New directive threatens the use of self-employed contractor models in Europe
Published on 3rd Feb 2023
Many staffing companies, AOR/EORs and platforms may need to start planning changes to their commercial models soon
Following a vote in the European Parliament on 2 February, a new European Union directive seems likely to be adopted in the next year or so. Under the current draft of the directive many self-employed contractors and gig workers in Europe engaged via staffing companies and employers-of-record (EOR)/agents-of-record (AOR), as well as digital platforms (the primary target of the directive), will have to be engaged as employees unless they can be engaged on very obviously business-to-business terms such as being paid a fixed price for defined deliverables.
In addition, various new transparency requirements will be introduced in relation to how technology is used in the recruitment process.
Individual Member States will have two years from the adoption of the directive at EU level to implement the directive into national law. Notwithstanding lobbying efforts against it by many platforms this adoption may well take place in early 2024. Many national governments across the EU are supportive of the principles of the directive and seem likely to move fast to implement the directive locally. Some commentators feel that aspects of the directive have not been properly thought through and are unworkable, but there does seem to be momentum behind it.
Implementation of this directive will, if and when it happens, force many staffing companies, AOR/EORs and platforms to change the way they operate in Europe. Users of self-employed contractors and consultants supplied via intermediaries (for example, in IT, engineering, design, consultancy, life science and research companies) will also have to make adjustments or face increased costs of supply. And if the directive works, a new government in the UK may be tempted to replicate it in the UK.
The changes that affected organisations will need to adopt to deal with the directive may take many months to implement – and so they will need to start planning soon. It would be unwise to assume that, because some aspects do not appear workable, it will not come into force.
The self-employed model
Many staffing platform models depend, in terms of cost-effectiveness and scalability, on the use of self-employment models to avoid tax and other employment "headaches" for themselves and clients. And, of course, some workers prefer the self-employment model, especially where they want higher take-home pay and are comfortable that their way of working involves genuine independence, with work via multiple platforms in any period. The European Commission thinks nine out of 10 of these platforms classify the 20-30 million people working through them in the EU as self-employed.
In addition, it has been common in the last 30 years for UK and US staffing companies to deploy contractors in many European countries via a self-employed model. This is often done partly to avoid the cost of setting up locally licensed staffing operations and being subject to regulatory limits on what temporary workers can be used for. It is also used partly to avoid local workplace tax, social security and corporate tax costs (allowing higher net pay to the contractors), and to minimise employment law risks and costs. For staffing companies it has been a way of going global "lite". Companies that do this will often eventually move to a licensed model with employed temps but only once their volumes in a particular country justify the costs of incorporating and getting a licence locally.
More recently, some EORs have begun offering a service under which they act as AOR or similar, and payroll locally engaged self-employed contractors, as well as employees, for end clients.
There have of course been several major employment status cases, based on existing laws, across Europe in relation to the growing use of self-employment models including in relation to taxi and delivery services. But there has not been a firm Europe-wide legislative response until now.
The proposed directive
In December 2021, the Commission launched a legislative proposal to improve working conditions in platform work. The proposed directive is targeted at providing additional protections for platform workers and increasing the transparency of automated systems and algorithms used by platforms to allocate work and monitor performance of their workforce.
Subsequently, amendments to the proposed directive have widened the already-broad definition of "digital labour platform" and made it even easier for workers to claim employment status – there has been political push-back in the European Parliament against more self-employment-friendly tests. The presumption will not lead to an automatic reclassification of workers because the platform will have the chance to argue against the presumption before a decision is made. However, the burden of proof will effectively be on the platform to show that the workers are not employees. The Commission believes the proposal could lead to the reclassification of up to 4 million workers.
Perhaps most importantly from a cost perspective a presumption of employment will affect not only employment rights but also (indirectly) tax and VAT status (as it will, in many countries, be difficult to argue a platform worker is employed for employment purposes but self-employed for tax purposes) and laws relating to the regulation of staffing companies and labour leasing.
Although the proposed directive will not apply to workers outside the EU (such as in the UK), UK and US staffing companies and platforms that organise work for individuals in the EU will be affected, and any new government in the UK in 2024 or 2025 may well be tempted to replicate the directive.
Crucially, the definition of "digital labour platform" is now wide enough to include many staffing companies as well as online staffing platforms. This could mean that workers supplied via certain types of staffing company and EOR/AOR will be presumed to be employees, thereby making it difficult for the staffing companies and EOR/AORs to engage workers on a self-employed basis and giving rise to various costs and regulatory burdens for the staffing companies. This could include many workers presently engaged as independent contractors and paid on a time and materials basis by digital labour platforms.
What is a 'digital labour platform'?
The updated definition of a "digital labour platform" now includes any commercial service which:
- is provided, at least in part, at a distance through electronic means, such as a website or mobile application;
- is provided at the request of a recipient or involves the allocation of work through an open call; and
- involves the organisation of work performed by individuals irrespective of the location or contractual designation of the relationship.
The organisation of work is no longer a "necessary and essential component" and this limb has been broadened to cover any organisation irrespective of the contractual designation; that is, not just online platforms. A provision has also been added explicitly stating that platforms exercising the function of temporary work agencies will be subject to the directive.
The European Parliament has also stated that a digital labour platform includes any "internet-based companies that organise the work provided by workers or self-employed people to third-party clients and serve as intermediaries between the workers and the clients". This seems to us capable of catching many staffing companies (which are increasingly using electronic means to provide elements of their service), talent platforms and some software-as-a-service platforms (where the service includes the supply of contractors).
It appears that the directive is intended to cover platforms which operate as "introducers only" (with supply then being performed by the workers for the hirers directly) as well as where the platforms act as contractual intermediaries (under which, as a matter of contract law, the workers provide services to the intermediary which then supplies those services on to the hirer under a contract between the hirer and the intermediary).
When will staffing companies and EOR/AORs be caught?
The definition of "organisation of the work done by individuals" refers to "at a minimum a role in matching the demand with the supply of labour by an individual who has a contractual relationship with the labour platform". This captures the work done by staffing companies as well as staffing platforms.
This "can include other activities such as processing payment" so companies such as EOR/AORs involved only in payroll of client-introduced self-employed workers could also be caught even if they do not find work for the individual. It is "irrespective of the contractual designation of the relationship" between the parties so a court would look at the reality of the relationship between the parties as well as what the contracts say.
The second element of the definition – to provide the service at the request of a recipient – appears easily satisfied.
Therefore, whether or not a staffing company or EOR/AOR will be a "digital platform" will depend on whether it uses "electronic means" to organise workers, including a website or mobile application. The organisation of work does not have to be exclusively via electronic tools - the directive explains that "hybrid arrangements" combining online communication processes with manual processes can constitute platform work.
A lot of staffing companies use, or plan to use, electronic means (for example, through the use of algorithms, chatbots or other electronic systems to attract contractors or match contractors to vacancies with clients, or assign workers to tasks or track performance of tasks, or assess compensation, with artificial intelligence looming large in the plans of some companies) and, therefore, may well be deemed to organise work through electronic means. Where these workers are currently engaged as self-employed contractors or freelancers the proposed directive will mean that they will be presumed to be employees unless the "digital platform" can prove that such workers are, in fact, self-employed. It will in practice be difficult and administratively burdensome for the digital platform (or staffing company or EOR-AOR) to prove this on a case-by-case basis.
Businesses that fall within the definition of digital labour platform will have to comply with the regulatory requirements laid out in the proposed directive when and if it becomes law, and will in many cases also be required to comply with local workplace tax, corporate tax and licensing requirements relating to staffing and employee leasing services.
Is there a defence?
Originally, the draft directive required two out of five criteria to be satisfied for there to be a presumption of employment. The current draft goes further than this; a platform worker is effectively now entitled to claim the presumption of employment with the digital labour platform.
Although the platform has the right to argue against this presumption, it will have to satisfy two criteria to show that the worker is genuinely self-employed.
The first is that the contractual relationship is not an employment relationship based on relevant national employment laws and the worker is "free from control and direction" of the platform both under the contract and in reality. Indicators of control and direction include a set salary, a defined time schedule or controlled working time and conditions, rating systems to allocate work, tracking or supervision of a worker, rules regarding appearance or conduct, restricted options to work for any third party or provide a substitute and restricted freedom to choose accident insurance or a pension scheme.
The directive says nothing about whether the end user's role in controlling or directing the worker will constitute the necessary control and direction – in practice, in staffing situations, it will be the end user rather than staffing company that exercises that control. However, it may be argued that that control and direction by an end user (which has no direct contract with the worker) is exercised via the rights the staffing company has under its contract with the worker and is thus effectively control and direction by the staffing company.
The second requirement is that the worker must be "usually engaged in an independently established trade… as that with which the work performed is related".
It may, therefore, be difficult for many digital labour platforms (and especially any staffing companies and EOR/AORs who fall within that definition) to show that these defence criteria are met, especially in relation to contractors currently treated as self-employed but who are paid on a timesheet/time-spent basis and/or who generally work as part of a team at the end client.
Employment law, tax, regulatory and transparency implications
Unless a digital labour platform can show that its workers are genuinely self-employed, it seems that all workers the platform engages and pays will be entitled to claim employment rights. Employment status could also trigger requirements under social security or employment tax. This may also lead to a requirement for platforms with workers inside the EU to obtain staffing or recruitment licenses in particular countries, although this will be for local authorities to decide country by country. Interestingly, the directive specifically requires platforms with workers in a country different from where the platform is established to declare that worker's activity to the appropriate labour authority and ensure compliance with national taxation and social security contribution obligations.
In addition, platforms will be required to implement human oversight into any automated decisions which significantly affect working conditions (that is, those relating to recruitment, access to and organisation of work assignments, earnings and pricing of assignments, health and safety, working time, promotion, contractual status, suspension or termination). Platform workers will be entitled to a transparent explanation "at the latest on the first day of application" of any automated decision. These transparency rules apply to both self-employed workers and those with an employment relationship.
The impact of strict compliance requirements and greater employment rights for platform workers will lead to higher administrative costs, employment overheads and tax/social security compliance for all organisations falling within the definition of digital labour platform.
Steps to reduce risk
The organisation of work through an electronic system is what appears to push many staffing companies and potentially some EOR/AORs into the broad scope of the digital labour platform definition. A potential, but likely undesirable, solution would be to match individuals to assignments and provide related services using solely manual processes without any material use of electronic systems or algorithms. Many online staffing platforms are unlikely to have this option and even traditional staffing companies will be reluctant to remove all forms of automation from their current processes or plans for the future given the current pace of digital transformation of staffing and recruitment processes.
The proposed directive acknowledges that genuinely self-employed workers (those who are "themselves responsible vis-à-vis their customers for how they perform their work and the quality of their outputs") can continue to operate as self-employed and use platforms to access work. Therefore, we are likely to see platforms, EOR/AORs and staffing companies, which are determined not to move to a 100% employed model (with all associated costs and regulatory restrictions and burdens), instead moving towards engaging contractors on output-based statement of work arrangements with payment linked to delivery rather than time spent. They would also need to ensure they do not exert control or direction over performance by workers.
Even where workers are genuinely self-employed, platforms will have to comply with the directive's transparency rules.
Moving to an employment model
If using a self-employed model will no longer work, what issues should be considered when moving to an employment model? On the assumption that workers will be presumed to be employees, workers will be entitled to claim employment rights including (but not limited to) holiday pay, sick pay, national minimum wage, pensions auto-enrolment and working time where there are laws relating to these things. However, it may then be difficult to argue that a platform worker is employed for employment law purposes but self-employed for tax purposes, so increased tax and social security liabilities for these employees should be considered when engaging contractors under the new model. In many countries, the tax and social security implications for platforms will be far greater than the employment law implications, and the proposal acknowledges that national tax authorities will apply the presumption (as would HMRC if the directive were to be replicated in the UK).
Staffing companies based outside the EU that decide they have to employ individuals inside the EU will need to consider whether they may come to be at risk of creating a permanent establishment in that country for themselves or their clients. This may require the company to pay corporation tax or VAT or both in that country and obtain general business licenses in addition to any recruitment or staffing licences they will need.
Osborne Clarke comment
It's not yet clear how this directive would interact with existing EU and national laws relating to agency workers and employment status. Legislators in Member States may have to think hard about how relevant national employment status rules and employment laws (including relevant case law) are impacted and ensure significant confusion is avoided. For example, as currently proposed, digital labour platform workers would be afforded greater or different rights to "agency workers" under the Agency Workers Directive and there is likely to be a significant degree of overlap between the definition of "temporary work agency" and "digital labour platform". It is acknowledged in the proposal that digital labour platforms exerting the function of a temporary work agency will be caught so arguably it would be fairer to deem the platform workers as agency workers under local laws implementing the existing Agency Workers Directive rather than employees with rights under the new directive, but this point has not been addressed in the proposal.
The proposed directive is not yet law but there seems a good likelihood it will be adopted by early 2024, with Member States expected to try to move fast, notwithstanding the practical challenges highlighted in this briefing, to implement it as national law over the next two years. As a result, platforms, many EORs/AORs and many staffing companies with self-employed workers in the EU will need to be well-positioned to handle potential reclassification of their self-employed workers.
In some cases, this may lead to a flurry of local establishment in key countries, and applications for licences and remodelling of commercial terms to cover employment-related costs (which can take some time in certain countries). In others, local partners may be engaged to deal with local employment requirements, although in many cases that may not be lawful given chain-leasing laws in many countries and question marks over the general legality of certain types of EOR model. And some platforms may move further towards output-based "statement of work" arrangements for contractors to maximise the chance that they will still be deemed self-employed.
We would recommend that all involved in use or supply of independent contractors and self-employed gig workers familiarise themselves with the proposals as soon as possible. Whatever solution affected platforms (including staffing companies and EOR/AORs) decide to adopt they will, unless the directive is substantially changed, have to start planning soon because the lead time for changing commercial models (to either an employed model or a defined deliverables-based "statement of work" model), negotiating new terms with clients and contractors and (where necessary) incorporating in country and obtaining licences is likely to be many months in some countries. In our experience this sort of transition can take over a year for some companies. Not for the first time in the world of contingent workforce, affected organisations face the prospect of having to prepare now for a potentially defective piece of legislation before it has been finalised.
We are obviously happy to discuss the different options that organisations will have and have experts in this area in our offices in every major European country.
This article was written with the help of Sophie Chesterman, Trainee Solicitor.