For years, independent contractors have been treated as micro businesses by governments and employers; but in recent years the images of master, servant and independent contractor have been blurred.
In a post-recession world where price has often outweighed all other factors, employers have grown used to the advantages offered by using contractors, particularly the benefits of low-cost, minimal administration and tax liability.
But governments around the world are increasingly faced with a conundrum: how to encourage entrepreneurialism, with attractive tax arrangements for small businesses, while ensuring tax revenues are sufficient to fulfill their governmental responsibilities.
With the exception of Italy, which banned project-based freelance contracts, to date governments have shied away from legislating against the use of independent contractors. But the lack of clarity in laws on employment status has fueled the rise in the number of independent contractors across the globe.
The solution? Pass the tax and employment risk onto employers who have previously hidden behind the corporate veil of the contractor’s business arrangements.
Canada. Switching the burden of proving that a contractor is not an employee from the contractor to the employer is one way of addressing the issue. Ontario’s Fair Workplaces, Better Jobs Act 2017 (known as ‘Bill 148’) has amended the Employment Standards Act 2000 to do precisely that.
United States. California’s Supreme Court has effectively reversed the presumption for determining whether a worker is an independent contractor or employee by abandoning the established multi-factor Borello control test in favor of the so-called “ABC” test. The recent decision in the case of Dynamex only applies to claims under California’s Industrial Wage Order but follows the example of Massachusetts which introduced the test in its Massachusetts Independent Contractor Law as long ago as 2004.
Under the “ABC” test, a worker is presumed to be an employee unless all three of the following conditions are met:
- A) the worker is free from the control and direction of the hirer regarding the performance of the service, both under the contract for the performance of the work and in fact; and
- B) the worker performs work that is outside the usual course of the hiring entity’s business; and
- C) the worker is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.
It is too early to say how effective these measures will be in reducing the numbers of independent contractors in the state.
United Kingdom. Meanwhile, the UK government has claimed a victory against public-sector employers with the reform of their IR35 rules last year. With the “off-payroll working rules,” the UK placed on the employer the burden of assessing the tax status of a contractor engaged through a personal service company and consequent tax liability for getting it wrong.
According to the UK government, evidence suggests that taxpayers could be missing up to £1.2 billion a year by 2023 due to the majority of contractors in the private sector incorrectly paying tax as if they were self-employed. By contrast, tax data from public-sector employers covering the first 10 months of operating the off-payroll working rules indicates that an additional 58,000 individuals working in the public sector are paying “pay-as-you-earn” tax and National Insurance contributions than in previous periods, with an estimated £410 million in tax revenue received as a result of the reforms.
The Netherlands. The Netherlands tried to introduce something similar but with less success. In 2016, the law on Deregulation of Labour Relations Assessment replaced the Employment Status Declaration. This law made both parties to a contractor agreement jointly responsible for defining their working relationship and jointly liable for tax and penalties should the tax authorities assess the relationship as one of employment.
Due to ambiguity in the law and general unpopularity of the change, its enforcement has been postponed until Jan. 1, 2020, while the government proposes introducing criteria to define an employment relationship. An agreement for a duration of more than three months with a moderate rate of remuneration, (€15 to €18 per hour) where the worker is performing work that is within the regular business operations of the employer will be considered employment.
Success tends to breed success and it is likely that if any of these measures achieves the desired effect, we will see other governments follow suit.