What laws surrounding gig economy should startups be aware of, and what are the pitfalls for startups reliant on this type of workforce?

calculator-1680905_960_720The rise of the “gig economy” where short-term, flexible and somewhat unpredictable working patterns are prevalent at the expense of basic employment rights has hit headlines recently in three high profile employment cases.  How does this affect the new and increasing number of startup businesses which are reliant on this type of workforce?

Companies such as Uber, Ebay, CitySprint and Hermes are all examples of employers using technology to implement new and non-standard working arrangements.  As a result of new working practices and uncertainty around the definitions of “employee”’, “worker” and “self-employed” in employment law, businesses may be encouraged to try and impose a particular status which is more closely related to what they wish the relationship to be rather than what the relationship is in actual reality. These businesses do not view themselves as employers and do not wish to owe any basic employment duties such as holiday pay or sick pay to staff whom they contract to provide their services.

This was the case in the Uber decision where driver employment contracts had been drafted stating that each Uber driver controlled their own fate and Uber was merely their client.  The Employment Tribunal disagreed stating that

“the supposed driver/passenger contract is pure fiction which bears no relation to the real dealings and relationships between the parties”.  

The Law Society’s Response to the Business, Energy and Industrial Strategy (BEIS) Committee stated

what this judgment has clearly illustrated is that Employment Tribunals will disregard a company’s classification of its staff as self-employed if in reality they are workers or employees, and this is true even if the company makes the worker sign up to a document stating that they are self-employed.”

New businesses should therefore be cautious to practice what they preach.  If they impose restrictions and work practices which in reality reflect a different relationship to the one they have on paper, then they risk tribunal claims down the line from their “workers”.  If an Employment Tribunal reclassifies these self-employed staff as workers or employees (as in the Uber, City Sprint and Pimlico Plumbers cases) this will have major financial implications.  

Gig Economy and Startups

The additional costs of providing workers with basic employment rights such as sick leave, maternity pay, holiday pay and protection from unfair dismissal (and potentially employers’ National Insurance if HMRC agree with the Employment Tribunal) could add 10-20% to the wage bill and this will inevitably restrict investment and growth.  While an established company the size of Uber will have the financial strength to absorb this, for a startup it could mean the difference between success and failure of the business model.

Finally, while the downside of getting employment status wrong can be significant, we should bear in mind that self-employment is still a perfectly valid way of working.  Many thousands of businesses use genuine self-employed contractors to meet variable demand and skill shortages and as long as the contractual arrangements match the reality of the situation there should be nothing to fear from the courts or HMRC.