The Taylor Review of Modern Working Practices makes a number of recommendations for the future of employment law. We analyse those proposals and what they might mean for businesses.

In recent years, the UK labour market has seen an increase in part-time working, self-employment and the use of zero hours contracts, driven in part by the emergence of the gig economy and platform-based working. The question has therefore arisen as to whether existing legislation and case law, which were founded in more traditional ideas of employment, provide an appropriate framework for the modern economy.

In October 2016, the government appointed an independent panel, led by Matthew Taylor (Chief Executive of the Royal Society of Arts and former adviser to Tony Blair), to carry out a review of "modern working practices". Its broad remit was to look at ways to ensure that the regulatory framework surrounding employment, and the support provided to businesses and workers, was keeping pace with changes in the labour market and the economy.

The much anticipated report, which has come to be known as the Taylor Review or the Good Work Review, was published on 11 July 2017. It sets out a number of proposals for reform, with a stated aim of making "all work in the UK economy… fair and decent with realistic scope for development and fulfilment".

The Review runs to over 100 pages and includes an analysis of the UK's current labour market as well as setting out a number of aspirational social policy aims for the labour market moving forwards. It additionally makes at least 30 different recommendations for reform of the employment landscape – some more specific and detailed than others.

We have focussed this briefing on what we consider to be the most noteworthy areas of proposed employment law reform. However, in order to understand the context of the proposals, it is helpful to consider, briefly, the underlying objectives that the Review panel was seeking to achieve.

Good work: the Review's key policy principles

The Review identifies seven key policy principles which underpin its recommendations. The seven principles can be summarised as:

  1. The UK should aim for "good work" for all – a fair balance of rights and responsibilities for employer and individual, with baseline protection for all individuals, while allowing an ability to adapt to innovation and technological change. Consistent taxation is also key to this concept of "good work".
  2. Genuine two way flexibility offered by platform-based working should be protected whilst ensuring fairness for those who work through platforms.
  3. The law should help employers to make the right choices and help individuals to know and exercise their rights.
  4. The best way to achieve better work is responsible corporate governance, good management and strong employee relations.
  5. Everyone should have attainable ways to develop and strengthen their work prospects.
  6. We should develop a more proactive approach to workplace health.
  7. Individuals must not become stuck at the living wage minimum or face insecurity.

The remainder of this briefing considers the key employment law reforms identified by the Review as ways of achieving these policy principles.

Employment status

The question of employment status, particularly in the context of the gig economy, is perhaps the most eagerly anticipated topic considered by the Review. The Review concludes that the current framework works reasonably well, but that it is unnecessarily complicated and that greater clarity would be desirable. Few would disagree with that basic premise, but the difficult question is how to achieve that clarity.

The Review recommends the following:

  • Retaining the current three-tier approach to employment status, but replacing the "worker" category with a new category of "dependent contractors".
  • A change in emphasis to the test for determining whether an individual is a "dependent contractor" – the aim being to introduce greater distinction between employees, "dependent contractors" and the self-employed. For example, it would no longer be necessary for someone to perform work "personally" for them to be a "dependent contractor" (which would avoid the situation where an individual is denied basic employment rights simply because they may provide a substitute to do the work) and, instead, greater emphasis should be placed on the question of control (i.e. who determines the "thing" to be done, the way in which it should be done and the means, time and place for doing it).
  • Updating legislation to clarify the legal tests for the various forms of employment status, rather than relying on a myriad of case law which is open to interpretation. The Review envisages key principles set out in legislation, with regulations and guidance used to provide supporting detail. It also recommends introducing an online tool to provide an individual with an indication of their employment status.
  • The term "worker" is defined differently in different pieces of employment legislation and the Review recommends that these are examined – presumably with a view to achieving greater consistency in the future.
  • Aligning the tax framework with the employment law framework so that, for instance, if an individual is an employee for tax purposes, they should also be either an employee or a "dependent contractor" for employment purposes (i.e. not self-employed).

Notably missing from the Review, though, is any suggestion as to what exactly the legal tests for an employee, "dependent contractor" or self-employment should be. The Review accepts that clearly stating the basis for employment status in legislation will "not be easy", but leaves this unenviable task to someone else. Some observers will be disappointed that the Review fails to set out a clear vision as to how this clarity might be achieved.

Gig economy

The Review also considers the impact of "dependent contractor" status on those operating in the gig economy. It outlines the need to retain flexibility while not undermining the national minimum wage. To do this, the Review suggests applying the rules on output work (also referred to as "piece work") to calculate minimum wage. In simple terms, this involves paying the individuals a "fair" piece rate for each task performed. The output work rules – which already exist in the national minimum wage legislation – are designed to result in an average individual, working averagely hard, successfully clearing the national minimum wage with a 20% margin of error. Crucially, the individual would not need to be paid national minimum wage for each hour logged on to a platform, for example, when there is no work available. The Review did acknowledge that this could create an additional administrative burden for employers.

Alongside this, the Review suggests that companies operating in the gig economy should use the data they collect via their apps to give "dependent contractors" a more accurate guide of their potential earnings, so that individuals can make informed decisions about their work – for example, deciding not to accept work when the algorithms suggest the work will not be financially worthwhile for them.

Protections for vulnerable workers

The Review identifies flexibility as an important aspect of the current UK labour market. However it notes that flexibility can be one-sided in favour of the employer, with the potential consequence that too much risk is transferred to vulnerable workers. The Review states that the UK should instead aim for two-way flexibility which is mutually beneficial. The key conclusions of the Review are:

  • Zero hours contracts should not be abolished, but:
    • The government should ask the Low Pay Commission to consider introducing a higher national minimum wage rate for hours that are not guaranteed. The intention would be to incentivise employers to schedule guaranteed hours where possible, and ensure that workers on low wages are better compensated if additional flexibility is required of them.
    • Reform rules on continuity of service to make it easier for individuals with discontinuous work to accrue the requisite service to access certain employment rights.
    • Those on zero hours contracts should be given the right to request a contract with guaranteed hours after they have been in post for 12 months (similarly, agency workers should have a right to request a direct contract where they have been placed with the same hirer for 12 months). Any such request would have to be considered "reasonably" by the employer, though the Review does not offer any suggestion as to how reasonableness would be judged – a crucial question for a reform such as this to have teeth. Organisations above a certain (unspecified) size should, according to the Review, also have to report on how many such requests they receive and how many are agreed to.
  • Agency workers should receive better information about rates of pay and who is responsible for paying them before they accept work.
  • The government should examine the use of information and consultation arrangements in the workplace to promote good workplace relations, and consider making such arrangements more readily available to workforces by, for example, requiring employers to put formal arrangements in place when requested by just 2% of the workforce (rather than the current 10%).
  • The current ability for agency workers to opt out of receiving pay equal to that which would be paid to a permanent member of staff doing the same job in return for pay between assignments (the so-called "Swedish derogation") should be abolished, as it is too readily abused by agencies.
  • The right to a written statement of terms should be extended to workers as well as employees, with individuals having a standalone right to compensation for their employer's default. Such statements should be given on day one of employment and also include a description of the individual's statutory rights.

Holiday pay

Holiday pay has been – and continues to be – a problematic area. It is perhaps not surprising, then, that the Review touches on some aspects of holiday pay calculation and enforcement. For example, it advocates increasing the reference period over which the average number of hours worked is calculated for the purposes of working out holiday pay entitlement from 12 weeks to 52 weeks, thereby taking into account the seasonal nature of some work.

It also suggests allowing dependent contractors to be paid rolled-up holiday pay – the individual would receive a 12.07% premium on their pay, but would not then be paid separately for holidays. Rolled-up holiday pay is not currently permitted under EU law, but Brexit may provide the UK government the freedom to change this.

The Review also suggests that HMRC should become responsible for the enforcement of holiday pay in order to provide a better route to enforcement than that currently offered by the Tribunal system (HMRC currently has enforcement powers in respect of statutory sick pay and the national minimum wage).

Enforcement

More broadly on the topic of enforcement, the Review also notes the general importance of people being able to enforce their rights (and, as an aside, it expressed a concern about the introduction of employment tribunal fees). To that end, the Review makes recommendations aimed at improving access to justice and the enforcement of awards.

For example, it recommends that individuals should be able to have their employment status determined by an Employment Tribunal without having to pay a fee, with the evidential burden placed on the employer to prove that any claimed employment relationship does not exist. It also suggests that the process of enforcing awards should be simplified, with more onus on the government to pursue the payment of awards, rather than the individual having to do so.

Tax

Whilst noting that specific tax reform was outside its remit, the Review concludes that the current tax system acts as an incentive for practices such as bogus claims of self-employed status by both businesses and individuals. In particular, the Review considered the fact that individuals can pay significantly different amounts of National Insurance for the same work depending on their employment status to be "not justified or sustainable". The Review believes that the level of National Insurance contributions paid by employees and self-employed people should be moved closer to parity and expressly endorses the "principles underlying the proposed National Insurance reforms in the 2017 spring budget" - proposals which the Chancellor of the Exchequer, Phillip Hammond, was forced to withdraw at the time due to political pressure.

The Review does not address the use of personal service companies, but it seems likely that any more detailed review of disparity in the tax system would also encompass this. We have already seen a shift in emphasis and responsibility when it comes to applying the rules relating to off-payroll working in the public sector, and similar changes in the private sector may be on the horizon in the future.

What next?

Perhaps the most striking thing about the Review is the sheer breadth of topics it covers and the fact that the panel has approached those topics in an holistic way, looking overall at the type of labour market we need – flexible, transparent and fair, with a focus not just on the quantity of work but also the quality of the work – rather than identifying quick fixes to isolated problems.

The result is something which, for the most part, simply provides the foundations for further discussion. It is important to remember that the Review makes recommendations only and, in any event, is far from being a policy document which can simply be adopted by the government. We may come to regard the Review as pivotal in reshaping the UK's labour market but it was commissioned, of course, before the 2017 general election with its unexpected result.

The government must now consider whether, how and when to implement any of the recommendations. Theresa May has committed to taking "this agenda forward in the months ahead" and has invited all parties to "engage with the difficult issues" raised – her lack of an outright majority in the House of Commons will make cross-party involvement important if change is to be effected. That said, this is an agenda which is likely to attract cross-party support in broad terms, although differences will doubtless arise on the detail; much debate and discussion will lie ahead before we see significant concrete reform. However, no reform at all is unlikely, so businesses should expect developments and plan accordingly.