The Employment Divide: Is it possible to simplify the distinction between self-employment and employment?

SUMMARY

• The distinction between self-employment and employment is becoming harder to sustain. Even on 2012/13 tax data from HMRC, a third of those reporting income from self-employment also report income from employment.
• Those two categories themselves simplify and often distort a much more complex labour market in which people are working and being paid in a range of different ways, including limited company contractors and workers employed through an umbrella company.
• The challenge this variation poses is that our tax system and the rights and protections offered through employment law may no longer fit the reality of the labour market.
• At the very least, people may look and behave very much like employees and yet lack the rights and protections of employees.
• Equally, they may in fact be self-employed – without a single employer responsible for giving them tasks or paying them – and yet fail to benefit from the tax treatment of other self-employed people.
• The aim of our project is to examine how widespread these mismatches are, what issues they raise, and how they might be tackled.

EARLY HIGHLIGHTS FROM THE ANALYSIS

• When we look for differences in the data, aside from employment status, between self-employed workers and employees, they can be difficult to find. The variation within each employment status may be more significant than the difference between them.
• There are nevertheless some important differences we do observe. Self-employed are less likely to be paid for overtime: 71% of self-employed who work overtime do so unpaid.
• Self-employed are less likely to receive training: only half as likely as employees.
• They take fewer days off sick: half as likely to take sick days.
• They are less able to save money from their earnings: 11 percentage point gap between self-employed and employees.
• We might assume that self-employed experience higher levels of autonomy at work as part of the trade-off for being self-employed. But, while broadly true, 1 in 5 self-employed do not report a lot of autonomy over their job tasks; and 1 in 3 do not report a lot of autonomy over working hours.
• The nub of the challenge may be that a significant proportion of self-employed do not enjoy the autonomy associated with self-employment; and yet also fail to enjoy some of the rights and protections that those in employment, with similar levels of autonomy, have access to.

POLICY OPTIONS TO EXPLORE

• Tackling this may require reducing the financial incentive for firms of treating workers as self-employed rather than employees. This could be done over time by equalising the level of National Insurance Contributions.
• Another approach could be to limit the option of self-employment to higher-paid workers, where we might more confidently assume that they have the bargaining power to access the benefits of self-employment while trading off rights and protections. This too would have to be a gradual change.

Thinking about such options, and we will develop others during the project, is likely to be appropriate as the distinction between self-employment and employment will come under further pressure in the years ahead.