I recently attended an ICAEW Tax Faculty debate on 'Employment Status – what’s the answer'. As I listened to the debate, I began to wonder whether in fact there ought to be an answer.
The concept of employment arises in three distinct areas, employment law, social security and tax. But it does not work satisfactorily in any of them. The Taylor Report on Modern Working Practices recommended that a worker’s status needed to be more readily understood. But his terms of reference specifically precluded him from making recommendations on tax – albeit that he could not resist the chance to express some views on this. And my recollection of his report is that he did not suggest a common definition of employment. It was therefore odd that the government should have issued in February a consultation on “Employment Status” badged jointly by the Department for Business, the Treasury and HMRC, which asks whether there should be a common statutory definition of an employment.
When a client seeks my view on something he intends to do, the first thing I normally ask is what he is trying to achieve. This is because in my experience clients often do not properly identify the problem before devising a route to escape what they perceive that problem to be, with the result that their proposed escape route is not necessarily the optimum one.
Employment rights are designed to protect workers from exploitation. Parliament not only wants to protect employees but also individuals who perform personal work or services for another party. The Employment Rights Act 1996 calls such a person a worker, so the Act applies to both employees and workers. Actually it would work just as well if it referred only to workers and amended that definition that excludes an employee from being a worker. So a common definition of an employee is unlikely to clarify anything when it come to employment rights. Indeed, in the recent Supreme Court decision in Pimlico Plumbers Ltd v Smith, Mr Smith was held not to be an employee but nevertheless to be entitled to employment rights as he was a worker.
Social security law is intended to protect people against unexpected disasters. It largely derives from the 1945 Beveridge Report. It was initially funded by National Insurance which was devised as insurance; employees would pay a weekly insurance premium to insure against sickness, unemployment, and death. Again, employment was deemed not to be the appropriate test. The Categorisation of Earners Regulations extend the insurance coverage to some people who are not employees and exclude some that are.
Earnings from employment were not initially taxed at all. We taxed only trades, and later offices also, but the income from employment was too small to bother with. Accordingly when employments were brought into the tax net, the term was intended to cover earnings for work done by a person who was neither a trader nor an office-holder. The income tax agency rules, which tax an individual as if he were an employee, do not adopt the employment tests at all; they use a different test to identify who should be deemed to be an employee. Accordingly the concept of an employee is not actually a helpful one; the law uses it as a starting point and then different laws amend it in different directions.
That is not wholly right. The concept of employment untrammelled is used in relation to the payroll tax on employers (called Secondary Class 1 National Insurance, but not part of that insurance system). But that is its only use, and Mr Taylor was not particularly concerned that employers might not understand employment status.
Surely what we really need to do is not to try to devise a statutory definition of employment which will not be fit for any of the purposes for which the word is used, but to use the term “worker” for employment rights, and “contributor” for National Insurance, leaving employment as a pure tax concept. It would be far easier for the man in the street to understand his status if we were to remove the mistaken impression that the word employee can simply be transposed into different legal areas. The reality is that it cannot unless we drop the objective of giving employment rights to a wider group of people or of giving social security benefits to a different wider group of people (many of whom are utterly confused by why they are forced to pay insurance to the State against the insured risks involved).