Uber ruling and IR35: a perfect storm?

The Supreme Court ruling in the Uber v Aslam and others case, published on 19 February 2021, was a landmark decision for the classification of workers. However, there are two key points in the ruling which may have far-reaching consequences.

Contractual rights vs statutory rights

Firstly, before Uber, because of the case of Autoclenz v Belcher (2011), it was thought that when assessing an employment relationship and employment status, it was right to look at the written contract(s) first and only depart from the written contract if this did not reflect the operational reality of the relationship. In Uber, Autoclenz was clarified and it was held that the case was not about contractual rights at all, but about statutory rights. Whether the claimants were workers was a matter of statutory, not contractual interpretation. The written contract was irrelevant to an assessment of whether statutory employment rights are applicable.

Contracting out of statutory employment rights

Secondly, the Supreme Court referred to section 203 of the Employment Rights Act 1996 (the Act) and similar provisions in other employment legislation, which state that any provision in an agreement is void in so far as it purports to exclude or limit the operation of the Act or preclude a person from bringing proceedings under the Act before an employment tribunal. In effect, the Uber judgment says that if a person is a worker or an employee, the statutory employment rights flowing from that status under the Act or any other employment legislation which prohibits contracting out, cannot be limited or excluded by a contract.

Employee status and the introduction of IR35

The misclassification of a particular individual as self-employed when they are in fact workers or employees is not a new phenomenon. The practical reality is that being “self-employed” suits an employer because the services of the individual will not attract employer’s NICs; it will not benefit from statutory employment rights such as holiday pay, sick pay, pension auto-enrolment, or the right to claim unfair dismissal; and the employer will not have to provide pay and benefits parity with comparable employees. It also suits some individuals as they can structure their “pay” in a manner that is optimal for reducing tax liability, usually by providing services through their own personal service company.

However, the attractions for a worker of being called self-employed when in fact the individual is acting as an employee are expected to change on 6 April 2021 with the introduction of the off payroll tax rules in the private sector which appear in Chapter 10 Part 2 of the Income Tax (Earnings and Pensions) Act 2003, also known as IR35.

Where a worker is obliged to provide services personally to an end user through a prescribed intermediary (broadly speaking, one that the worker has a material interest in) and the end user is a medium or large company, if the worker is deemed to be acting as an employee for tax purposes, then the end user will be required to apply PAYE to the fees of the intermediary in respect of the worker’s services, deduct income tax and employee’s NICs, pay employer’s NICs and where applicable, the Apprenticeship Levy. IR35 also applies with changes where the supply chain involves more than one intermediary between end user and worker, such as one or more recruitment agencies.

If IR35 applies, then there will be no tax benefit to a worker who is acting as an employee of an end user via an intermediary, to maintain a label of self-employment.

If, after Uber, it also becomes significantly easier for a worker supplied via an intermediary who is acting as an employee of an end user, to establish statutory employment rights, on the basis that:

1. the written contract(s) governing the relationship is irrelevant; and
2. any contractual agreement for the worker or their intermediary to indemnify the end user should they seek to establish worker or employee status against the end user is void,

then it appears there is no longer any reason why a mislabelled self-employed contractor who is acting as an employee should not seek to assert statutory employment rights against the end user in the event of termination or at any other time within their engagement if statutory rights are infringed.

In two years’ time, will we see an increase in claims for unfair dismissal made by individuals previously thought to be self-employed? Will employers need to consider applying fair disciplinary and dismissal processes to individuals previously considered to be self-employed prior to termination? The Uber judgment and IR35 combined could ultimately have that effect.