There’s much in the press these days about the so-called gig economy. The gig economy describes the present state where workers need not necessarily be employed by a firm. They can be engaged for the duration of a ‘gig’, after which they stand down until needed again some time later.
Without getting into specifics, the UK working population of 33 million people is roughly divided with a quarter working in each of four sectors - large firm, small and medium sized firm, self-employed and government.
Managers have a choice. They can employ staff or they can dip into the self-employed sector to contract with those seven million ‘gig’ workers to give added business flexibility. Many of those gig workers operate their own limited liability company in which they are the only employee. Others don’t.
The politics of the gig economy
Many on the left of politics argue that the gig economy is morally wrong. Others on the right suggest that it’s one of the vehicles by which many people who want to work, can. They argue that the flexibility it gives is key to the UK’s future growth.
So how does it all operate and how can a manager make best use of this part of the labour market?
Models of business
We shouldn’t think that labour flexibility is anything new. Before the Industrial Revolution there were workers indebted to feudal lords and there were free men who journeyed from place to play, picking up work. Into the twentieth century, we retained many tradespeople (and most were men) who obtained work as and when they could. It was only in the mid-twentieth century and the advent of the post-modern factory that we all embraced the idea of working for one ‘lord’ as an employee.
With the demise of the UK’s manufacturing base and the closure in the late twentieth and early twenty-first centuries of centres of mass production and employment, workers had to again find work as they could. Our economy swung from manufacturing to services and labour flexibility became the watchword. The gig economy was born, with workers once again picking up work here and there.
Today there are two obvious descriptors – employee and sub-contractor - and a further descriptor that’s not quite so simple. It’s the latter – the worker – that causes politicians so much concern. All three types give managers flexibility and essential competitive advantage if managed right.
An employee signs an employment contract and gains employee rights. They have protection under the Employment Rights Act 1996, the employer can expect certain behaviour from the employee, like confidentiality, and the employer automatically owns their work. In return, the employee expects to be paid for the time they’re on duty, even if there is nothing for them to do.
Generally, the core people in any company (including the directors) are employees.
The second type of person is the sub-contractor – the self-employed person entering a business-to-business contract with the firm. Even firms like the BBC have a huge cadre of firms with which they contract, referred to as ‘private service companies’ (PSCs). PSCs employ only one person – the owner. Some people open limited liability companies while others operate as sole-traders. This all came from the days pre-2015 when it was very tax ‘efficient’ for both parties to have the person contract through their own company. In those days, the person could earn up to £40k at a tax rate of just 10%!
Those days have gone, but it is still marginally cost effective to open a company to facilitate billing, since costs like travel and subsistence can be billed to the PSC. Those costs reduce the declared profit of the PSC and associated corporation tax and allow VAT to be claimed back from HMRC. The PSC’s client firm also wins by avoiding employers NI, presently 13.8% of wages.
Sub-contractors come in two forms – those wanting to contract only with one firm as a proxy for employment, often referred to as ‘contractors’, and those running a genuine trading company with many clients. It’s the former that is of interest in this gig economy discussion.
The final, and most confusing type, is the worker. Just to complicate things further, there are two types of worker – those employed by an agency as intermediary and those contracted directly with the firm. The former worker type is covered by the Agency Worker Regulations 2010. Agency workers have a contract with an agency. They are controlled by the employer whilst on assignment, but they are employed and paid by the agency. The latter make their own agreements. To complicate things further, a worker may be self-employed, working freelance or they may be on a seasonal, casual or zero hours contract. Workers are entitled to some employment rights such as holiday pay, unlawful discrimination and comparable treatment to similar full-time employees.
Below we focus more on the worker who reaches and agreement directly with the firm.
Benefits, dis-benefits and opportunities
From the manager’s viewpoint, the key advantage of the 'gig economy' is flexibility. As a result of the flexibility created, he or she can switch labour on and off, almost at will.
There are two downsides. First, most managers are, understandably, disinclined to develop a worker or a sub-contractor. Both must come ready with skills and knowledge. If the manager’s firm needs increased skill and knowledge, the manager must cancel the worker’s or sub-contractor’s contract and find someone of greater competence. Few workers or sub-contractors bother to develop themselves – that, after all, would mean down-time and zero billing for the duration of the training activity. And, to be blunt, most workers and sub-contractors are in it for the money. The relationship is purely economic.
Unless workers and sub-contractors pay to develop themselves, they will, in competence terms, stay static or fall back as their competencies get rusty. Managers must continually seek out new workers and new sub-contract companies to keep their firms ahead. Generally, workers and sub-contractors are engaged for today, with no view of a long-term relationship.
Second, don’t expect commitment from a worker or sub-contractor. Just as the manager can switch labour on and off, the worker or sub-contractor can leave at will (or at least giving notice within the terms of the contract). The relationship is in balance and this does build respect. The relationship is, however, precarious. If something untoward happens or the worker or sub-contractor gets a better offer, they’ll be off.
The psychological contract is much stronger with employees and it’s much easier to build commitment with this group.
Finally, since sub-contractors are running their own companies, they have costs. Unlike employees and workers, they are not paid for holidays, pension, tools, travel or vehicle, insurance, training and development, health insurance, income protection insurance, death in service insurance and other benefits. They also don’t expect to be employed for the whole 260 working days in a year since a significant number of days are often spent finding the next contract. Their rates are therefore generally anything up to twice what an employee gets paid. So, a software engineer paid say £75,000 per annum as an employee would expect around £800 a day as a contractor (a gross pay of £208k if working every day).
The simple risk to the manager and his or her firm is that both HMRC and employment tribunals will apply the ‘duck test’. If a worker or sub-contractor looks like an employee, they will judge them to be so. Such a judgement could mean hefty fines and recovery of unpaid tax for both parties. Managers must be sure to set up the right contract for the right relationship.
There is also a growing swell of tribunal cases that judge that workers should be given more employment rights and associated benefits.
Overall however, managers can employ employees, contract with workers and reach sub-contract agreements with contractors.
Firms can comprise any combination of the three to suit the desired people-management strategy – considering the relevant costs and benefits of each. Generally, most firms have at least a small core of employees. Some are augmented with a sizeable cadre of workers. And many make use of at least a few specialist sub-contractors.
If you’d like to be sure that you get the right contract and relationship with the right employee, worker or self-employed person, call us or email.