The Taylor Review

July 12, 2017

Partners and Uber drivers set to be given the same rights

Billed as a major report into the ‘gig economy’, the Taylor Review of Modern Working Practices proposes substantial changes for the rights and taxation of partners in law, accountancy and other professional services firms.

The Review examined various aspects of modern work, including employment rights, taxation and the tests for self-employment. Although it is only the starting point for any legislative changes, the warm welcome given by the Prime Minister to the Review (and the expression of opinion from the opposition that it does not go far enough) suggests it will dictate the direction of travel for legislation in these areas over the coming years.

Law firm partners as workers and dependent contractors

The Taylor Review specifically identifies the rights of so-called ‘Limb (b)’ workers as an area needing attention. Limb (b) workers are known as such because they fall within part (b) of section 230(3) of the Employment Rights Act 1996, which captures individuals who undertake personally work for another party to a contract (other than a client).

This is important for partners in professional services firms, as the Clyde & Co LLP and Anor v Bates van Winkelhof case in 2014 established that many LLP members are limb (b) workers.

The net cast by the Clyde & Co case omitted to address clearly whether partners in general partnerships or certain other categories of individual would be classified as limb (b) workers. The Review recommends that the test for worker status should be revised and focus on the degree of control exercised over the individual, rather than the existence of a contractual relationship. Although this may make the position clearer in the context of Uber or Deliveroo, the reverse is likely to be true for law firm partners, who enjoy varying degrees of autonomy.

The term ‘worker’ however may be retired. The Review recommends that it be replaced by the term ‘Dependent Contractor’.

Rights of dependent contractors

Along with a new name for workers come new rights, although the proposals in this regard are quite limited and primarily administrative in nature. For professional firms recruiting partners, a notable change proposed is a requirement to give a written statement of particulars, setting out matters such as the new partner’s hours of work, normal pay, holiday pay, sick pay and pension. The review suggests introducing a standalone right for individuals to bring a claim for compensation if this written statement is not provided. Apart from the administrative burden, the main impact of this may be in raising awareness for partners, many of whom do not realise they have rights such as statutory holiday and sick pay.

Notably, the Review does not address whether dependent contractors should be entitled to bring a claim if they are dismissed “unfairly”. If the status quo remains, then law firm partners, (even if they are dependent contractors) are unlikely to acquire that additional right. Given that a desire to avoid unfair dismissal claims drives much of the process behind employee terminations, firms will no doubt appreciate the continued flexibility as to the process behind partner retirements.

Tax

Potentially the biggest changes for partners are the proposals that national insurance contributions are equalised over time between the employed and self-employed and aligning the test for self-employment status for tax and employment rights purposes.

For members of LLPs, that might mean doing away with the salaried member tests introduced in 2014, which have been the source of an annual head-scratching exercise for many firms, due to the complexity of HMRC's conditions for qualifying as self-employed. However, celebrations would be premature, as it could work in the opposite direction, since the Review suggests that where an individual is an “employee” for tax purposes, that decision could also be binding for employment law purposes.

More troubling to firms is that the Review focuses on the tax advantages of self-employed status as being a distortion which should be addressed through equalisation of tax rates. It must be anticipated that government would address that distortion by raising national insurance contributions of the self-employed rather than lowering the rates of the employed. There is the potential for increases in both the individual rate (where the self-employed pay a lower percentage, but the difference is generally not large) and, crucially, by charging an amount similar to the employer’s national insurance rate, presently 13.9% of earnings.

This tax increase would be hugely significant if introduced and risks trading one distortion for another, since it may create a large tax gap between those firms operating as LLPs compared with those operating through limited companies, which can avoid national insurance for owner managers by paying dividends. This issue would be exacerbated by the downward direction of travel for corporation tax.

Next steps

Change to the definition of ‘worker’ will require legislation, so is unlikely to be imminent. Tax changes may come sooner, with the national insurance increase proposed in this year’s Spring budget potentially returning in 2018. It remains to be seen whether there is the political appetite to make some of the more far-reaching tax and other changes proposed in the Review.


Related pages:

Employment issues more

Partnership and LLP Team more

Partnership and LLPs more

Partnerships and LLPs for Professional Practices more

Tax for Partnerships and LLPs more

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Daniel Sutherland
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dsutherland@foxwilliams.com

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