Published by Ben Dobson on 12 October 2016
- Our Work
- The Reformer Blog
3 November 2016
Last week’s Uber tribunal ruling – that two of its drivers are technically employed rather than self-employed – has implications stretching far beyond Uber drivers, raising a much wider question about the adequacy of social security for dependent self-employed people. Unfortunately, the debate so far has seen a binary split between support for the status quo and affording Uber drivers full worker status. Focus should instead be on reforming the social security system, so that gig economy workers and self-employed people that are similarly dependant on one company have access to an adequate safety net without inhibiting the Government’s aim to embrace the sharing economy.
The decision to give Uber drivers worker status including holiday pay, rest breaks and the National Minimum Wage (NMW) threatens the business model of on-demand platforms, who offer a near-instant service at a low cost precisely because gig workers are not employees but are paid per job. This means they are 100 per cent productive from the company’s perspective, which enables them to charge low fares and expand their workforce almost limitlessly, as they are protected against demand fluctuations and paying drivers when they are unproductive. If Uber drivers are workers who must receive NMW even for times when they do not have a passenger, they are no longer 100 per cent productive. In fact, a recent study of UberX drivers estimates that over one third of driving time is spent without a passenger – time for which the ruling suggests drivers should be paid. In response, the cost of paying for unproductive workers is likely to be passed to the consumer in higher fares, and the number of Uber drivers is likely to be significantly reduced.
This is worrying not just because it would take an excellent service away from millions (1.8 in London alone) of users, but also a flexible way of earning money away from thousands of people, three-quarters of whom reportedly prefer being self-employed. And though one may point to high-profile examples of dissatisfied drivers, we may infer from them continuing to provide their services that, even for them, it is preferable to their next best alternative. For these people, driving Uber out of the UK will have no positive impact.
If the Government remains committed to encouraging the gig economy to thrive, policymakers should instead consider whether it is appropriate for the social security system to offer more generous support to dependent than normal self-employed people, in recognition of their reliance on the contracting company and the benefits they generate for them.
Social security for the self-employed
Self-employed people in the UK – both dependent and non-dependent – typically enjoy fewer financial security benefits than employees. Most notably, they do not receive statutory sick or holiday pay, and nor do they benefit from an employer pension. They are also ineligible for higher-rate Jobseekers’ Allowance (JSA) if they become unemployed.
However, as the Social Security Committee have highlighted, they also pay lower average National Insurance Contributions (NICs) than employees (see Figure 1).
Figure 1: National Insurance Contributions as earnings increase
Furthermore, self-employed people are entitled to claim all state social security benefits except higher-rate JSA. Therefore, though unprotected, for example, by statutory sick pay, self-employed people can claim Employment and Support Allowance (ESA) or Universal Credit (UC) if they are unable to work owing to sickness, just as employed people can.
However, awareness of eligibility for social-security benefits has been found to be low amongst the self-employed, and the protection they receive is, in reality, very minimal in comparison with employees. For example, if a self-employed person cannot work through illness, they cannot receive UC until they go through a seven-day waiting period and a month-long assessment period. This means the system provides no support in cases where illness lasts less than a week, and, even for more prolonged illness periods, it requires self-employed people to endure a period of at least five weeks without cash flow. This is particularly problematic given that the self-employed disproportionately have low incomes: around 20 per cent earn under £100 per week, compared with only 5 per cent of employees.
Traditionally, there has also been a tension between means-tested social security and people with fluctuating or unpredictable earnings. As self-employed people have no guaranteed income, they cannot know exactly how much they will earn in a year until it has ended. Therefore, assessing eligibility for means-tested in-work benefits, such as Working Tax Credits, was until recently done by taking the prior year’s total earnings as a proxy for how much the person will earn in the coming year, and then adjusting retrospectively if it ends up being significantly different (over £2,500 more or less) to the previous year. Retrospective repayments in instances where earnings surpassed the previous year commonly caused financial difficulties.
The introduction of ‘Real Time Information’ (RTI) has partially resolved this problem. As employers and self-employed people are now required to provide HMRC with live earnings updates, the amount of in-work benefit payable is much simpler to accurately calculate.
However, under UC, RTI will only be used to calculate benefit eligibility for those earning above a ‘minimum income floor’ (MIF). This is an assumed level of earnings calculated using the NMW applicable to the individual, and the number of hours they are expected to look for and be available to work. When calculating eligibility for in-work UC, the highest of the MIF or the person’s actual earnings is used. The Social Market Foundation have estimated that around one fifth of families with an individual whose main job is self-employment are claiming in-work benefits that will be replaced by UC, and that, of these, 39 per cent will earn less than the minimum income floor. These households will therefore lose out as UC is rolled out.
It is clear, therefore, that limited support is available for low-paid self-employed people. This is likely to include many gig economy workers now and in future as the fastest growing sectors of the gig economy are relatively low skilled. Of course, self-employed people cannot enjoy all the same benefits as employees as they do not have an employer to bear the costs of statutory benefits and extra NICs. This is the major ‘con’ for which increased autonomy and the ability to take a greater portion of your economic output are the competing ‘pros’ of self-employment. However, as dependent self-employed people are constrained by one company, it is clear that these ‘pros’ are less pronounced than for traditionally conceived self-employed people. Accordingly, it is right that they be afforded greater social insurance protection, perhaps including faster access to sickness benefits and no MIF.
A hybrid solution
Policymakers should draw inspiration from the Italian social security system, which recognises ‘dependent self-employed’ people as a separate hybrid category between employed and self-employed. Dependent self-employed people enjoy rights concerning insurance against sickness, maternity, accidents at work and family benefits that are similar to those of employees, partially funded by the organisation upon which they depend. However, benefits are less generous and encompassing than for employees, requiring much lower company contributions.
Applied to the UK gig economy, classifying workers as dependently self-employed, and taking a small national insurance contribution from gig companies for each ‘worker’ based only on the value of jobs completed, could allow a more generous safety net to be provided, without undermining the ‘pay-per-job’ model that is the cornerstone of on-demand platforms.
Ben Dobson, Researcher, Reform