrangement where workers’ wages are capped (520 euros a month). These jobs often encompass seasonal work (mini job contracts cannot extend over three consecutive months in a year).

• Midi jobs: a casual arrangement where the workers earns more than a mini job but less than 1,600 euros a month.

Both arrangements mean that workers do not make enough to entitle them to the fullest full range of employment protections.

China

Three-tier

Employee, self-employed and independent contractor.

Self-employed usually refer to those who do not have a regular or long-term employer.

USA

Two-tier

Employee and independent contractor (test varies state to state)

Belgium

Two-tier

Employee and self-employed

In 2016 the De Croo Act introduced a more favourable tax system for income that is generated by work in the digital “collaborative economy”. Subject to certain conditions, transactions assisted by online platforms benefit from a flat rate of 10% on income up to a threshold of 5,100 euros annually (instead of 33% on “regular” income).

Ireland

Two-tier

Employee and self-employed.

There is no legal definition of these terms but a Code of Practice for Determining Employment Status defines each term by reference to what work is done, how the work is completed and whether written or verbal agreements are used. There is no third tier but a category of as required/standby casual workers which, although not specifically defined, are generally considered employees for employment rights purposes.

How has the Conservative government tried to reform employment status?

In 2018 the Conservative government consulted on a range of recommendations set out in the Good Work Plan commissioned by the government. These included a recommendation to codify the employment status test to “tackle exploitation”, “increase clarity in the law” and “align the incentives driving the nature of the labour market”. The government’s response to the consultation on employment status was significantly delayed with the onset of the pandemic and was finally published in July 2022. It concluded that the current approach to employment status provided the right balance for the current labour force and that the intermediatory category of “worker” was essential for flexibility in the market. The response stated that that the “employment status framework for rights works for the majority” and that the “benefits of creating a new framework for employment status are currently outweighed by the potential disruption associated with legislative reform”. No legislative changes were made but guidance was published for HR and legal professionals.

What is the EU doing to reform employment status?

In December 2021, the European Commission put forward a proposal for a Directive to improve conditions for people working on digital platforms across the EU. The European Council recently agreed its position on the Directive, bringing it one step closer to being finalised. The Directive focuses on the employment status of platform workers and proposed new rights for individuals whose work involves the use of algorithmic technology. The proposal includes a presumption of employment status if the platform exerts control and direction over the performance of work, judged by whether three out of seven criteria are met. This idea of a “rebuttable presumption” has already been adopted by several countries, including Spain and Belgium. While the UK is no longer a member of the EU, this could influence Labour’s legislative reforms.

What are the alternatives to reforming employment status categories?

If Labour’s aim is to improve rights and protections for certain individuals there are a number of alternatives that could be considered:

Redefining the boundary

Personal service is considered the determining factor in the UK for worker status, but this is fairly unique when looking at other jurisdictions which focus on control or whether a percentage of an individual’s work comes from a certain business. Redefining the tests to reduce the emphasis on personal service, to provide protection for those dependent on a single or majority source of income, or otherwise to codify the legal boundaries (including who would fall in the “genuinely self-employed” category) could enable the UK to achieve improved protection and security for vulnerable workers while ensuring others continue to benefit from the flexibility they want.

Introduce a “Labour Inspector”

Many countries in the EU have an enforcement regime that helps to regulate employment rights. These bodies have a determinative power to investigate and take enforcement action in respect of whole workforces, instead of individuals having bring a claim in the tribunal system. Dealing with status determination cases in this way would have the effect of reducing the existing strain on tribunals and create a regulatory body with – potentially – investigative powers as well as a broad enforcement remit.

Clarify areas of employment law

A number of challenges that arise in practice in the context of platform working are as a result of current employment laws being ill-equipped to modern ways of working rather than the particular working status of the individual. Clarifying the rules on holiday pay, national minimum wage and working time and how they apply, for example, in the context of multi-apping in the “gig” economy will be beneficial as work and business models become increasingly flexible.

Introduce a rebuttable presumption

This is the approach favoured by the EU. Although this could be viewed as addressing the current imbalance between business and individuals in employment status disputes, it would not bring the sought after clarity to employment status. A rebuttable presumption is in reality very similar to the current test in the UK - only the burden would be placed on the business to prove that the individual is not an employee.

What are the potential consequences of reforming employment status?

• Labour’s aim in moving to a “single worker status” is to provide transparency and reduce disputes over employment status. Taking steps to simplify the current employment status framework could enable individuals and businesses to better understand the employment rights and protections that apply to particular working arrangements. However, it is unlikely that the creation of a single status of “worker” will prevent disputes arising.
• The Green Paper does not provide details, but it seems likely that Labour will collapse employee status into worker status as part of its proposal, with all those individuals now falling within the expanded worker category benefiting from the same level of protection as employees currently enjoy as well as additional protections proposed by Labour (see below). It is highly likely, however, that there will continue to be grey areas where individuals do not fall neatly into the expanded “worker” or self-employed category.
• The existing tests used to determine employment status, such as control, integration, substitution, may well end up being adapted and applied to this binary classification as they have been currently construed to largely differentiate worker from self-employed or worker from employee. The experience of other jurisdictions with binary categories demonstrates that many of the same challenges still exist. Tests for employee/self-employed status have developed through case law on a case by case basis leading to similar challenges in achieving certainty.

• Alongside the creation of a single “worker” status, Labour proposes to afford all workers the same basic rights and protections, including rights to sick pay, holiday pay and parental leave. It also proposes to “give all workers day one rights”, including for unfair dismissal. The proposal for a single “worker” status should be read cohesively with these other proposals in order to understand the true impact of the proposed reforms. With all workers benefiting from the widest range of rights and no qualifying periods, the additional cost to business would be significant and the currently stretched and under-funded tribunal system would be unlikely to cope with the increasing numbers of individuals able to bring claims. We consider Labour’s proposals to reform unfair dismissal law in more detail in the first article in this series.

• The announcements from Labour do not address the question of whether status will be aligned for employment status and tax purposes. Currently, as mentioned above, worker status is not recognised for tax purposes and the tests for determining employment status for employment rights purposes and tax purposes have subtle differences. This may lead to uncertainty if there is no change to the current position for tax purposes – with those seen as not “genuinely self-employed” for employment rights purposes still being self-employed for tax purposes. Or, if there is to be greater alignment (which would offer certainty), this would lead to additional tax and national insurance contributions for employers.

• Platform businesses approach to status in the UK may diverge from their approach internationally with the potential of these reforms to prompt a re-evaluation of UK models. The reforms risk driving models which engage a growing number of “genuinely self-employed” platform workers to provide the flexibility individuals want, with the consequent reduction in employment rights.
• Employers with employees in Great Britain and Northern Ireland could find themselves in a confusing situation with workers in Great Britain being afforded greater employment protection than workers in Northern Ireland. This would certainly add to the ever-increasing employment law divergence between the jurisdictions (although there is nothing to prevent employers giving workers in Northern Ireland additional benefits equivalent to those in Great Britain).

What do Labour’s proposed reforms to worker status mean for employers?

Taken together, if the proposals to move to a single “worker” status and remove qualifying periods for certain basic rights are implemented, they will have a significant impact on businesses. Employers will need to:

• Accommodate and meet the cost of additional rights such as sick leave and pay, and family leave and pay to individuals who previously did not qualify as workers. Business will need to consider how they do this, whether by passing the cost on to the end-user or otherwise.
• Review and amend contracts and policies. In certain industries, many individuals are likely to be re-classified from “worker” to employee and this will need to be accounted for.

What steps should employers take to prepare?

Whilst further detail of the Labour party’s reforms to employment status is needed, employers should consider taking the following action now to prepare:

• Evaluate workforce composition across the UK to identify the distribution of employees, workers, and self-employed individuals to identify those potentially impacted by the reforms.
• Conduct impact assessments to evaluate the potential financial repercussions of changes in employment status classification on various operational aspects, including compliance, HR processes, payroll, and employee benefits.