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Growth in self-employment placing pressure on ‘outdated’ government policy & regulation

Author: Nina Broughton, Chief Economist at the Social Mark

Last month’s ruling that Uber’s army of self-employed drivers should be classified as employees shows how the growth in self-employment is placing increasing pressure on outdated government policy and regulation, with policymakers struggling to catch up with the way the world of work is changing.

With increasing numbers of workers in self-employment, the reach of government policy designed to protect and support workers is becoming shorter and shorter. Government must also recognise that differences in tax policy and regulation for workers and the self-employed can create artificial incentives for firms to move towards a self-employed or contractor relationship.

Much of our current employment legislation is based on the traditional employee-employer model, which as a result is becoming more expensive compared to other models of employment. There is no equivalent of employers’ National Insurance Contributions for the self-employed; the self-employed do not have to be paid the National Living Wage; and, they do not have the same entitlements to sick or holiday pay. With a lack of clarity on the boundary between self-employed and other workers, decisions are being made through lengthy employment tribunal cases.

The lack of modern policy and regulation around employment status is also a real problem due to the scale of low pay among self-employed workers. While we have made great strides in tackling low pay among employees, the self-employed have traditionally been overlooked. The Social Market Foundation’s latest research with Trust for London into the extent of low paid self-employment revealed that around 1.7 million self-employed workers (45%) across the UK economy are currently paid below the National Living Wage. In the transport and storage sector – which includes taxi drivers and delivery drivers –  we estimated that almost 60% of self-employed workers are paid below the current National Living Wage rate. Given the extent of the problem, the government’s announcement that Matthew Taylor will lead an independent review into modern employment is welcome news.

A variety of policy responses are likely to be required to tackle low paid self-employment. If the government really wants to build ‘an economy which works for everyone’ – and deal with the problems of low pay among the self-employed and ‘false self-employment’ – it must address the tax and regulation gap between employees and the self-employed, and give the self-employed a stronger voice.

As part of this the government should conduct a review of employment statuses, with a view to setting statutory employment status tests for both tax and employment regulation purposes. It should also examine how it can minimise tax gaps between the self-employed and other workers, and avoiding any future changes to the tax system that widen the tax differentials between employment statuses. Policymakers should also acknowledge where policies designed to tackle the low pay problem among employees risk exacerbating the divide between employee and self-employed. One way to do this would be to extend the Low Pay Commission’s responsibilities to ensure that it is explicitly required to take into account the effects on self-employment in making recommendations on future National Living Wage rate rises.

The ruling has already provoked a debate on the problem of “false” self-employment, whereby firms falsely classify workers as self-employed when they are treated as employees. This must be addressed, but is only part of the story. Not all self-employed people are “falsely” self-employed, just as not all are start-up entrepreneurs about to produce the next big tech company.

Empowering self-employed workers also has an important role to play. Government should also look at how training, better advice on business growth and wider opportunities can help people decide whether self-employment is the correct career path for them. For instance, we find that a low-paid self-employed person is twice as likely to escape low pay a year later if they find a job as an employee, rather than staying in self-employment.

There is also room for unions to support self-employed workers and campaign for better conditions, as they have done in sectors that have longer histories of self-employment, such as the creative industries. Some are already stepping up, with examples including the Independent Workers Union of Great Britain (IWGB) which is seeking recognition from Deliveroo to represent its army of delivery riders. Our report sets out ideas for how unions and similar organisations can be supported to do more.  With the self-employed becoming an ever larger part of the workforce, the government can ill-afford to ignore them.