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Horizons: Global trends in employment law Edition 4: The modern employee? Contingent workers and the future of employment

The traditional employee/employer model is in a state of constant transformation. In the latest edition of Horizons, Eversheds Sutherland’s Diane Gilhooley takes a look at the opportunities, risks and challenges facing employers addressing the growing importance of the contingent workforce.

Contingent workers

The global contingent workforce has been driven by demand, with both businesses and workers enjoying the flexibility it affords. However, the use of contingent workers can pose challenges for businesses, unions, workers and regulators. As business models change and the numbers of freelancers, contractors, consultants, temporary agency, on-demand and gig workers grow, strains on the traditional employer-employee model can sometimes be played out in litigation, protest and regulatory change.

All employers using contingent workers globally, not just gig employers, need to be aware of these new developments as the risks arising from misclassifying non-permanent workers, particularly the self-employed, are evolving. That said, the compelling benefits to employers and workers of mutually acceptable flexibility means that these developments are likely to deepen rather than diminish over time.

While governments in different countries welcome the development of new ways of working that help increase economic activity, and so are wary of unnecessarily constraining new ways of working, some are responding by typically focusing on two issues: how to protect lower-paid contingent workers by strengthening their rights and how to stem tax shortfalls associated with the rise in self-employment, particularly amongst higher-paid, specialist freelancers. For example, in the UK, the government has confirmed that it will make employers more accountable for assessing the application of, and potentially paying, employment taxes where they engage some ostensibly ‘self-employed’ contractors and new EU legislation establishes minimum rights for those working unpredictable patterns.

Not just the gig economy

A contingent worker is a person who works for a business, but is not employed permanently by it. Typically, such workers are used to provide short-term or on-demand resource and specialist skills. While contingent workers’ rights differ depending on jurisdiction and the type of arrangement, they are distinct from employees under open-ended employment contracts. Unlike indefinite employees, they generally have fewer employment rights and benefits and they can offer flexibility, lower costs and other advantages to businesses. However, these arrangements do offer the contingent worker a chance to access work in a way that complements their lifestyle and their domestic commitments.

Across many countries, when assessing whether a contingent worker is an indefinite employee or, for example, a self-employed contractor, there is a surprising similarity of approach (see box: Typical global factors in employee status). However, greater convergence is beginning to emerge, spurred on by new gig workers in some countries and also by the global increase in other contingent workers, such as self-employed consultants and freelancers.

Both trends have highlighted the challenges when determining contingent worker employment status for the purpose of identifying their workplace rights and employer tax, social security, vicarious and other liabilities.

Recent developments

Reflecting these challenges, we have seen litigation seeking to re-characterise non-employee contingent workers as employees, governments introducing new legislation to make the use of contingent workers more expensive or difficult, as well as trade unions and workers organising collectively, in order to protest and to file misclassification claims. Despite these measures, it is clear that there remains a strong appetite amongst workers and employers to use contingent working arrangement and so, despite these challenges, it is difficult to envisage a future without them.

There have been victories and defeats for contingent workers and their unions, as well as employers testing the status of various working arrangements in different countries. In the UK, claims brought by platform taxi drivers and couriers have generally succeeded, subject to pending appeals, while similar claims in the US have had less success for workers, although this has varied by state. In Spain, France and the Netherlands, there have been successful misclassification claims, while some similar claims in Italy and Brazil have failed. Some of these court cases have been accompanied by strikes and protests.

The variety of case law outcomes illustrates the difficulties faced by the courts when applying sometimes old employment status definitions to modern workplaces. Each case turns on its individual facts, making it challenging for employers to draw lasting insights.

It is difficult to envisage a future without contingent working arrangements.

Governments and regulators, concerned at a decline in tax and social security contributions, and recent misclassification litigation, have also proposed new laws to address the use of contingent workers.

For example, California recently agreed landmark legislation to determine whether a worker is an employee or an independent contractor following high-profile misclassification case law in 2018. Other US states are expected to focus on the classification of contingent workers in 2020. This activity is unlikely to be consistent, with some expected to favour business by classifying some contingent workers as independent contractors and not employees, and others taking a more protectionist stance.

Canada, Australia, Ireland, the EU, UK, Finland, Russia, Czech Republic, Germany, Italy, France and Romania are proposing, or have already finalised, policy changes. These differ by country but, typically, include one or more of the following: greater restrictions on the use of temporary agency, fixed-term or zero hour workers; increased unemployment social contributions for fixed-term workers, new scheduling rights including minimum advance notice for shifts; minimum or equal pay for some contingent workers in relation to employee counterparts; stepping up state labour inspections or enforcement; applying discrimination and harassment laws to contingent workers; reversing the burden of proof and redefining the legal definition of employment status; or requiring businesses to assume greater responsibility for social security or tax contributions where they engage certain self-employed contingent workers.

Managing contingent worker risks

Given these recent developments, managing contingent worker misclassification risks has become a moving target, particularly across multiple countries, each with differing litigation outcomes and policy responses.

Local disputes over whether contingent workers should have received employee pay and benefits have also distracted from additional, potentially serious risks. For example, in many countries the distinction between employees and non-employee contingent workers is highly significant in terms of employer tax, social security and other obligations and has also become a PR pressure point, as follows:

  • Reputation: employers accused of using sham contracts to deny workers their employee rights have attracted adverse public attention.
  • Financial: where misclassification claims are successful, they can lead to governments seeking unpaid employment tax, pension, severance and social security payments, as well as employer exposure to vicarious liability for workplace accidents and the triggering of wider employee rights (such as those on business transfers or upon termination).
  • Operations: business models making extensive or strategic use of contingent workers may be threatened or need operational restructuring where employee status is misclassified.
  • Establishment: in some countries, where an agent or consultant is engaged to represent a foreign employer, misclassifying their employee status may trigger legal requirements to establish a legal entity in that country in addition to immigration complications.

Typical global factors in employee status

Photo of Diane Gilhooley

In broad terms, the factors below feature in many jurisdictions when deciding whether a contingent worker has been misclassified, although not all may apply, some may be prioritised over others and regulators are stepping in to propose change.

In a minority of countries, an intermediate employment status exists. This, typically, is a third category of worker and sits between employees and independent contractors, with less protection than employees but more rights than independent contractors.

Global factors for employee status*

  • Personal service
  • Works in a subordinated position
  • Dependent on employer for work
  • Degree of control exercised by employer
  • Terms of agreement: hours of work, place of work, regular pay, termination procedures, minimum wage, benefits such as paid holiday, family leave, pensions etc.
  • Integrated into employer’s organisation
  • Open-ended or long-term relationship

Global factors against employee status*

  • Can send substitute
  • Runs own business
  • Works for others and takes on financial risk
  • Free to decide whether/how to do the job
  • Terms of agreement: paid per assignment or for services rendered, pays own tax and social security, not entitled to employee benefits, has own insurance etc.

* There are country differences and specific advice should always be taken


Tips when using contingent workers globally

Do:

  • Consider conducting an audit of business needs
  • Limit the duration of assignments
  • Comply with agency worker (leasing), fixed term and any other special contingent worker rules
  • Take advice when drafting terms of engagement, keep them updated and ensure they are applied in practice
  • Maintain separateness (do not integrate them into the organisation)
  • Keep up to date with misclassification case law and regulatory changes

Don’t:

  • Re-engage contingent workers for long periods
  • Treat them the same as permanent employees
  • Exercise day-to-day control, including instructing when, where and how they work
  • Allow them to become economically dependent or integrated into the workplace
  • Require exclusivity

How are businesses responding?

Responding to these evolving challenges requires a nuanced approach. In some sectors and countries, both workers and businesses are embracing the benefits of contingent working and demand is growing. But, a different approach may be needed elsewhere.

In our experience, a prudent first step is to conduct a legally privileged audit of the relevant business model to identify how best to resource its needs, using a mixture of permanent, temporary and contingent labour, which will minimise the risk of litigation arising subsequently.

This should be undertaken in the light of the organisation’s appetite for risk, particularly reputational risk, and whether it prioritises a single global policy over separate, country-led practices.

Identifying risk, informed by an assessment of the company’s use of contingent workers in each jurisdiction, is an important step. Where risk is high and/or an employer is risk averse, it may decide to adopt a policy that strictly controls or limits the global use of contingent workers, for example, ruling out certain types of contingent workers, mandating terms and conditions, or requiring senior executive approval for their recruitment.

However, such a strict response is not feasible or practical for many businesses. Where this is the case, we see businesses flexing their contingent worker approach having conducted a risk assessment. For example, they may take steps to change contingent workers’ terms and how they are used in the business, reduce their numbers in higher-risk areas, ensure indemnity and arbitration clauses exist where appropriate, and redesign staffing models in some business activities or countries (see box: Tips when using contingent workers globally). Keeping abreast of case law and regulatory changes, and being prepared to adapt in response, are also important when taking this approach.

A prudent first step is to conduct a legally privileged audit of the relevant business model.

Finally, a word of warning to those businesses seeking to fashion a watertight contingent worker contract to prevent status misclassification. Many countries give prominence to substance over form, meaning that the facts and the real nature of the contingent relationship are analysed when assessing employee status, meaning that any written agreement is not determinative. As such, ensuring that line managers understand the significance of their day-to-day interactions when using contingent workers is as important as investing in legal drafting.

The compelling advantages to businesses (and in many cases workers) of contingent working arrangements mean that the contingent workforce is here to stay. Provided businesses review carefully why they are using contingent workers and ensure that their documentation, processes and risk assessments are reviewed regularly, this will continue to offer them a pathway to managing labour costs effectively whilst enabling their contingent workers to control how and when they access work in conjunction with their other commitments.

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