False Self-employment Status

Chuka Umunna Excerpts

Friday 4th March 2011 Commons Chamber

[Mr Chuka Umunna (Streatham) (Lab)]

Before starting my speech, I should declare an interest: before being elected to this august House, I practised for more than half a decade as an employment law solicitor, and advising on these issues was very much my bread and butter. I thank the GMB union, of which I am a member, and UCATT, a construction workers union, which I am proud to say is headquartered in my constituency, for providing me with valuable information and assistance in my preparation for the debate. I also thank the fine national newspaper, the Daily Mirror, which is running an excellent ongoing campaign against false self-employment. It, too, has been most helpful.

At the outset, I ought to explain for the record what I mean by self-employment. The law makes a distinction between contracts of employment and contracts for service: in the former, the individual is, obviously, employed, and in the latter they are not. There is no set test in law for an employment relationship to exist—I know this because it has created a huge amount of litigation that has kept my profession in practice for some time.

The courts take into account a number of factors, some of which are given more credence than others. First, of particular importance are features in the relationship that are consistent with there being employment—for example, an obligation on the individual to do the work personally and exclusively and the obligation on the employer to pay wages. Secondly, the degree of control exercised over the worker by the other contracting party is also quite significant—for example, control over when, how, where and to what standard the service is provided. Finally, one factor that has become increasingly important is the mutuality of obligation between the contracting parties; there is an obligation on the employer to provide work and on the worker to do it.

Why does this all matter? It is hugely important, because employment is an individual’s passport to a plethora of protections and rights that have been put in place over the years to afford people protection in our market-based economy so that it works in a more balanced way, not just for the rich and powerful, but for everyone. Many of those rights and protections were introduced at the behest of the Labour movement. When people talk down our trade unions in this country, they would do well to reflect on how they have helped deliver for working people over the decades.

Some of the key rights and protections include the right to claim unfair dismissal; the right to a redundancy payment; the right to maternity, paternity and parental leave, which various Prime Ministers have taken advantage of in the past couple of Parliaments; the right to a minimum period when leaving employment; and the right to protection on the insolvency of an employer, which has been particularly relevant during the recent recession. I cannot emphasise enough just how important these rights and protections are—I know that from practising employment law—but many people take them for granted.

In my experience, the majority of employers running businesses do not wish to deprive employees of the rights and protections that I have discussed, yet one attraction for employers, in avoiding the employment relationship, is that they as an employer avoid all the accompanying obligations. Furthermore, financially, if they avoid the employment relationship, they avoid having to pay employer’s national insurance.

Admittedly, there are employees who seek to avoid employment, and historically some have sought to do so to avoid paying income tax, but in my experience they are very much the exception to the rule. What is becoming clearer by the day is that we in this country have a problem with a substantial minority of employers falsely declaring their staff to be self-employed to avoid their obligations to them. That is why I call it false self-employment. Others refer to it as bogus self-employment, but I do not like the phrase, which is why I prefer to refer to it as false self-employment.

The problem is particularly pronounced in the construction industry, and I know that partly through practice, I suppose, but also through the information and evidence that UCATT has given to me. About 50% of construction workers are self-employed in this country, about twice the proportion of workers in the construction industries of other western industrialised countries. In fact, self-employment in construction in this country is between two and three times higher than that in any other advanced country’s building industry, including in the famously flexible US labour market. UCATT estimates that about half of those employed in construction in this country—possibly up to 1 million workers—are in false self-employment.

Other sectors in which false self-employment features highly include retail, cleaning and aviation, and in factory and agricultural workplaces. Last year, the previous Government estimated that the Exchequer could be losing up to £350 million in taxes as a result of such practices. In fact, research by the university of Essex suggests that that is a gross underestimate. It thinks that in reality the fiscal loss is far in excess of £1 billion per year, and that is extremely relevant in the context of the Government and hon. Members on both sides of the House wanting to reduce our public sector debts.

Let me give just one example: Ryanair. I have no doubt that many Members will have travelled on a Ryanair flight. I have, and perhaps I should not go into my other views on the airline, but the Daily Mirror reports that up to half of Ryanair’s pilots are not on the staff roll but are hired by an agency called Brookfield Aviation International, based in Epsom, Surrey. One self-employed pilot there tells of how he spends all the 900 hours that he is legally allowed to fly for Ryanair in the cockpit, how he works when he is told to, and how he has to take holiday when the airline lets him, but the company treats him as self-employed, and he says that he is afraid to challenge that state of affairs, because in his words:

“If you rock the boat you can be shown the door.”

A more widespread example, which we see all around us whenever we are out and about in London, is that of courier drivers. Daniel, who goes under a different name in the Fair Work Coalition’s paper on the issue, which I urge the Minister to read, is one such courier. He is married with two children, and until his job finished abruptly he was a driver for a courier firm making deliveries throughout the UK. He was dependent on the firm for his vehicle, and the company dictated the hours that he worked, but he was told that he was self-employed and responsible for his own tax and national insurance. His hours were long, unpredictable and unsociable, and he was often paid at well below the minimum wage rate that he was promised.

There is so much that I could go over, because this is a massive topic, but I do not have the time. I should be grateful, however, if the Minister could respond to a few questions. Generally, what is the Government’s approach to the issue? What is their assessment of the current situation, and what action, if any, are they willing to take to end false self-employment in Britain today?

More specifically, in relation to the enforcement action that Her Majesty’s Revenue and Customs takes against employers seeking to avoid their tax and PAYE obligations as I have described, the Exchequer Secretary to the Treasury said in answer to a parliamentary question in January that HMRC employs just 39 employee status inspectors. Given the scale of the problem, surely that number has to be increased drastically. I imagine that the extra revenue would more than cover the associated costs of doing so. If the Government had that extra revenue, perhaps they would not have to impose all their austerity measures. Does the Minister agree?

The previous Government consulted on proposals to introduce legislation so that workers in the construction industry would be deemed to be in receipt of employment income for income tax and national insurance purposes, unless certain criteria were met. Will the Government take forward those proposals? If not, why not?

The previous Government set up the Gangmasters Licensing Authority in 2005 to protect and enforce workers’ rights in the agricultural, horticultural and shellfish industries. Its functions include ensuring that false self-employment in those sectors does not proliferate. Are the Government prepared to explore an expansion of the remit of the Gangmasters Licensing Authority to include other industries such as construction?

Many people think that the employment agency standards inspectorate, which exists to protect agency workers, is an inefficient regulator. What is the Government’s view of that, and what action will they take on the matter?

This issue is of such importance because many of those who are forced into false self-employment work in low-paid professions and need the protection and rights that are afforded by employment. Many of those people are my constituents. It is also in the interests of businesses, in particular small and medium-sized enterprises, to clamp down on this practice, because false self-employment gives an unfair competitive advantage to businesses that disregard their PAYE and national insurance obligations by engaging workers in this way. Of course, there is a corresponding disadvantage for businesses that properly engage their workers and employees.

Before I wrap up, I want to say something to the Minister. When discussing almost any issue, Government Members and Ministers raise the point with Labour Members that the previous Government did not take sufficient action in a certain area. Although the previous Government achieved a lot, I will not pretend that they fully resolved this issue before losing power. However, I think the Minister will agree that what my constituents and working people up and down the country who are listening to this debate will want to know is what the coalition Government who are now in power will do about this problem. I urge this Government to get a grip of the situation.

[The Parliamentary Under-Secretary of State for Business, Innovation and Skills (Mr Edward Davey)]

I thank the hon. Member for Streatham (Mr Umunna) for raising this important issue. Like him, I think it is important that we debate this matter, so I congratulate him on securing the debate.

I make it clear to the hon. Gentleman and to the House at the outset that the Government do not condone false or bogus self-employment. If an individual is wrongly categorised as self-employed when they are a worker or an employee, it has implications for the individual, the employer and the Exchequer, as the hon. Gentleman explained. As self-employed people effectively pay a lower rate of tax and national insurance, and because engagers pay no employers’ national insurance, there will always be those who try to present an employment relationship as self-employment.

The terms and conditions of any employment should reflect the reality of the employment relationship. The true economic activity undertaken by an individual should determine how they are taxed. Those who are working under employment terms should be taxed as such. That ensures that people receive the appropriate employment rights and contributory benefit entitlements, and that they pay the right tax and national insurance. It is not a matter of making a choice about someone’s employment status; their status should reflect the reality of the relationship between the parties.

Employers should be aware that anyone who incorrectly treats a worker as self-employed is liable for that worker’s tax and national insurance contributions, and may be liable to penalties. An individual worker can also pursue a claim for employment rights through an employment tribunal or an enforcement body, as appropriate.

Of course, there is guidance on employment status in relation to tax on the website of Her Majesty’s Revenue and Customs, and guidance on employment rights on the direct.gov and Business Link websites. The direct.gov website includes pen pictures of key groups, to help people understand their own status. We have also made information and guidance available through the ACAS helpline. I believe that greater awareness of obligations, penalties and rights for both workers and employers is the best mechanism to avoid abuse, along with an effective enforcement regime.

I think the hon. Gentleman will agree that it is for businesses to decide the most appropriate arrangements for engaging workers. The Government should not promote a particular approach but should ensure that they have the right enforcement mechanisms in place.

[Mr Umunna]

I completely agree with the Minister’s points about public awareness of the issue. One of my questions to him should have been what the Government were doing about that, and I am encouraged by what he has said.

In practice, I was aware of the existence of much of what the Minister has talked about, but I found that clients often were not. Will the Government consider advertising in newspapers and magazines and on the television the information that is available? Although it exists, I believe there is a lack of awareness of where it is.

[Mr Davey]

I have to say that people who want to find it can find it very easily, but I think some people may want to avoid finding it. Indeed, that was the message of the hon. Gentleman’s speech. There is great availability of information—I have mentioned a number of websites, but there are other sources of information for people to turn to. I agree with him, however, that raising awareness is important.

It is essential that we do not lose sight of the fact that legitimate self-employment is a key part of the UK labour market. I know that the hon. Gentleman does not disagree with that. Nearly 4 million people in the UK are self-employed, which reflects the UK’s tradition of entrepreneurship. The legal and institutional features of the UK, including its competitive markets and employment framework, have delivered diversity and dynamism in the labour market, which allows more people to find a job that suits them. That has contributed to the UK having higher employment, at 70.6% of the total working-age population, than most other OECD countries, whose average is 64.8%, and still lower unemployment, at 7.8% compared with an 8.6% OECD average.

Like all other forms of employment, self-employment consists of a wide variety of individuals with a range of activities and capacities. The spectrum ranges from individuals working for themselves to people running multinational businesses and employing a substantial number of employees. The self-employed are not generally covered by employment legislation, because they are their own boss. They do, however, benefit from key protections such as the right to work in a healthy and safe environment and protection under discrimination legislation. The rights and responsibilities of the self-employed are governed by the terms of their contract with their client or customer.

Self-employed people are usually identified by the fact that they are in business for themselves and provide a service to multiple clients. They are generally more independent workers than others, and they have far greater control over how and when to deliver a service and who delivers it. They are usually better able to protect their own commercial interests, although they bear any financial risk from the business that they operate.

A self-employed person must register with the tax authorities, submit an annual tax return and account for their own tax and national insurance payments. The hon. Gentleman will be aware of such requirements from his previous work. Taxation is clearly a matter for the Treasury and HMRC, but as I said earlier, any employer who incorrectly treats a worker as self-employed is liable for their tax and national insurance contributions. If they do not meet those liabilities, they could be subject to penalties. That is the law at the moment, and it is a strong one.

I hope that the hon. Gentleman accepts that the Government recognise that false self-employment exists—it is difficult not to do so. As I think he said, in July 2009 the previous Government undertook a consultation, through the Treasury and HMRC, on the problem in the construction sector, to which it is considered particularly relevant. Officials are currently in the process of reporting back to Treasury Ministers, so I do not have an announcement for the hon. Gentleman, but I know that those Ministers are examining the matter.

The hon. Gentleman asked whether the Government should extend the Gangmasters Licensing Authority to cover construction. We had a long debate a few months ago on the Gangmasters Licensing (Extension to Construction Industry) Bill, which the hon. Member for Midlothian (Mr Hamilton) promoted as a private Member’s Bill, in which I explained to him that the Government did not think that such an extension was a good idea. Licensing bodies should be considered only when certain conditions are met. There must be evidence that existing regulation is inadequate and evidence of significant abuses of employment rights; confidence that the licensing system would be a proportionate and effective way of tackling the problem; and any scheme must be practical, enforceable and affordable. In that long debate, I set out why the proposals for extending the GLA to the construction industry did not meet any of those key conditions.

The hon. Member for Streatham suggested that the employment agency standards inspectorate is not seen as an effective regulator, but I think it does a good job—it is a key part of regulatory safeguards. Employment agencies, as other businesses, must comply with the national minimum wage regulations, which are rigorously enforced by HMRC. As an indication of that, I can tell him that in 2009-10, HMRC identified more than £4.4 million in arrears for more than 19,000 workers. It is making full use of new penalty powers to fine businesses that are in breach of the regulations. In the first 10 months of this financial year, HMRC issued 761 penalty notices, which is an average of 76 each month—HMRC is playing its role.

Employers must adhere to the special employment agency regulations enforced by the employment agency standards inspectorate of the Department for Business, Innovation and Skills, which both responds to complaints from agency workers and undertakes proactive, risk-based inspection, increasingly in partnership with HMRC. The agency has powers to prosecute and prohibit individuals from running agencies. Since April 2010, nine individuals have been prohibited from doing so, and more cases are in the pipeline. The regulatory framework, therefore, is active and working, and it is bringing bad employers to book.

[Mr Umunna]

The Minister spoke of my request for the remit of the GLA to be extended to cover construction. I sense from his comments that there is a problem in that industry. If he accepts that the status quo is not particularly satisfactory—he has made the Government’s position on extending the GLA’s remit clear—what does he propose to do about that industry?

On HMRC, does he think that 39 inspectors are sufficient given the scale of the problem? Will he expand on the Government’s assessment of that? Does he think that the £350 million fiscal loss estimate given by the previous Government is correct, or does he believe that it is a gross underestimation, as many trade unions do?