UK Contractor Payroll Reforms Reignite Employee Definition Debate

The rise of the gig worker has shaken up the talent pool, with some far-reaching consequences — particularly as it relates to employment regulation.

Earlier this year, the U.S. Department of Labor ruled that gig workers do not have to be classified as employees, and, therefore, do not have to be paid minimum wage, Social Security taxes or overtime. The decision reignited the debate over the legal definition of employee, gig worker, contractor and freelancer. In the U.K., that controversy has tax authorities weighing in.

IR35, the U.K.’s latest in off-payroll reforms, is forcing businesses to get ready for changes that will take effect next year in the private sector, following an HMRC consultation. The rules, which already apply to public companies, require firms to more closely assess their contractors to determine whether they should be taxed as employees, part of HMRC’s efforts to ensure the same taxes are paid by employees and contractors when they do the same job.

Companies, though, are not necessarily prepared to comply. Recent research from Brookson Legal found that most businesses surveyed plan to take a “blanket” approach in addressing these changes. However, 15 percent reported having “no idea at all” as to how these regulation changes might affect them.

“Far from saving businesses time and money, [taking a blanket] approach will lead to serious repercussions — leaving businesses wide open to increased cost, a wide-scale contractor talent drain, reputational damage and, in some cases, accusations that they have broken the law,” warned Brookson Legal Managing Director Joe Tully in a statement, according to People Management last week.

Separately, Andy Chamberlain, deputy director of policy and external affairs at the Association of Independent Professionals and the Self-Employed (IPSE), described the survey’s findings as “deeply alarming,” People Management reported.

“The government needs to hit the pause button,” he told the publication. “It cannot push ahead with reform while there are clear indications that businesses will not be able to comply with the new rules.”

The initiative has introduced confusion among professionals, too. According to the Freelancer & Contractor Services Association (FCSA), some sole traders may be unnecessarily concerned about the upcoming changes.

An HMRC Error?

A recent FCSA report found that 18 percent of sole traders are making unnecessary preparations, and 13 percent of limited company contractors said they plan to stop contracting as a result of the payroll reforms.

“The fact that our research points to 18 percent of sole traders who are making plans for the 2020 rollout of the reforms when they do not apply to them speaks volumes about the lack of clarity regarding the reforms,” said FCSA CEO Julia Kermode in a statement, according to reports.

She added that sole traders, by definition, are outside the scope of IR35, and warned that HMRC and HMT made “a very serious error” when they included sole traders in the bodies’ estimate that “58,000 average monthly worker instances” will be impacted by the payroll reforms. That lack of clarity and potential error are cause for the government to not move forward with the reforms, the FCSA argued.

“The complexity, unfairness and administrative burdens that the proposals will bring supply chains are damaging to the U.K. economy, damaging to the flexible labor market, damaging to the recruitment sector and damaging to the workers it will impact,” said Ed Molyneux, CEO at small business software company FreeAgent, in another statement.

He continued, “This latest research corroborates that. What’s more, our economy relies on the fact that companies can turn to talent on tap on an ‘as needs’ basis, and with 13 percent of contractors considering turning their backs on this way of working under the new rules, and with 36 percent stating they would only work on an ‘outside IR35’ contract, it is little wonder that 70 percent believe the proposals are unfair.”