Thursday, 18 August 2016

Employment vs Self-employment

My post about the insane bribes for taxi drivers in Queensland turned into a jumbled slugfest about employment vs self-employment status.

In economic terms, there are people who are clearly employees at one end (where the employer needs the same people to come in and do a set job at pre-arranged times everyday - school teachers, bus drivers, shop assistants etc) via those who are self-employed at the other (plumbers, electricians etc who are called in when needed), all the way to (small) business owners. But there are massive grey areas where that can be reasonable room for debate whether somebody is actually an employee or self-employed in economic terms.

The distinction is important for at least three quite separate topics.

1. Vicarious and employer liability

An employer is more likely to be found vicariously liable for the acts of an employee and is also more likely to be liable for injuries etc suffered by an employee.

So if an employee in a restaurante deliberately ignores food safety measures and diners fall ill, the restaurateur is liable. And if the wiring in the kitchen is faulty and an employee is electrocuted, the employer is liable.

Conversely, if the restaurant orders ingredients which turn out to the poisonous and the same evening, diners fall ill, the restaurateur might (or might not) be able to escape liability and the self-employed supplier of the ingredients would be liable to the diners instead (he would be liable to the restaurateur anyway. And if the wiring in the kitchen is faulty and a self-employed electrician who is called to fix it manages to electrocute himself while doing so, then that is his tough luck.

2. Pay

An employee must turn up and be available for work whether there is anything to do or not; similarly, an employee expects to be paid whether he actually did anything or just sat around. If a role is redundant, then special rules apply, weighted in favour of the employee (fair enough up to a point - it is the employer's job to drum up business and he can be expected to plan ahead).

A self-employed person is only called and paid when needed and is usually paid by results (although a lot of rent-seeking businesses charge hourly rates whether they succeed or not). There are other rules to ensure that workers on zero-hours contracts are treated as employees, even though they would be self-employed under this test alone.

The government then messes things up by having the National Minimum Wage and Employer Pension contributions (a hidden tax and a massive subsidy to the pensions companies). The NMW simply does not apply to the self-employed, if you want to mow lawns or deliver parcels or drive a mini cab for £3 an hour as a self-employed person you are free to do so, and there is clearly no bar to the self-employed or small business owners making a loss, i.e. a negative effective hourly wage.

3. Taxation

Instead of taxing the least mobile and most highly visible source/flow of wealth (i.e. land and monopoly rights), most governments in their infinite wisdom tax the second least mobile factor of production - labour - at the highest rates. The effective rate on a basic rate employee, even ignoring VAT is about 40%, they just dress this up and split it into half income tax and the other half is split up into Employee's and Employer's National Insurance Contributions.

So there is every incentive for people to tweak things and present what is actually employment under the teal tests 1. and 2. as self-employment. HMRC has exactly the opposite incentive. Shiney gave the example of HMRC reclassifying partners in an LLP as employees. I could give the example of the extra 7.5% income tax on dividends to reduce the incentive for small business/limited company owners to pay themselves dividends instead of salary.

This is insane of course, to the extent that we have to tax incomes at all, it would be far better to tax all sources of income at the same rate to save arguments, rather than punishing employment status and then dreaming up endless anti-avoidance measures.

There, that is my non-partisan crash course in the topic. The problem is that most people start with the answer they want and then work backwards to the justification, for example saying that XYZ delivery company pays less than the NMW, thus automatically assuming that their delivery drivers are actually employed not self-employed.


Shiney said...


Good summary.

Dinero said...
This comment has been removed by the author.
Dinero said...

Is it still true that in Germany Employees on PAYE, pay with travelling costs deducted.

I suspect the advent of Zero hours contracts was a response to the NMW. The mathematical reasoning being that it is no longer possible to pay one days wages in the form of an hourly rate that reflects the productivity of one day including non productive parts of the day, and so the response to this is to not employ the employee during the non productive parts of the day, and so the hourly pay is higher and high enough to comply with the NMW.

Steven_L said...

An employee must turn up and be available for work whether there is anything to do or not

Not always. Some more enlightened councils (but unfortunately not my employer) now let their staff 'work' from home. Her indoors is allowed to 'work' from home two days a week. Whereas I have to sit in the office five days a week, whether there is anything to do or not.

Bayard said...

"I could give the example of the extra 7.5% income tax on dividends to reduce the incentive for small business/limited company owners to pay themselves dividends instead of salary."

If they pay themselves a salary, they would also have to pay both employer's and employee's parts of the labour tax (aka "National Insurance").

Lola said...

Employer liability. Not exactly. A main contractor employing a self employed sub contractor. The main contractor is still liable even though he does not 'employ' the self employed subbie.

DBC Reed said...

As usual the assumption is made that if someone is self -employed then it is OK legally for them to get less money, so this makes it OK economically. In fact it means a slew of SME's make sure there is not enough demand in the economy to translate into sales as they try to live off the demand provided by other properly capitalised companies.

Lola said...

DBCR. No. It's the other way about. More money is extracted from employers (the incidence of which falls on 'employee' take home pay) as part of the confidence trick of the welfare state which does the classic of concentrating benefits and distributing costs.

Lola said...

If I may extend my thesis a bit? This whole s/e - emp thing is a construct to create a new feudalism. If you want drones you need to create dependency and one of the ways of doing that is make people want a 'job'. The alternative mindset is to want to 'make a living'. As a younger man I was always asked 'have you decided, yet, how you are going to make a living?' but only by people who were generally self starters, mates of my dad mostly. My mother's side - mostly 'professionals' or civil servants asked - 'have you got a job/career in mind yet?' ('Career' also means out of control, note). For me the first philosophy works. Never ever thought of myself as 'having a job' even (or especially) when I was 'employed'.

Once you inculcate people with the get a job bit they are doomed to wage slavery. Bad thing. IMHO this is why Unions always demand 'more jobs'.

This, of course, works into the whole LVT / CI meme. Once you free people from rent and wage slavery they'll stop thinking 'job' and start think 'making a living'.

And this is Liberty.

And that's why LVT / CI won't happen. Davos Man won't allow it.

Shiney said...


"As usual the assumption is made that if someone is self -employed then it is OK legally for them to get less money"

Really? That does not necessarily follow.

In my experience people at the blurred edges of employed vs self employed prefer the latter. Oftentimes it seems to be driven by the 'worker' rather than the 'employer' and there are many and varied reasons why - control/autonomy, better take home for a given job 'rate', ability to charge certain expenses etc etc.

Bayard said...

No employer is going to hire anyone unless that person is going to make them more money than they cost to employ. The more an employee costs to employ, the more money that employee has to make for their employer for it to be worth hiring them, so one of the effects of having a minimum wage is that a lot of people become effectively unemployable, through no fault of their own. The option of work at the minimum wage is no longer on the cards for them, the choice is between being unemployed or working self-employed at a rate which works out at less than the minimum wage. (Yes, I know that on Planet Socialism, all employers are silk-hatted Philip Green types who can afford to pay their workers far more than the minimum wage, but choose not to to further enrich themselves and their shareholder cronies, but most of us don't live there)

Mark Wadsworth said...

S, thanks.

D, good point about NMW, and yes, AFAICR, in Germany employees can claim part of their normal home to work travel expenses as deductions from taxable income.

SL, I was generalising.

B, sure, there are two layers of NIC. But the salary plus NIC is an allowable expense for corp tax, so overall the difference in total tax bill per £1 net cash received by director/shareholder is now only about 3%.

L, don't confuse things, that is more contractual liability than tortious or statutory.

DBC, you have missed the point.

L, fair points but I suppose the bulk of people (me included) prefer the 'security' of employment rather than trying to make it on your own. Other's prefer using their own initiative and value their independence. That is the fourth distinction, people's mentality. You cannot argue that one is better or worse than the other, that's like arguing whether it is better staying out late or going to bed early.

S, again it is forces for courses. I once had a nurse girlfriend who once spent an hour explaining to me that nurses love doing overtime via an agency at unsociable hours because the pay is three times as high as normal and then explaining that nurses don't like doing overtime etc because they miss all the fun, have a disrupted home life and find it difficult getting home in the middle of the night. She could not understand that theses are two sides of the same coin.

B, yes, that is probably why the Tories upped the NMW to make themselves look benevolent while increasing the number of "lazy unemployed scroungers" on whom they can wage war.

Bayard said...

AFAICS, the only real difference between being "employed" and being "self-employed" is employer's NI contributions and employer's pension contributions. Do away with these by making tax and pension arrangements the responsibility of the employee and the difference will become academic. Not that this is likely to happen any time soon, given the engrained paternalism of both Left and Right.

Mark Wadsworth said...

B, no, there is a whole list! That is why I did the post
- two layers of NIC instead of one.
- 20 days 'paid' holiday
- SMP, SSP etc
- paid sick leave (for most)
- more or less no allowable deductions from taxable income
- max working hours
- 'employer' pension contributions
- plus plenty more which don't spring to mind right now.

Sobers said...

A business owner is still liable for the H&S of self employed contractors that they employ to work on their premises. If the contractor uses unsafe working practices and someone is injured, the business owner will be in the dock with the contractor, if he had any knowledge of what was going on and did nothing. Several cases in the farming sector recently - farmer employs contractor to erect building, contractor fails to use safe methods, man falls off roof, farmer knew about what was going on, he gets fined by H&S as well. Thus its best to get a contractor in, and go on holiday, that way its not your fault if they do something stupid.................

Mark Wadsworth said...

S, yes of course there are shades of grey.

The way we were taught it - business owner notices something is wrong with electrics and calls in a self-employed electrician. If electrician electrocutes himself, tough luck. But if at the same time he has the self-employed painters and decorators in, and one of them is electrocuted, then the business owner is liable.

Then there is constructive knowledge, separate topic.

The rules of thumb are if you do something in course of business, more likely to be liable to third parties, employees and contractors.

So if we hire a bouncy castle for a kid's birthday party and it is set up unsafely and somebody is injured, the bouncy castle provider is liable. But if we run a theme park and an independent bouncy castle operator sets up the bouncy castle etc, then we are primarily liable.

And the categories do not necessarily overlap depending on whether you are looking at 1 2 or 3. So a 'self-employed' fruit picker might be treated as employee for employer liability purposes, even though for holiday pay purposes, he is self-employed.

DBC Reed said...

@MW Since I was told I was missing the point at the outset by referring to the difficulties of Uber drivers in getting fairly recompensed, I will take your latest criticism to this effect (above) as a reassuring indication that I am persisting with a useful line of enquiry.
Guardian today 20.x.16 "The GMB union is backing a court case taken by 19 drivers over taxi-hailing app UBER, who say they are employees and are not self employed." So the game is afoot.
Elsewhere there is news that UBER is developing a driverless taxi with Volvo. This , if it happened, would exacerbate the problem that modern economies are developing forms of consumption without distributing wages which would pay for them. That being the case economies will have to distribute spending power to the punters by other means than wages.

Bayard said...

Mark @12:41, fair enough, but all those things on the list are either paternalist (the employer has to do it because the employee is deemed too stupid or lazy to do it), taxation or stealth taxation, the only exception being the "paid" holiday, which I presume you put in brackets because, ultimately, it is the employee paying for it in exactly the same way as he would pay for it if he was self-employed. Do any of your unmentioned differences not fall into those three categories?

AFAICS, the whole "employer's liability H&S scam mentioned by Sobers is simply making sure that when something goes wrong, the person deemed liable will be rich enough or insured enough to be worth suing for compensation, plus a dollop of the inevitable paternalism.

Mark Wadsworth said...

B, yes, it's "paid" holiday in the same way as the NHS is "free". And these things all fall into your broad categories.

To some extent it might be making the person with the deepest pockets liable, that's not the point. Most of the time the courts and legal system ensure that those with the deepest pockets are protected and the little guy can fuck off, so fair enough. There's nothing wrong with H&S rules, up to a point, and they have to be enforced against somebody, i.e. the occupier/landlord etc.

Mark Wadsworth said...

DBC, the GMB is feathering its own nest there by reclassifying them as employees which they are clearly not, not under any test.

And even if they are right, which they are not, as you say, all that means is that people take fewer cab rides = fewer jobs or Uber develops something dirverless = fewer jobs. What's wrong with Uber at least "distributing" £3/hour for real work done (if people are willing to work for that little) AND AS WELL having a Citizen's Income (however funded)? That's the best of both worlds.

Sobers said...

"The way we were taught it - business owner notices something is wrong with electrics and calls in a self-employed electrician. If electrician electrocutes himself, tough luck. But if at the same time he has the self-employed painters and decorators in, and one of them is electrocuted, then the business owner is liable."

I'm not sure that first point is still the case. I think nowadays the business owner is considered responsible to ensure that all contractors have the relevant experience and knowledge to do the job safely. Its not just that if the premises themselves are unsafe for example, it would be if you employed an electrician, and he turned out to have no qualifications and killed himself, you as business owner would be liable for not having checked his credentials beforehand. If he used unsafe working practices (working from height and fell for example due to unsafe methods) the business owner could still be liable if a suitable risk assessment had not been made and a plan of working methods agreed with the contractor beforehand.

There really isn't a great deal of difference between employed and self employed when it comes to H&S nowadays, the HSE get their income from fining people when accidents occur - they thus now go after everyone regardless of the employment status of the worker.

Mark Wadsworth said...

S, yes, H&S law has moved on a bit in the last 15 years, gone too far in some ways and maybe distinction 1 is not as important as it once was.

Bayard said...

I think it's important to distinguish between H&S matters, which by and large are pretty proportionate, and simple legal liability, regardless of the H&S aspects of it. It's in the latter case that the liability now seems to rest with whoever has the deepest pockets, regardless of the logic, because there is no point in suing someone who can't afford to pay.

I once worked for a building company and there was an accident on site where an employee of a scaffolding subcontractor was hit on the head by a scaffolding clip thrown down from above. Despite the fact that the site agent had just told this man to go and put on a hard hat and not to walk under the scaffold while it was being dismantled and had also told the other scaffolders to lower the clips in a bucket and not to throw them down, the injured scaffolder sued the building company and the comapny's insurers paid up because it was cheaper than fighting the case. I wondered why the scaffolder didn't sue his employer, but I expect his employer told him it wouldn't be good for his health if he did.

Shiney said...

@Sobers "the business owner is considered responsible to ensure that all contractors have the relevant experience and knowledge to do the job safely"

Yes... as a business owner I'd say that would be the HSE interpretation and we take steps accordingly. As with any regulation it adds cost to every job - IMHO quite rightly in this instance. And I know I can sleep easy knowing I won't get me collar felt.

@Bayard @M
Yes, sometimes H&S is a PITA but I think workplace safety is important. One of the few areas where I'm in favour of plenty of regulation. OK sometimes its a bit maddening but generally in line with what people would consider reasonable

Oh, and I've heard many stories along the lines you mention (not from my business I might add) its just the world we live in. Its the Lawyers fault.... usually.

DBC Reed said...

@MW I don't know how you can work out whether the GNB's members are self employed or not: you have not seen the case work.
I tried unavailingly to get people to look at the tricky cases that appear on the Net as Taxi Driver Employment Status Accounting Web at the beginning of all this but they were confident that their opinions would cover all difficulties, sight unseen, apparently.The GMB is taking a bit more care.
The half-and-half arrangement of Citizen's Income (or National Dividend)plus untaxed earnings seems plausible and is the same split between Dole plus cash-in-hand earnings that a lot of people have settled for.

Mark Wadsworth said...

DBC I work in tax so I am well aware of the distinction between E and SE.

DBC Reed said...

Go on then: deal with the tricky cases on the Taxi Driver Employment Status website.(There used to be more of these but it was so long ago that I tried to raise them that they have withered with time.)
Frinstance I cannot see how a driver who is supplied with the taxi and fuel by a firm gets to be deemed self employed, even with the hideous right-wing bias of the British legal system. Perhaps this is what the GMB is trying to sort out, despite your distaste for their useful efforts in the general interest.

DBC Reed said...

Thought as much. Asked a direct question, you fail to answer.

If that is not bad enough , you are developing this attitude that I do not stay on topic (you being the judge& jury of that!)

With UBER you were waxing indignant that compensation was being mooted for regular taxi firms that had lost their privileged because paid-for right to customers ( would not an anti-monopoly LVT-ish congestion charge for taxis work better? off topic though this will doubtless be deemed). I pointed out that there was a problem with the way UBER drivers were paid , turning out to be a fundamental legal question about self employment which had implications for a lot of modern business practice (in the so-called gig economy).
Far from off topic, you followed up with a whole essay on self employment which was helpful.Now the GMB is talking about going to court to get a definitive ruling on the issue but you consider this unhelpful (and no doubt monstrously unfocused on the issue which is ,(you would)rather ,commercial compensation in Australia).
Rather than going off the subject,I helped steer the discussion towards the real subject which the punters on here got stuck into productively ( with Shiney giving me pause for thought).

Mark Wadsworth said...

DBC, my day job is dealing with the tricky cases, in real life spend half my time answering these "tricky" cases andI usually tell clients "Stop mucking about, this person is an employee so man up and pay the PAYE". I'm wasn't saying what I thought the distinction 'should' be, I was saying what it is.

As you say, there is plenty of guidance on the net about where the dividing line is and of course there are grey areas. Your particular gripe seems to be about UBER and the NMW which has nothing to do with the topic, UBER are pretty evil but no more evil than existing taxi drivers (who clearly are self-employed or do you query that as well?) and the NMW follows on from employment status and is not an indicator thereof.

Sobers and Shiney, on the other hand made helpful comments by pointing out that for H&S purposes, employees and the self-employed are treated more or less the same, so i learned something new there.

Bayard said...

"Yes, sometimes H&S is a PITA but I think workplace safety is important."

I, too, think that workplace safety is important, but my reservations about the whole H&S thing is "risk compensation". If you don't have to think too hard about safety because someone else, usually your employer, is doing the thinking for you, then generally, you don't make the effort. If something is failsafe, then you are less fussed whether it fails or not. It's not for nothing that ABS brakes are called "the wanker's forcefield". I prefer the attitude of the old boy who said "In my day we didn't have health and safety, we had something else, we called it "taking care"".

"Frinstance I cannot see how a driver who is supplied with the taxi and fuel by a firm gets to be deemed self employed,"

I'd agree with you there, but I thought Uber was people driving their own cars, paying for their own fuel.