How IR35 could be impacted by Labour’s plan for a single ‘worker’ status

Determining employment status in the UK is often a convoluted process. Neither employment nor self-employment have a statutory definition. Instead, the employment status of an engagement is determined by referring to case law, which often fails to be clear in its conclusions and is plagued with legal jargon.

Whilst the UK has two statuses for tax purposes (employed and self-employed), there are three for employment rights – employed, self-employed and worker. It’s these three statuses that the Labour Party has been looking at as part of its plans to simplify employment status rules.

But, could their proposals have an unintended impact on IR35 – potentially removing the need for IR35 case law altogether?

“Labour will create a single status of worker”

This week, we were given an opportunity to review a potential Labour government’s vision for workers’ rights with the publication of a Labour green paper titled ‘A new deal for working people.’

Within these proposals, Labour has pledged to extend sick pay to the self-employed, tighten discrimination and whistleblowing laws for the self-employed whilst also promising to introduce a Single Enforcement Body; which would bring about well overdue enforcement of standards amongst umbrella companies. These are all welcome commitments, but it’s their plans on employment status that particularly interests us at IPSE.

Labour would replace the current three statuses used in employment law so that it becomes just two. This would see a single status of ‘worker’ created for any engagement that is not considered ‘genuinely self-employed.’

Could the single ‘worker’ status remove the need for IR35 case law?

Before we even consider this possibility, Labour needs to win the election in 2024; let’s not forget that just three Labour leaders have managed this feat since 1900.

But let’s imagine the employment status rules are replaced, with the ‘worker’ and ‘genuinely self-employed’ statuses established.

If the boundaries of these two statuses were clearly defined (certainly not a guarantee!), this could remove the current reliance on IR35 case law and potentially lead to clients becoming more confident in engaging contractors they consider to be ‘genuinely self-employed.’

If almost all engagements were easily identifiable as either ‘worker’ or ‘genuinely self-employed,’ it could not only remove the need for HMRC’s flawed CEST tool – which we know gives an ‘undetermined’ result in 22 per cent of decisions – but it could also lead to fewer tribunal cases where employment status is disputed.

Ultimately, this proposal could (and it's important to stress the word 'could') bring about a greater alignment of tax status and employment status which would undoubtedly have an impact on the application of IR35 case law.

Defining the ‘genuinely self-employed’

We’re yet to see any detail on how the boundary between worker and self-employed would look. We can also only speculate how it would work in practice. But, such a change to the employment rules would have significant ramifications and it would be expected that a future Labour government would have to consult stakeholders before implementing this proposal.

One potential area of concern for us at IPSE would be if the definition of the genuinely self-employed is drawn up to be too narrow in its application, potentially catching some genuinely self-employed within the ‘worker’ status.

Earlier this year, IPSE submitted a written response to the Labour Party’s National Policy Forum, which recommended the adoption of IPSE’s Self-Employment Matrix to accurately define and determine the genuinely self-employed.

For more information on the Matrix, you can read through the definition and segmentation matrix within our full response to the Labour Party’s Commission on Better Jobs and Better Work.

We will continue to work closely with the Labour Party and Angela Rayner’s office – who has the responsibility for Labour policy on SME’s – whilst also pressing the need for an accurate definition of the genuinely self-employed, should this policy be brought forward.