Key Issue

REPORT CALLS FOR THE ENFORCEMENT OF DIRECT EMPLOYMENT

With the introduction of changes to IR35 due to come into force on 6 April 2021, the Joint Industry Board (JIB) is urging clients and large contractors to enforce direct employment in their workforce and build back better by investing in the skills which are needed to meet the demands of the industry and deliver a safer, more productive environment for the future.

DIRECT EMPLOYMENT – A STUDY OF ECONOMIC, BUSINESS, AND SOCIAL OUTCOMES: BASED ON THE ELECTRICAL CONTRACTING SECTOR The JIB has recently released a compelling and authoritative report; ‘Direct Employment - A Study of Economic, Business and Social Outcomes’ based on the electrical contracting sector, which highlights the negative impact which the steady growth in non-direct, off-payroll working is having on the UK electrical contracting and construction industries.

Authored by Howard Gospel, Emeritus Professor of Management at King’s College London, it is one of the most comprehensive studies which has ever been undertaken and draws on interviews with over 50 experts, industry materials, government reports, and peer-reviewed academic research. The report analyses the growth in non-direct, off-payroll working, the impact this has had on productivity, skills and safety, and the benefits which a directly employed workforce bring to the industry.

In the report Foreword, Andy Mitchell, Co-Chair of the Construction Leadership Council, and Gail Cartmail, Unite Asst General Secretary and President of the Trade Union Congress, herald the report as a very timely one and, in commending the recommendations to the industry, jointly urge it to make sure that the report doesn’t sit on a virtual shelf but becomes a “catalyst to action in the work we are all embarked upon to create a more innovative, productive, sustainable, and attractive industry”.

The report acknowledges that subcontracting and self-employment remain essential features of electrical contracting and other parts of the construction industry, but suggests that the balance has been allowed to tip too far away from direct employment. It indicates that if the industry’s and the government’s priorities for this and future decades are to be achieved – for example, in safety, quality, skills, efficiency and innovation –then a healthier, more sustainable balance needs to be restored.

Professor Howard Gospel says: “The UK’s retreat from direct employment cannot be explained away as some sort of ‘natural’ phenomenon or the ‘inevitable’ consequence of increased market competition. It is the result of specific actions and decisions taken over many years by industry clients, contractors, and successive governments – not least in the key policy areas of procurement, tax, social security and employment law.”

The report acknowledges that non-direct working offers firms some short-term conveniences, including the freedom to take on and remove workers at will. It also recognises that there are cost savings by not having to provide benefits such as paid holidays, sick pay and pensions. Whilst there may be advantages for individuals through higher take-home pay, these workers do not enjoy the benefits or the security which is offered by direct employment.

Nevertheless, the report points towards the stark fact that, on balance, the negative effects of non-direct working predominate. This is a particular problem in the area of skills formation, where non-direct employment threatens the future of apprentice training, career progression and the industry’s capacity to take up new technologies and techniques. In addition, research evidence indicates the negative effects on health, safety and well-being, and the undermining of industry standards and regulations. From a broader societal point of view, non-direct working also reduces the tax receipts which fund public services.

Jay Parmar, Chief Executive of the JIB, says: “Despite far higher levels of non-direct working in the UK than almost anywhere else in the world, and the well-documented negative effects on (among other things) construction productivity, skills and safety, the leadership and collective will to do something about this issue has long been lacking. This report therefore calls for a comprehensive and sustained campaign to reverse this trend, as a key part of current efforts to build a better, more productive, higher skilled and sustainable UK construction industry.

“Clients and large contractors must therefore act now and demonstrate leadership by awarding contracts to firms which directly employ their workforce and by enforcing direct employment and greater transparency throughout their supply chains. We must also join together to campaign for public policy changes which remove artificial incentives towards false self-employment and false direct employment through the tax system. Only by doing this can we hope to provide a better future for those working in the industry, both now and in the future.”

The recommendations made by Professor Gospel will be a key focus for the JIB over the coming months. The organisation also expects to work closely with the Construction Leadership Council, whose Industry Recovery Plan, published in 2020, acknowledges direct employment as an essential ‘enabler of apprenticeships, upskilling and competence’.

“The report analyses the growth in non-direct, off-payroll working and the benefits which a directly employed workforce bring to the industry”

DIRECT EMPLOYMENT – A STUDY OF ECONOMIC, BUSINESS, AND SOCIAL OUTCOMES: BASED ON THE ELECTRICAL CONTRACTING SECTOR

Contents

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DIRECT EMPLOYMENT – A STUDY OF ECONOMIC, BUSINESS, AND SOCIAL OUTCOMES: BASED ON THE ELECTRICAL CONTRACTING SECTOR

About the author Foreword Executive summary 6 1. Scope of the study 10 2. Direct employment v. non-direct working 12 3. Trends and drivers 16 4. Outcomes: benefits and disbenefits 20 5. COVID-19 30 6. Policy considerations 32 7. Recommendations 36 8. Conclusions 40 Appendices 42 DIRECT EMPLOYMENT – A STUDY OF ECONOMIC, BUSINESS, AND SOCIAL OUTCOMES: BASED ON THE ELECTRICAL CONTRACTING SECTOR Figure 2 Approximate proportions in different employment statuses and change over time Employment Self-EmploymentAppendix Figure 3a – Do-ability – Within the JIB / the Parties More Difficult Do-able Training Competence Toolkit Rule 17 Other Agreements Time

Appendix

‘Modernisation’

ECS

Longer Term

Real

False

Note: The size of the circle represents the approximate proportion of employment; the arrow indicates change over time. Evidence / Source: Based on author’s assessment and evidence in section 3. 3 45 Figure 3b – Do-ability – Outside the JIB / the Parties More Difficult Less Difficult Shorter Term Longer Term Time Do-able Industry Leadership Tier 1 Contractors Big Clients Tax Regulation Intermediaries Regulation Employment Law Less Difficult Shorter Term Appendix DIRECT EMPLOYMENT A STUDY OF ECONOMIC, BUSINESS, AND SOCIAL OUTCOMES BASED ON THE ELECTRICAL CONTRACTING SECTOR Report to the Joint Industry Board for the Electrical Contracting Industry Professor Howard Gospel Business School, King’s College, University of London

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DIRECT EMPLOYMENT – A STUDY OF ECONOMIC, BUSINESS, AND SOCIAL OUTCOMES: BASED ON THE ELECTRICAL CONTRACTING SECTOR

DIRECT EMPLOYMENT V. NON-DIRECT WORKING

DIRECT EMPLOYMENT – A STUDY OF ECONOMIC, BUSINESS, AND SOCIAL OUTCOMES: BASED ON THE ELECTRICAL CONTRACTING SECTOR

The terms of reference suggested a broad definition. z Direct employment is an employment status for tax and employment law purposes. It contrasts with self-employment, agency worker status, etc. z More widely direct employment is to be seen as part of a broader strategy of retaining a greater proportion of work activity – and hence employment – in-house, in contrast to commercial outsourcing / subcontracting.

From a legal perspective, the law is relatively clear on the definition of direct employment. Both employment law and tax law are less clear on other forms of non-direct working. In employment law there is a distinction between an employee and a self-employed independent contractor. There is also an intermediate category of ‘worker’ who may be seen as a dependent contractor. In tax law, there is only a distinction between an employee and a selfemployed independent contractor2 – however in practice there is considerable contention over this and over whether an individual is indeed genuinely self-employed or in fact dependent on an employer3 . Non-direct engagement via self-employment may be ‘real’ i.e. the individual is truly an independent contractor or sole trader who works for multiple companies / clients. On the other hand, the individual may work predominantly or wholly for one company and this may be a way of avoiding or evading taxes. In this report, this is referred as ‘false’ self-employment. Direct employment may also be ‘real’, i.e. with a contract of employment, PAYE, NIC, employment rights, individual and collective. On the other hand, it may be a way of employing someone on a contingent, on-call basis, where the individual only receives pay when ‘on assignment’ to a particular job, with no guaranteed hours, viz a zero hours contract. In effect, this is a way of avoiding or evading taxes by both the individual and the contractor. In this report, this is referred to as ‘false’ employment. Below I simplify the various arrangements. z On medium and small jobs an electrical contractor will often be the only firm doing electrical work on a site. On bigger jobs, a Tier 1 construction company subcontracts work to a Tier 2 company which will in turn subcontract to a Tier 3, 4, 5 etc. If all these directly employ labour, this is direct employment. But, it is more complex, especially as one goes down the subcontracting chain. z Subcontractors will mainly be businesses which provide various building, electrical, and mechanical services or they may be labour-only subcontractors. z A subcontractor may employ all or some or none of its operatives directly. A subcontractor who employs all or most of its operatives may also occasionally use nondirect labour to ‘top up’ or ‘get a job over the line’. z There are various intermediaries in the sector which often overlap. z There are two types of recruitment companies. z (i) Employment agencies find individuals permanent work and are essentially people-job matching organisations. “In tax law there is only a distinction between an employee and a and a self-employed independent contractor – however in practice there is considerable contention over this.”

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