A loophole that many self-employed people have used to avoid paying income tax and national insurance in the UK has closed. After a yearlong delay, the IR35 regulation came into force on April 6. It gives larger companies the responsibility for deciding contractors’ employment status, with a view to ensuring they pay the taxes that they are supposed to.
This will reduce the leeway thousands of voluntarily self-employed workers have to avoid tax payments and social contributions. It also makes it harder for companies to avoid taking proper responsibility for these people by denying them employment rights and benefits such as pensions or holiday entitlements, while avoiding the considerable expense of paying employers’ national insurance for them.
The change in the rules for the voluntarily self-employed is mirrored by exactly the same trend regarding the involuntarily self-employed that saw investors criticising Deliveroo’s employment model ahead of its disappointing IPO, and the UK’s supreme court ruling against Uber. The dominant liberal interpretation of the relationship between employers and their workers is becoming less and less acceptable within society. And it raises profound questions about the future of liberal capitalism.
The loophole closes
The new IR35 regulation changes the rules around what is known as off-payroll working for private companies. It puts an end to workers who are really employees voluntarily working as self-employed by establishing their own intermediary company.
Many workers take advantage of the rules to pay themselves very low salaries through these companies and pay most of their income as dividends, meaning they paid far less tax on their take-home pay.
In 2015, the government said that 100,000 workers fell into this category, and only 10,000 were paying the income taxes and national insurance that they should have been. Since then, the number of self-employed people is estimated to have risen considerably.
The IR35 loophole was closed for the public sector in 2017, notably forcing the BBC to convert many celebrity presenters into employees. The same change was supposed to have been introduced for private companies in 2020 but was delayed by a year.
In making these changes, the UK government has shown little sympathy with arguments by some contractors and employers that the benefits of contractual freedoms outweigh the costs. This is comparable to the recent Deliveroo and Uber cases, where investors and the supreme court respectively dismissed suggestions that denying workers their rights in the name of freedom was acceptable.
‘This is what we believe’
The question of contractual freedom and the extent to which an employment contract reflects a power relationship between the employer and the employee is central to liberalism. From a liberal perspective, contracts entered into under coercion are not compatible with the principles of individual freedom. The question is, when can we say that someone has been coerced into an employment contract?
The Austrian thinker Friedrich A Hayek, whose teachings have inspired conservative governments since Margaret Thatcher, adopted a very narrow definition of coercion. In The Constitution of Liberty (1960), he argued that “so long as the employer can remove only one opportunity among many to earn a living, he cannot coerce, though he may cause pain”.
The argument is that to coerce someone into an employment contract, you have to be a monopolist withholding an essential good – the owner of an oasis in the desert, say. All other contracts must be considered to have been entered into by free agents. This means that there is no need for the state to intervene to make them fairer.
Thatcher reportedly enthusiastically endorsed Hayekian views, by pulling a copy of The Constitution of Liberty out of her handbag during a Conservative party meeting and declaring, “this is what we believe”.
Similarly, the arguments in favour of very liberal contracts by Uber, Deliveroo and those opposed to IR35 all have a distinctly Hayekian ring to them. Deliveroo, for instance, has been making the case that its riders value the flexibility that self-employed status gives them.
Clearly, however, such arguments have been losing their clout. Most explicitly, in the Uber case, the supreme court said that, rather than the content of a written contract, what matters in determining the employment relationship is the reality of the power differential between employer and employee.
The court decided that employers can often dictate contractual terms, and workers usually have little scope to negotiate them. Therefore, what Uber presented as its drivers’ choice were not actually choices of self-employed workers, so in realty they were employees.
It was not long ago that chief executives and academics alike were hopeful that the sharing economy, of which companies like Uber and Deliveroo were often seen as heralds, could be both fair and sustainable. Yet collective discomfort with growing inequality, partly driven by the rise in “gig work” and contractors’ high pay, has changed the dynamic.
It could be argued that we are seeing an epochal shift away from the type of liberalism that has been dominant since the 1980s. Since the global financial crisis of 2007-09, academics have reminded us that any social order – including liberal capitalism – is fundamentally a historical phenomenon and as such will eventually come to an end.
These challenges to the employment contract – a key pillar of liberal capitalism – may be signalling that we are moving a step closer to the end of this particular phenomenon. The big question, of course, is what will it be replaced with?
Humans are notoriously bad at reading the signs of their times until they draw to a close – “the owl of Minerva spreads its wings only at dusk” as the German philosopher GFW Hegel famously put it.
What we can say with certainty, though, is that failing to address growing discontent with capitalism will jeopardise both liberal economic ideas like free trade and light-touch regulation, and also democracy itself – by fanning the flames of populism. The new version of capitalism will clearly have to devise a new social contract between workers, businesses and the state. Changing our interpretation of the liberal employment contract is a good place to start.
By: Gerhard Schnyder
Professor of International Management & Political Economy, Loughborough University
By: Luda Svystunova
Visiting Fellow, Institute for International Management, Loughborough University
Gerhard Schnyder receives funding from the NORFACE Network (Grant no 462-19-080).
Luda Svystunova does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article.