Business

Who do I really work for?

A wrench on a workbench Image copyright Reuters

A desire to work for yourself is not the only reason the number of self-employed workers in the UK has been soaring.

Some find themselves self-employed because the people they work for prefer it that way.

When Norwich hair salon owner Barry Alan started out in the business, he was an employee. He's employed stylists in the past.

Not any more.

Today, all seven of the stylists working in Mr Alan's large central Norwich hair salon are what are called "chair-renters".

Instead of paying his stylists a weekly salary, Mr Alan shares the money customers pay with them.

You simply divide the money by whatever percentage you as the salon owner and the stylist have agreed, Mr Alan says. "If they are hungry to succeed and do well, the rewards are there."

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Media captionBarry Alan tells the BBC's Michael Robinson how his system of self-employed 'chair-renters' has helped cut his business costs

Chair-renting is administratively simple for his business, Mr Alan says, and there are other advantages.

Because his stylists are freelance, Mr Alan doesn't have to pay Employers' National Insurance or in-work employee benefits such as paid maternity leave, sick pay, holiday pay or redundancy.

Most important of all, he doesn't have to worry about the weekly wage bill he'd have to find if his stylists were employees - particularly after the new £7.20 an hour Living Wage comes into force in April 2016.

"The happy-go-lucky Barry would be no more," Mr Alan says. "You would see a very stressed-out guy who is constantly looking at whether he can cover his overheads."

Mr Alan says he now provides extensive training, but having to pay staff as employees would make that harder.

Rent-to-work

"I'd be in a situation where I'd have to say 'sorry, Miss Young Graduate Stylist, we can't support you for two years because the minimum wage has gone up so we're going to have to let one or two of you go'."

Stylist Eden Spark was trained in Barry Alan's salon. Four years later, she is one of his "chair-renters".

"I think it's a good way to do it", Ms Spark says. "It makes you work hard and makes you ambitious."

Despite having none of the usual in-work employee benefits, Ms Spark says the chair-renting arrangement works for her.

"I like being my own boss," she says. "And I'm not really sick that much."

Image caption Stylist Eden Spark says chair-renting works for her

In this new class of freelancer, self-employed because they're not wanted as employees, some are far from happy.

When the national courier company Citilink suddenly collapsed last Christmas, the RMT union discovered that, despite the smart green-and-yellow livery people saw when parcels were delivered, most of Citilink's drivers weren't employees of the company.

"The public have a perception that these people are directly employed," RMT deputy general-secretary Mick Lynch says.

"But we found 78% of the drivers were in fact self-employed. They had to pay for their own vans, for the painting of the vans and for their uniforms."

Instead of wages, Mr Lynch says, self-employed Citilink drivers were paid a fixed fee per delivery.

Tax savings

"When there's low levels of work they get no pay, when there's high levels of work they get overworked," Mr Lynch says.

"The risk that Citilink had was exported to the workers and of course that makes them vulnerable."

Mr Lynch says Citilink's business model was based on employed drivers until the company embarked on a programme of making staff drivers redundant in the early 2000s.

"Drivers were given the choice of coming back as self-employed," Mr Lynch says.

"Many felt there was no choice because if they didn't take the self-employed basis they would have no work at all."

John Manners-Bell of the consultancy Transport Intelligence says the Citilink model is now commonplace in the courier industry.

"It all comes down to cost," Mr Manners-Bell says. "It's much cheaper for companies to use self-employed drivers than to have them on their payroll."

Image caption Transport industry consultant John Manners-Bell

Mr Lynch says similar transfers, from staff to self-employment, are now commonplace in some sectors of British industry.

For some workers, being off the books can be financially beneficial.

Manchester-based IT support consultant Peter Meace is 58. He gets work through specialist recruitment agencies, which connect him with clients wanting to use his services, and travels to wherever he's contracted to work.

Mr Meace says he's better off self-employed because he benefits from another feature of the new British workplace: the so-called "umbrella company".

Umbrella companies stand between agency workers and their clients, processing client payments and dealing with tax and National Insurance.

They are also designed to save tax.

Mr Meace says the tax benefits his umbrella delivers more than justify the £35 a week it charges him.

"Things such as money I spend on mileage or accommodation become tax-deductible," Mr Meace says.

"In some contracts I've been spending £800 a month on expenses, but they go as tax-deductible items and I don't pay tax on them."

In a month where he spends £800 in expenses, Mr Meace reckons, the umbrella saves him approximately £300.

Deductions

Employers hiring agency workers also benefit.

Not only do they not have to pay for in-work benefits and taxes, fierce competition between recruitment agencies also means some of the tax savings consultants like Peter make get passed on in the form of lower charges for their services.

Umbrella companies emerged in the late 1990s as a service for better-paid agency workers. But, because of their tax efficiency, umbrellas quickly spread though the IT industry encouraging employers to switch from employees to agency staff working through umbrellas.

Between 2013 and 2014 alone, the Freelancer and Contractor Services Association says, the number of people working through umbrella companies increased by almost 25%.

Image caption IT support consultant Peter Meace says the umbrella system saves him tax

To deal with the growing demand, hundreds more umbrella companies sprang up, many offering services to employers in far lower-paid sectors.

Meredith McCammond, an expert in employment taxes for the lower-paid at the Institute of Taxation, says some umbrellas began adopting more aggressive tax avoidance strategies to compete for business and maintain their profit margins.

"Some employees have been encouraged to claim expenses that aren't legitimate or are over-inflated," Ms McCammond says.

"Not only does the worker make a tax saving when they use an umbrella company, but the umbrella company itself saves on their Employers' National Insurance in respect of any aspect of the worker's salary that can be attributed to those travel costs."

Ms McCammond says agency workers are often unaware of the potential danger they are in.

"We've seen cases where workers have come in with their payslips and haven't been able to understand what these various deductions are, and it's clear that the umbrella company has put through a flat amount of, say, £5 a day for a worker's lunch, even if the worker has taken a packed lunch from home," Ms McCammond says.

"It was fairly standard practice for some umbrellas to put through a flat sum of, say, £30 a day for subsistence costs," she added.

"Employers saved the National Insurance on that £30 a day, employees saved some tax and National Insurance and, if and when HMRC come knocking, it could be many years later."

Employment tax consultant Sue Ollerenshaw says competition between umbrellas and recruitment agencies is particularly intense in sectors like road freight transport.

"There's more and more downward pressure on margins," Ms Ollerenshaw says.

"Agencies are looking to be able to supply drivers at a rate where they can still make a profit. And, at the bottom of the market, the non-compliant agencies are putting intolerable pressure on the agencies that do want to comply because, by using non-compliant models, they are able to offer drivers at very, very competitive rates."

In his recent Budget, Chancellor of the Exchequer George Osborne promised to take action against some of the more outlandish avoidance techniques some umbrellas have been using.

But, if recent history is any guide, the attractions to employers of keeping workers off the books will mean someone is likely, once again, to come up with a new tax ploy for avoiding employment taxes which nobody - including the UK tax authorities - has yet thought of.

Listen to The New Workplace at 12:00 BST on Saturday 15 August on BBC Radio 4, repeated on Sunday 16 August at 21:00 BST, or listen again on BBC iPlayer.

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