Governments, particularly those in ‘common law’ countries like the UK, USA, Canada, Australia and New Zealand, are getting very concerned about worker misclassification, better known in the UK as ‘disguised employment’. But this is through no sense of altruism, although they may like to pretend they are concerned about worker rights. No, the key driver is that governments are losing tax money hand over fist, because the ‘job for life’ is dying.
Federal and state governments in the USA, in particular, have embarked on a campaign to stamp out ‘worker misclassification’. There, it is believed that employers systematically misclassify workers as independent contractors to avoid paying employment and social security taxes. If this sounds like the situation we have in the UK, think again: in the USA, it’s the employer who gets stiffed with fines and back taxes, not the contractor.
But is this simply yet another case of the age-old worker exploitation wheeze, with sweatshop bosses evading their responsibilities. Or is there something deeper going on here? Perhaps even something that, rather than being ‘fought’ by governments with regulation, they should actually embrace? Or at least embrace at the same time as learning how to build a more efficient 21st Century tax system.
In an article for Bloomberg Business Week, Professor Richard Greenwald of St Joseph’s College in New York estimates that 31%, or 40m, of the US workforce is self employed. He forecasts this will grow 9% to 40% by 2019.
ContractorCalculator recently heard Kevin Green, Chief Executive of the Recruitment and Employment Confederation (REC), speak at the Houses of Parliament. He was presenting some fascinating UK labour force statistics to the All Party Parliamentary Group (AAPG) for the freelance sector at the Houses of Parliament. His data was astonishing, more so because it is rarely remarked upon.
Although only 4m or 14% of UK workers are contractors or self employed, less than half of the total workforce is in full-time, permanent employment. That suggests there are not many ‘jobs for life’ around anymore. By that I mean jobs for which employers carefully collect income tax and national insurance contributions (NICs) on behalf of the government over 40 years of an employee’s working life. Such jobs used to dominate during the ‘industrial age’, but workers in the new ‘knowledge economy age’ are increasingly choosing not to take them.
Unfortunately for governments and their tax-collection bodies around the world, the self employed aren’t quite such a steady, reliable and cost-effective group when it comes to collecting their taxes. Their work patterns and earnings are less predictable, for example, and those working through their own companies may pay tax in different proportions at different times, particularly if they take dividends or their national equivalent.
OK, we could do with some additional time series data from the USA and UK to validate the fall in full-time permanent employment and the increase in skilled, flexible knowledge workers. But, on the face of it, the story isn’t completely one of a ‘worker classification crisis’, with vulnerable workers becoming the 21st century equivalent of 17th century mill workers downtrodden by the bosses.
Instead, it appears that large numbers of workers are becoming flexible knowledge workers, such as contractors. And they are doing so by choice. So creating laws to bludgeon employers, as in the USA, or to punish the self-employed so they return to employment, as in the UK, is unlikely to be viable or sustainable. Not if you believe Greenwald’s forecasts for the growth of the flexible workforce in the USA. And not if you want to keep employers and knowledge workers paying taxes in your jurisdiction.
So let’s hear no more of this ‘worker classification’ or ‘disguised employment’ crisis, because what we’re really facing is a ‘tax revenue loss crisis’. And rather than trying to legislate flexible workers out of existence, as has been done in the UK, or force client organisations to relocate, as is a very real threat in the USA, governments might try being honest about the problem and work with flexible workers and their clients to solve it.