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Governance in the labour supply chain

12 December 2016 by Michael Hepburn

Governance in the labour supply chain - read more

Workers in the ‘gig’ economy present new employment law obligations for organisations

A gig economy is an environment in which temporary positions are common and organisations contract with independent workers for short-term engagements. The trend towards a gig economy is well under way.

In the summer, the ongoing Uber case was the first of, perhaps, many gig economy examples of workers taking a services company to employment tribunal over employment rights. With so many new technology services in the delivery, transport and other sectors using new business models it is perhaps no surprise that UK employment law for the individuals involved is uncertain.

Uber vs black cabs

In the Uber case, the workers were classified as self-employed drivers who use the app to connect with passengers. The passenger pays Uber through the app – with the fare calculated by Uber – and then Uber pays the driver. The driver’s agreement with Uber is that each fare creates a direct business relationship between the driver and the passenger, but with specific obligations on drivers regarding their qualifications and the road worthiness state of their vehicle.

The same obligations on qualifications and vehicle state are no doubt prevalent within the black cab fraternity, however, drivers are free to pick up fares where and when they arise. To a certain extent, and subject to local authority approval, they are able to agree the fare with the passenger. In the majority of cases, they are paid in cash and recoup payment straight away.

Employment status

In the Uber case, the employment tribunal ruled on the status of the workers from an employment law perspective. As a result, in the UK, there is now an employment law concept of a ‘worker’ who is someone with less employment rights than an employee but more than a self-employed contractor.

As always in employment status cases, the degree of control exercised is a key element in determining the driver’s employment tax status. Uber certainly exercises some control through the driver agreement over safety and quality of service to passengers, which is perhaps not controversial.

However, the drivers argued that Uber exercises a significant amount of control over their work by the way the app works, giving Uber control over the amount of work they get and therefore their earnings. There were also suggestions that penalties are applied for refusing jobs and that drivers are restricted to certain fixed routes.

Intermediary businesses

Clearly all businesses following an intermediary model will want to follow this case closely – but the final ruling may have wider impacts. If Uber wins, the Government may decide to revisit employment law in this area; with 15% of the UK workforce now categorised as self-employed there is likely to be public support for improving their rights.

Alternatively, a strong tribunal ruling in favour of the drivers may give many self-employed individuals rights as workers across a range of industries, not to mention HMRC potentially challenging Uber for failing to deduct PAYE and NIC correctly, and seek recovery on all payments made to its drivers.

Should employers be concerned? There is currently no statutory definition of employment and decisions on employment status are based on case law. They depend on the specific fact pattern underlying the engagement of the workers. So, if a company operates in the gig economy, this decision needs careful scrutiny as it is likely to affect workers.

Due diligence

On 7 November, HMRC relaunched and updated its due diligence advice to entities that use labour providers. It suggested that providers should undertake regular checks on their labour supply chain, including making sure staff are paid in line with the National Minimum Wage or National Living Wage, verifying the VAT registration of suppliers and reporting any concerns the company may have regarding potential compliance issues or exploitation of staff. It has also confirmed that employers can use a new online form to notify it of any staff outsourcing.

HMRC goes on to say that, as well as the risk of reputational damage, the end-user business could be liable to account for unpaid tax and NICs if the supplier failed to pay these. It gives some advice on how engagers can check the legitimacy of the supplier.

HMRC recommends that engagers should undertake the following:

  • Make sure the labour supply is commercially sustainable so it can meet statutory tax obligations and make a profit
  • Consider the history of the labour supply business – if a previous business failed because it did not pay its tax debts, what changed to stop this happening again?
  • Add a clause to contracts which requires labour suppliers to show evidence that VAT and PAYE returns have been filed timeously and that all the relevant payments have been made to HMRC
  • Ensure appropriate licences are held and are in order – for example, a Gangmaster Licensing Authority licence or a Security Industry Authority licence.

HMRC has always suggested that employers use its employment status indicator tool, which is due to be revamped again shortly, to establish whether someone should be paid on the payroll (as an employee) or not (self-employed).

Ambiguous labels

The Uber case is a reminder that the labels given to individuals are not determinative. Contracts should accurately reflect what happens in practice. It is also inappropriate to base opinions on what others are doing, since HMRC considers every case is different and needs to be considered accordingly.

Although it is anticipated that Uber will appeal the employment tribunal’s decision on worker rights (and a final ruling may be years off), all employers that regularly use self-employed or supplied workers should keep a close watch how such services are commissioned, delivered and managed to ensure that they fully understand the legal obligations that they may create.

Michael Hepburn is Employment Tax Manager at BDO LLP

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