As the labour market becomes increasingly fluid, will the standard nine-to-five contract of employment become the exception in the UK rather than the norm? Jamie Kerr, the IoD’s head of entrepreneurship and tech policy, and Séamus Nevin, its head of employment and skills policy, consider the issues posed by the rise of the gig economy
The rise of the gig economy snapshot
• The UK labour market is changing profoundly, with advances in IT creating new routes into employment and offering people greater flexibility in how they work.
• The resurgence of the gig economy is central to the debate on whether labour rights are keeping pace with the changing world of work.
• In its latest report, the IoD calls on the authorities to clarify definitions of employment, self-employment etc and to make the public more aware of both the benefits and the pitfalls of self-employment. It also looks at extending training provision for the self-employed.
• In light of the Taylor review, the IoD believes that the government should also establish a commission to look into levelling the playing field with regard to the taxation of employment and self-employment.
If you had walked past a post office anywhere in the UK in the early 20th century, you’d have been brought up short by the sight of its shop window, plastered with cards featuring requests for work from members of the community it served. Local independent traders and craftsmen would also use it to advertise their goods and services. Everyone in the area used the post office; everyone walked past the window – the system was simple, efficient and community-centred. In one form or another, this “gig” approach was the method by which most people had offered and found workfor millennia.
Towards the end of the century, the increasing development of workplace rights pushed most people towards “real” jobs – ones that involved trudging into the office and working from 9am to 5pm, Monday to Friday. Musicians became the only people still seeking gigs.
Today, on-demand work has expanded well beyond the scope of rock bands and shop-window entrepreneurs. The pool of potential clients is bigger and the range of services available to consumers is wider. Post office windows have been replaced (albeit not entirely) by complex algorithms and smartphone screens, giving rise to the latest trend to both thrill consumers and puzzle policy-makers: the growth of the modern gig economy.
The case for flexible work
The world of work is transforming: technological, socioeconomic and demographic shifts are changing the way we think, demanding greater flexibility in how both individuals and organisations operate. In fact, the concept of employment itself seems to have passed its sell-by date. A proliferation of online platforms has made access to work easier than ever before by connecting people who have jobs to offer with those willing to do them. Such advances have given people more control over when, where and how much they work.
The flexible nature of the gig model also offers several benefits to employers, as they don’t need to incur staff costs when the demand for their goods and services is not there. For start-ups, charities and other organisations with inconsistent cash flows, such an arrangement is a bedrock requirement. But they are not alone: globalisation has driven the need for more flexibility across the private sector as the development of a 24/7 marketplace and the rapid expansion of the services economy transform the workplace. Such changes require all organisations to think creatively about how they can best organise work to satisfy a diverse and demanding customer base.
Advances in IT offer hope to those seeking a better work-life balance. A rapid increase in computer processing power; advances in mobile and cloud technology; and the growth of the internet of things have all fed into innovations such as telecommuting, co-working spaces and virtual teams. These changes have the potential to create more opportunities for both workers and consumers, and so boost economic growth. But they also have the potential to reduce job security in certain sectors.
Such insecurity and the concern that some people may be caught at the vulnerable end of self-employment – with few other options for paid work – have prompted criticism of gig platforms. But, while the surge of self-employment in the past decade has created significant challenges, there have been many notable benefits. Recent Labour Force Surveys conducted by the Office for National Statistics suggest that the creation of new routes into self-employment has helped groups who have historically struggled to find work – particularly lone parents, disabled people and the long-term unemployed. The number of women in self-employment has grown at about twice the rate of men in the past few years. Today more than half of the part-time self-employed workforce is female.
Older people are increasingly opting for self-employment too: about a third of individuals still working their late sixties are going it alone. This proportion rises to a half for the growing number of people working beyond 70. Self-employment is also becoming more important for the newest generation of workers:
the number of under-25s entering conventional jobs has been falling ever since the turn of the millennium. Political parties of all persuasions have supported this trend.
We should be wary of the narrative that self-employment offers predominantly low-wage, low-quality work, which is the caricature often painted by the model’s detractors. According to the Resolution Foundation – a left-leaning think-tank – the gig jobs that have seen the highest growth rate over the past 10 years are in typically well-paid sectors. For instance, there have been increases of 60 per cent in banking, 90 per cent in public administration and 100 per cent in advertising. By contrast, self-employment in the taxi industry, which offers one of the most widely scrutinised types of gig work in recent times, has grown by seven per cent.
Of the nearly three million people in the UK who have found a new job since 2008, about 45 per cent have been classed as self-employed, meaning that one in every seven of the nation’s workers are now working for themselves. HMRC is becoming concerned about the impact of this state of affairs on the public purse, because self-employment generally provides a lower take from income tax and national insurance contributions than that yielded by conventional employment. This points to a growing hole in the finances that will become harder for the government to ignore. The Office for Budget Responsibility has estimated that the trend, if it continues at the same rate, will have cost the Treasury £3.5bn by 2020-21.
There is then the debate as to whether employment regulations and practices are still fit for purpose. The new explosion of small-scale entrepreneurship might make you wonder whether we’re returning to the kind of economy espoused in 1776 by Adam Smith in The Wealth of Nations. He described a genuine market economy of individuals engaging in commerce with one another. New gig platforms are by no means simply tech-charged manifestations of the “invisible hand” of Smith’s free-market model. Rather, the role they play in facilitating exchange is decidedly visible. But we should recognise that the latest generation of specialised platforms also raises the spectre of social inequality. The invisible hand can be a helping hand that spreads the benefits of trade as widely as possible – or it can be an unforgiving fist.
The rise of the new gig economy has also prompted questions about what it really means to be self-employed. One key problem is that the theoretically binary distinction between employment and self-employment understates the level of complexity that exists in practice. There is little clarity in the statutory definitions of employment status, although there is a body of case law. For the purposes of employment rights an individual can be classed as one of three types – employee, worker or self-employed – while for tax purposes they can be categorised as one of two types: employee or self-employed. In some cases, because employment law and tax law follow different statutes, it’s even possible for an individual to be classed as an employee under employment law and as self-employed under tax law (and vice versa). This “arbitrage” highlights another challenge arising from the murky divide between employment and self-employment: the fact that some workers lack the legal rights of an employee, despite having many of the characteristics of one.
Statutory sick pay, statutory maternity pay, training support and employer pension contributions are some of the occupational benefits that an employee will forgo when they become technically self-employed. As more people do this, there is growing pressure for the law to be simplified. An independent review of self-employment for the government conducted last year by Julie Deane, CEO of the Cambridge Satchel Company, found evidence indicating that a lack of clarity is causing confusion. Moreover, data from HMRC suggests that more than 5.5 million people report income from self-employment, but that almost 1.8 million of these also report income from employment. In other words, approximately one-third of people who believe themselves to be self-employed are actually, or also, in contracted employment.
One consequence is that firms can in some cases be reluctant to help self-employed workers understand their entitlements, because doing so would risk making their association look like an employer-employee relationship, should it be subjected to an employment status challenge in court. This reality was borne out in a recent IoD survey of business leaders focusing on their understanding of the law on employment status. One-third of respondents admitted that they were unsure about the statutory definitions, while three-quarters said that they would welcome clearer terminology.
Against this backdrop, it’s clear that there’s a strong case for improving everyone’s understanding of their employment status, as well as the rights, responsibilities and trade-offs associated with different types of employment. Strengthening the protections afforded to vulnerable workers in a sustainable way without reducing the availability of jobs or economic growth is a difficult, but important, objective.
Some key first steps
The IoD’s Future of Flexible Work report, published in the run-up to the general election, considered some of the challenges posed by the new gig economy and considered what the government should do to shore up the labour market and support self-employment in a fast-changing commercial environment. The full report is available at IoD.com but its key recommendations are as follows:
- First and foremost, we recommend that the government does much more to help people understand their employment status for the purpose of knowing their rights at work. HMRC has already trialled a portal helping individuals to identify their employment status for tax purposes. We recommend the creation of a similar service for workplace rights.
- Now that the Taylor review of modern employment practices has concluded, we urge the government to review the UK’s tax and national insurance systems with the aim of levelling the playing field for employees and self-employed people (see panel, opposite page). People should not should not be choosing self-employment for tax reasons.
- Specifically within the gig economy, the government should enable workers offering services such as cleaning and home maintenance services on a given online platform to carry over their profiles and customer reviews to any other platform, so that they can retain their ratings. Reviews are the equivalent of a CV on which a gig worker’s professional reputation is based.
- Self-employed people need to be able to access the social security safety net. The government should therefore consult on boosting their pension enrolment rates through a “nudging” scheme in the same way as the employee auto-enrolment programme, while HMRC should work on ensuring that the self-employed are made aware of their rights and social protection entitlements.
- The government should explore ways to facilitate engagement in lifelong learning. Steps should include opening up the apprenticeship levy to other forms of training; incentivising education providers to expand their offering of computer-based and blended learning; and flexing the income tax system to enable learners to engage in on-the-job training.
- The government and the Advertising Standards Agency need to ensure that adverts for self-employed work fully state both the benefits and the costs.
These are just a few of the steps that the authorities ought to be taking. We should acknowledge that the growth in self-employment and the gig economy is posing important challenges, but we shouldn’t allow these to eclipse the positive effect it has had since the financial crisis of 2007-08. We also need to recognise that this growth has not been driven predominantly by low-skill, low-wage jobs, although they are undoubtedly part of the mix. And, contrary to what many campaigners would argue, not all online platforms offering gig work are vehicles for corporate exploitation.
In reality, future-proofing British businesses will require new technologies to be widely embraced. While we must guard against exploitative business practices, we also need to look to how a broader policy outlook can prepare our labour market and regulatory system for the fast-changing decades that lie ahead. Such far-sightedness must be a key feature of the political response. While some of the challenges posed by the rise of gig work and self-employment generally will require short-term action, the government should use this moment of close public scrutiny to highlight longer-term changes in the nature of work and the need to prepare for them.
An important question remains: will there be enough cross-party support to push the required reforms through a gridlocked parliament? Time will tell.
A tax dilemma
Stephen Herring, the IoD’s head of taxation, analyses the effects of the new gig economy on the public finances
Reforms are certainly needed in relation to income tax and national insurance, but this doesn’t mean that they will be easy to achieve. Unless sufficient “fiscal headroom” becomes available to the government – which is unlikely until its annual budget deficit is eliminated after 2025 at the earliest – there are bound to be both winners and losers from any changes.
No one should be under any illusion that technical alterations will be straightforward to enact in this area, which has been under scrutiny for decades. Piecemeal tax changes have often posed implementation problems and led to complex case law decisions. The final proposals will need broad-based consultation with the businesses and individuals affected.
An overarching goal should be that any new tax and national insurance system has to be simpler and less open to interpretation. The chancellor would also be wise to avoid using such a reform as a covert method of increasing taxation. In the institute’s view, UK businesses and individual taxpayers are not undertaxed. If necessary, the chancellor should be willing to facilitate reform by accepting that – at the margin – there may well be a cost to the Exchequer. Such a fiscal “investment” should focus on those who would suffer financially from any proposed changes, so that generous transitional arrangements are established. These might well need to extend to four or more years.
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