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HR Legal

Uberization – the need for clear rules in the field of on demand-work

Blog, 14 March 2018

On-demand Economy represents one of the major global mega trends of this decade. Many companies and governments are struggling with the classic employee and independent contractor categories in the light of these new developments. These new ways of working and its many possibilities may call for a new legal framework, which considers multiple legal issues, such as employment law, taxation law and social security law.

Along with the digital era came a new way of doing business there is nothing to suggest that businesses based on the concept of sharing economy, on demand-economy or gig economy are on their way out – on the contrary. In a report from 2015, PwC published a forecast stating that the sharing economy stood to increase its turnover from USD 15bn. in 2015 to USD 335bn. in 2025.

However, even though companies and governments have spotted the possibilities of the new technology; these possibilities also give cause for legal discussions. One of these concerns the terminology “employee” and “self-employed” and their legal contents.

In its report from December 2015, the European Parliament took its first steps towards a digital inner market. According to the report, EU’s institutions recognize both the positive effects and the challenges of the new platform economy. The EU encourages the member states to develop strategies on how to secure the rights of the gig workers and highlights the need for a clear definition of the term “self-employment” in order to avoid so called “bogus self-employment”.

The discussions on how to understand and interpret the word “employee” is not new at all. Within the fields of employment and taxation law, guidelines have been developed on how to distinguish employment from self-employment.

The reason why a definition of the term “employee” or “employment” is relevant, is because of the rights and protections employees have been awarded in the legislation of many countries, e.g. holiday, pay during sickness, terms of termination, etc. On the other hand, self-employed persons may deduct operating expenses in the tax accounts; however they also have an obligation to pay corporation tax.

The technological evolution and the growth of the gig economy create the possibility for conducting business without actually employing personnel. This means that even though an Uber-driver or a Tasker from TaskRabbit can decide when and who they will be assisting, their work is still subject to the structures and rules imposed by the company making the platform available.

Employee or self-employed

The legal assessment of whether a working person should be categorized as an employee or as self-employed is based on an overall assessment. This assessment takes into account – among other factors – the relationship between the parties; who is instructing the other, who bears the economic risk of the work, etc. A self-employed person will typically perform the work at his own expense, having more assignors who are not necessarily serviced by him personally. Furthermore, a self-employed person will typically be paying his own operational costs in relation to his work. This is just some of the factors that can be taken into account when assessing whether a person is employed or self-employed, and it should be kept in mind that the assessment should always be specific, taking into account all factors of the case in each incident.

If you were to determine whether Uber-drivers are employed or self-employed, you would most likely come to the conclusion that most Uber-drivers are self-employed. They do not receive any salary from Uber. On the contrary, the drivers receive their pay directly from the customer and pay their expenses themselves. The Uber-driver uses his own car and is responsible for having car insurance etc. Thus, the Uber-driver is running the economic risk of the business – not Uber. Furthermore, the driver can conduct other business while being an Uber-driver without compromising his duty of loyalty towards Uber. As it is evident from the above, there are quite a few good arguments for categorizing the Uber-driver as self-employed. However, it can also be argued that Uber has some power to exercise control over their drivers, as they determine the structure within which the Uber-driver must conduct his business. Furthermore, Uber determines the price for the drivers’ services.

Looking at case law and administrative practice, the self-employment test differs, depending on whether the claim is based on employment law or tax law and social contributions, and in terms of employment law there also seems to be a difference between cases brought by the employee due to unjustified termination claims, and claims related to financial claims, like bonus and stock options. The inconsistency between the different areas of law emphasizes the need here for clear rules.

In regard to social contributions, it seems that the municipalities in Denmark already have categorized sharing economic work as self-employment. In October 2016 a new rule entered into force in Denmark lowering your welfare support if you do not work for at least 225 hours pr. year. This work must be “ordinary” and “unsupported” by the government. According to the public employment agency, sharing economic work – such as using Cleady or driving for Uber – does not fall within this category. In a case from 2016 an unemployment benefit claimant had his welfare support taken away because he rented out his car via a Danish car rental platform called GoMore. The authorities found that renting out your car was self-employed work and thus not “ordinary”, even though it had just been for 5 hours within a period of four months. In contrast, an English court has found that an Uber-driver should be categorized in a special category of “workers” according to English law.

What new legislation should look like?

The need for clear rules on how to legally treat this new form of work is evident from the above examples. These new rules should be flexible to the advantage of both companies and workers. The rules need to take into account the different needs and purposes of employment regulation on one side, and tax and social contribution rules on the other side.

In this context, the legislators should take into consideration the special circumstances surrounding the concept of gig economy and not make use of the so called referral-solution; employers must treat their temporary staff and stationed workers on the same terms as their permanent, local employments. It would be a mistake to use this referral-solution in a special law concerning on demand-work. The gig economy is a new possibility to create growth and jobs in the world, and by turning a blind eye to the obvious desire for a flexible model within this area, we risk closing down an important development.

The special circumstances surrounding on demand-workers suggests that a third category should be introduced as an alternative to ordinary employees and self-employed persons. The professors Seth Harris and Alan Krueger have already proposed the term “independent workers”. A definition of these “independent workers” could be something like: “persons organized by a company and doing business in accordance with that company’s guidelines, but who, as a self-employed person, undertakes to provide services to customers on his own initiative and at his own expense and risk”.

These new rules should naturally be based on both companies’ and employees’ wish for a flexible collaboration. New rules must be clear and should include a positive list of the terms and conditions under which the on demand workers can work. Thus, it should not be necessary for companies to make specific, complicated and risk full assessments every time they consider a new structure for their business or terminate a co-operation between themselves and a driver, a cleaner, etc. In other words, there legislation should be short and simple and the need for interpretation should be minimized.

Along with the digital era came a new way of doing business there is nothing to suggest that businesses based on the concept of sharing economy, on demand-economy or gig economy are on their way out – on the contrary. In a report from 2015, PwC published a forecast stating that the sharing economy stood to increase its turnover from USD 15bn. in 2015 to USD 335bn. in 2025.

However, even though companies and governments have spotted the possibilities of the new technology; these possibilities also give cause for legal discussions. One of these concerns the terminology “employee” and “self-employed” and their legal contents.

In its report from December 2015, the European Parliament took its first steps towards a digital inner market. According to the report, EU’s institutions recognize both the positive effects and the challenges of the new platform economy. The EU encourages the member states to develop strategies on how to secure the rights of the gig workers and highlights the need for a clear definition of the term “self-employment” in order to avoid so called “bogus self-employment”.

The discussions on how to understand and interpret the word “employee” is not new at all. Within the fields of employment and taxation law, guidelines have been developed on how to distinguish employment from self-employment.

The reason why a definition of the term “employee” or “employment” is relevant, is because of the rights and protections employees have been awarded in the legislation of many countries, e.g. holiday, pay during sickness, terms of termination, etc. On the other hand, self-employed persons may deduct operating expenses in the tax accounts; however they also have an obligation to pay corporation tax.

The technological evolution and the growth of the gig economy create the possibility for conducting business without actually employing personnel. This means that even though an Uber-driver or a Tasker from TaskRabbit can decide when and who they will be assisting, their work is still subject to the structures and rules imposed by the company making the platform available.

Employee or self-employed

The legal assessment of whether a working person should be categorized as an employee or as self-employed is based on an overall assessment. This assessment takes into account – among other factors – the relationship between the parties; who is instructing the other, who bears the economic risk of the work, etc. A self-employed person will typically perform the work at his own expense, having more assignors who are not necessarily serviced by him personally. Furthermore, a self-employed person will typically be paying his own operational costs in relation to his work. This is just some of the factors that can be taken into account when assessing whether a person is employed or self-employed, and it should be kept in mind that the assessment should always be specific, taking into account all factors of the case in each incident.

If you were to determine whether Uber-drivers are employed or self-employed, you would most likely come to the conclusion that most Uber-drivers are self-employed. They do not receive any salary from Uber. On the contrary, the drivers receive their pay directly from the customer and pay their expenses themselves. The Uber-driver uses his own car and is responsible for having car insurance etc. Thus, the Uber-driver is running the economic risk of the business – not Uber. Furthermore, the driver can conduct other business while being an Uber-driver without compromising his duty of loyalty towards Uber. As it is evident from the above, there are quite a few good arguments for categorizing the Uber-driver as self-employed. However, it can also be argued that Uber has some power to exercise control over their drivers, as they determine the structure within which the Uber-driver must conduct his business. Furthermore, Uber determines the price for the drivers’ services.

Looking at case law and administrative practice, the self-employment test differs, depending on whether the claim is based on employment law or tax law and social contributions, and in terms of employment law there also seems to be a difference between cases brought by the employee due to unjustified termination claims, and claims related to financial claims, like bonus and stock options. The inconsistency between the different areas of law emphasizes the need here for clear rules.

In regard to social contributions, it seems that the municipalities in Denmark already have categorized sharing economic work as self-employment. In October 2016 a new rule entered into force in Denmark lowering your welfare support if you do not work for at least 225 hours pr. year. This work must be “ordinary” and “unsupported” by the government. According to the public employment agency, sharing economic work – such as using Cleady or driving for Uber – does not fall within this category. In a case from 2016 an unemployment benefit claimant had his welfare support taken away because he rented out his car via a Danish car rental platform called GoMore. The authorities found that renting out your car was self-employed work and thus not “ordinary”, even though it had just been for 5 hours within a period of four months. In contrast, an English court has found that an Uber-driver should be categorized in a special category of “workers” according to English law.

What new legislation should look like?

The need for clear rules on how to legally treat this new form of work is evident from the above examples. These new rules should be flexible to the advantage of both companies and workers. The rules need to take into account the different needs and purposes of employment regulation on one side, and tax and social contribution rules on the other side.

In this context, the legislators should take into consideration the special circumstances surrounding the concept of gig economy and not make use of the so called referral-solution; employers must treat their temporary staff and stationed workers on the same terms as their permanent, local employments. It would be a mistake to use this referral-solution in a special law concerning on demand-work. The gig economy is a new possibility to create growth and jobs in the world, and by turning a blind eye to the obvious desire for a flexible model within this area, we risk closing down an important development.

The special circumstances surrounding on demand-workers suggests that a third category should be introduced as an alternative to ordinary employees and self-employed persons. The professors Seth Harris and Alan Krueger have already proposed the term “independent workers”. A definition of these “independent workers” could be something like: “persons organized by a company and doing business in accordance with that company’s guidelines, but who, as a self-employed person, undertakes to provide services to customers on his own initiative and at his own expense and risk”.

These new rules should naturally be based on both companies’ and employees’ wish for a flexible collaboration. New rules must be clear and should include a positive list of the terms and conditions under which the on demand workers can work. Thus, it should not be necessary for companies to make specific, complicated and risk full assessments every time they consider a new structure for their business or terminate a co-operation between themselves and a driver, a cleaner, etc. In other words, there legislation should be short and simple and the need for interpretation should be minimized.

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Anders

Etgen Reitz

Partner

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