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.