Employment status reform – which way now?

The Government has published the long-awaited outcome of the 2018 employment status consultation, which followed the Taylor Review as part of the Good Work Plan. The Government concluded that ‘now is not the right time’ to change the labour rights and tax employment status frameworks. Instead of reforming how we define ‘employment’ in light of modern working practices, the Government has published new guidance and will keep the issue under review. Given the current challenges facing employers, many will be relieved at not having to deal with changes to how employment status is determined at this point in time. However, other recent developments mean there’s still a lot to keep employers busy. This article reviews some of the key issues.

The Government’s consultation response

There are three statuses for employment rights: employee, worker and self-employed; but only two for tax: employed and self-employed.

The 2018 consultation sought views on whether changes to how employment status is determined would achieve greater clarity and certainty, and whether the tax and employment status tests should be aligned.

A large number of respondents to the consultation supported employment status reform. However, while acknowledging that the current frameworks are complex, and that aligning the employment rights and tax employment status frameworks could have advantages, the Government noted there was no overall consensus on what action it should take.

Therefore, in light of the UK labour market’s evolution since the Good Work Plan was launched, coupled with economic pressures for businesses caused by the COVID-19 pandemic, the Government determined that “now is not the right time” to reform employment status. The Government believes that retaining a three-tiered framework for employment rights creates flexibility while affording core mandatory employment rights, such as National Minimum Wage (NMW) and holiday pay, to individuals in more casual employment.

However, alongside the consultation outcome, the Government published new guidance on employment status and employment rights for individuals, employers, and HR/legal professionals. These aim to provide “enhanced detailed guidance to help people work out which category they fall into and to demystify case law”.

The Government has also updated its ‘Calculating the Minimum Wage’ guidance to include a specific section on gig economy workers to ensure the correct legal interpretation of working time for NMW purposes. Employers should familiarise themselves with this new guidance.

Additionally, the Government will, in the longer-term, explore options to improve the employment status system for tax.

What’s next for businesses?

The consultation outcome, which some will view with relief and others as a missed opportunity, doesn’t signal an end to developments in employment status or wider employment and Off-Payroll Working (OPW) issues.

Longer term reform is still a possibility – and in our view desirable – and recent developments in holiday pay, together with OPW compliance, continue to demand businesses’ attention.

Key points for organisations to consider as they monitor and respond to the changing environment include:

• The Future of Work Review: launched in May 2022, this review aims to identify key questions on the future of work that the Government should prioritise, provide a detailed assessment of selected issues, and make recommendations to guide long-term strategic policy making (potentially including the role and speed of automation, and how the Government could build on flexibility in the labour market to encourage productivity and growth whilst ensuring appropriate worker protections);

• Holiday pay developments: in a recent case, the Supreme Court held that part–year workers under permanent contracts are entitled to holiday pay calculated as 5.6 times their average week's pay (as 5.6 weeks is the minimum annual leave entitlement under the Working Time Regulations), rather than to pro-rated holiday pay calculated by multiplying the pay for their hours worked by 12.07 percent – employers with term-time, flexible or part-year workers should review their holiday pay calculation methodology and payroll processes to ensure they comply with the Supreme Court’s recent ruling and, if not, consider what steps might need to be taken to regularise the position of affected employees; and

• Recent OPW case law: The Court of Appeal’s recent decision in Atholl House Productions Ltd made important points on how the various case law tests should be applied when determining an engagement’s OPW status, which must be applied in future cases – organisations that engage contractors should ensure that the key principles are considered carefully and reflected in their approach to OPW status determinations and disputes, as well as in supporting internal training programmes, to demonstrate they take ‘reasonable care’ in light of HMRC’s enforcement regime.    

For further information please contact:

• Donna Sharp

• Eloise Knapton