In just a few short years, gig economy companies (GECs) such as Uber, Deliveroo and Airbnb have become part of the fabric of modern life, using large numbers of individuals engaged on self-employed contracts to provide services to us all with just a few taps of our smart phones.
However, following a number of recent court/tribunal decisions involving GECs and the individuals that work for them, the Courts have now established that such individuals are “workers” and not actually self-employed. These decisions highlight the care and caution that businesses must exercise, whenever they are attempting to engage individuals as genuine self-employed contractors/consultants.
Benefits to GECs of using self-employed individuals in the gig economy
The benefits to GECs from engaging individuals on a self-employed basis are many, and have been instrumental in GECs becoming so successful in such a short space of time. They include:
- Employee/worker rights - self-employed contractors are not entitled to many basic employees’/workers’ rights, such as holiday/sick/maternity pay, the national minimum wage, enrolment in a pension scheme and unfair dismissal rights. This helps to significantly reduce a GEC’s staff costs and potential staff liabilities.
- Remuneration - self-employed individuals only need to be paid for the work that they do, not the time that they spend available to work. Again, another factor which obviously reduces a GEC’s costs.
- Taxation - an employer's National Insurance contributions are not chargeable in respect of fees paid to self-employed contractors. This significantly reduces a GEC’s tax liability to HMRC.
- Ability to respond to customer demand - when customer demand increases, GECs can simply allocate more work to its self-employed contractors, allowing the business to adjust quickly to changes in customer behaviour.
Some individuals also prefer to work for GECs because of the flexibility that they can offer them, whilst customers like them because they can obtain goods and services simply by using an app on their smart phone.
How can you tell whether someone is an employee/worker or self-employed contractor?
Broadly, there are three factors that are prevalent in an employer/employee relationship which do not form part of the self-employed contractor relationship. These are:
- Mutuality of obligations - one party must provide work and the other party must accept and carry out that work in return for pay.
- Personal service - the individual must perform the work personally and cannot get someone else to do their work for them.
- Control - one party must exercise sufficient control over the way the individual performs their work, including when, where and how.
However, to properly determine whether an individual is an employee/worker or a self-employed contractor, the Courts must take a number of other issues into consideration and make an overall assessment in consideration of all the facts of the case.
GECs often argued that because their staff could choose which jobs they undertook and what hours they worked, their staff had to be self-employed contractors as the GEC did not have sufficient control over them. However, the Courts have now held otherwise, for example, in the case of Uber, they cited reasons such as:
- Drivers had to accept or cancel trips on Uber’s standard terms;
- There were a number of conditions imposed on drivers in relation to the routes they could take, how they fixed their fare and what vehicles they could use;
- Drivers were subject to a rating system which amounted to a performance management tool;
- Uber bore the losses where there had been an instance of fraud or where a refund was paid to the customer for something that was not the driver’s fault. This would not have been the position if the drivers were genuinely self-employed.
What steps can you take when drafting contracts of engagement to ensure individuals are classified as self-employed contractors?
At the outset, it is important to document the relationship in a written contract. Whilst the terminology used in a contract (i.e. “contract for services” rather than “contract of employment”) is not a guarantee that it reflects the “real” relationship between the parties, it will at least help to show what type of agreement you intended to enter into.
In terms of the content of the contract, inclusion of the following provisions will help you to argue that the individual you are engaging is a self-employed contractor rather than a worker or employee. These provisions can be remembered by the acronym “PIONEERS”:
- Payment – determine the individual’s fees by reference to a daily rate or the particular services the individual is providing, as opposed to a retainer fee or one that is based on the number of hours spent by the individual performing the services.
- Indemnity – require the individual to indemnify you for income tax and employee's National Insurance contribution (NICs) liabilities, and penalties and interest in respect of the same. An employer cannot do this with an employee so including a right to do this strongly suggests the individual is engaged as a self-employed contractor.
- Obligation to provide/perform work – whilst it will not always be possible depending on the relationship between the parties, if the individual can refuse work offered to them this is a strong factor to suggest there is no mutuality of obligations and therefore no employer/employee relationship.
- Non-exclusivity – allow the individual to carry out work for others – do not include exclusivity clauses or restrict who the individual can work for once their contract with you is terminated.
- Expenses – require the individual to bear the cost of any expenses it incurs in providing any services e.g. travel, staff and equipment.
- Employee benefits – avoid the provision of employee benefits such as sick pay, holiday pay and use of company cars.
- Restrictions – Keep restrictions on where, when and how the individual performs their services to a minimum e.g. minimum hours per week/month and fixed hours of work.
- Substitutes – include a right for the individual to substitute someone else to do the work for them.
The potential savings that engaging individuals on a self-employed contractor basis can create are considerable and it is certainly advisable to consider if engaging self-employed contractors is the right approach for your business. These savings can be enjoyed by businesses in industries other than the gig economy, so it is worth investing the time to understand how to do this successfully. The implications of getting it wrong can result in you having to completely restructure your business – a prospect that may be necessary for Uber (and other GECs) unless it can successfully overturn the recent decision of the tribunal which held that their personnel were workers, and not, as was intended by Uber, self-employed contractors.