Proposed EU directive may classify most gig workers and contractors as employees
Published on 24th Jan 2022
Will some staffing platforms cease to be commercially viable, and will traditional contractor and consultancy arrangements in EU be affected?
Many would agree that low-paid workers operating regularly via apps and digital labour platforms, and working under some degree of control should have basic employment rights (to the extent they do not under existing laws). However, the latest plans of the EU to address this go a lot further than hitting obvious "employment" situations relating to low-paid platform workers. Potentially, a wide range of staffing and consultancy arrangements will also be affected, damaging the cost-efficiency and convenience of existing contingent workforce and platform worker arrangements.
The main issue with the proposed directive may be that it contains a very tight employment status test, capturing many contractors who most would otherwise consider self-employed. Another potential issue is that the definition of "digital labour platform" is so wide (in order to prevent loop-holes) that it may catch many contractors working through traditional staffing companies. And the draft directive may mean that platforms and staffing companies that operate outside the EU (based in the US or UK, for example) and organise work for individuals in the EU will need to establish and pay tax (including VAT) in each EU country the workers are based in – pushing up their operating costs and tax liabilities significantly.
The digital 'gig' economy
There are currently thought to be around 28 million people working through digital labour platforms across the EU. This has been predicted to grow to 43 million by 2025. According to the European Commission, nine out of 10 of these platforms currently classify people working through them as self-employed. Just as in the UK (for example taxi app cases) and US, the rise of digital labour platforms (often referred to as the “gig” or “platform” economy) has led to a significant number of court cases in recent years across the EU in relation to the classification of the working relationship between the worker and the digital labour platform.
On 9 December 2021, the Commission launched a legislative proposal to reform conditions for digital labour platform workers in the EU. The Commission says the purpose of its proposals is to improve the working conditions of platform workers, support the sustainable growth of digital labour platforms in the EU, and provide legal certainty. The proposals include a draft directive, and this focuses on the employment status of platform workers and proposed new rights for individuals who are managed through algorithmic technology. EU lawmakers also want to improve visibility and “traceability” of platform work by bringing in obligations for platforms to declare work to authorities at a national level — to support enforcement of legal requirements, and ensure social security contributions are being paid where the work is actually taking place.
What is a 'digital labour platform'?
The Commission's proposed definition of a “digital labour platform” is extremely wide, including any natural or legal person providing a commercial service that is provided "at least in part" at a distance through electronic means and at the request of a recipient of a service– and involves, as a necessary and essential component, the organisation of work performed by individuals, irrespective of where that work is performed. There are only limited exceptions to this. This definition encompasses any company whose core business involves “work performed by individuals”.
Given the way that even traditional staffing companies and consultancies are now using electronic means to automate parts of the matching, resourcing and payment processes, this could capture a lot of staffing companies that would otherwise not typically be considered to be gig economy players or platforms. For example, it could capture an organisation that provides professional consultancy services using self-employed consultants and links the consultant to a particular project using algorithms, or a small business providing a personal service that also happens to provide an aspect of the services online (as a form of "electronic means").
Presumption of employment
The proposed presumption of employment at the heart of the new status test. The draft directive provides a list of five criteria that demonstrate "control" over any individual. If the digital labour platform satisfies just two of the following five criteria, there is a presumption of employment:
- effectively determining or setting upper limits for the level of remuneration;
- requiring the person performing platform work to respect specific binding rules with regard to appearance, conduct towards the recipient of the service or performance of the work;
- supervising the performance of work or verifying the quality of work results, including by electronic means;
- effectively restricting the person’s freedom, including through sanctions, to organise their work; in particular, the discretion to choose their working hours or periods of absence, to accept or to refuse tasks, or to use subcontractors or substitutes; or
- effectively restricting the possibility to build a client base or to perform work for any third party.
While platforms (and other entities caught within the definition of digital labour platform) would be able to rebut the employment presumption, this would, for many involved in the use of contingent workforces, be a significant change to the power dynamic between individuals, users and intermediaries (including platforms). The "platform" would have to prove that the relationship was not actually an “employment relationship”, as defined in relevant national law, in order to rebut the presumption. The clear criteria the Commission proposes are intended to bring the platforms increased legal certainty, reduce litigation costs and facilitate business planning.
Will there be some ways round this directive?
What changes will platforms, staffing companies, consultancies and other intermediaries need to make to get round the directive? As well as switching the burden of proof for employment status away from workers and onto platforms, the proposal stipulates that any legal challenges brought by platforms to try to rebut the presumption “shall not have suspensive effect on the application” – this means that they must treat workers as employees during any period they are trying to overturn that status. It is likely that the mechanism for individuals to challenge their status would remain the same as it is currently, such as court challenges or disputes before national labour authorities. However, the impact of the new legislation is likely to encourage more employment status claims, as it presents an easier route to success for individuals: they will just need to raise the question and then the work will all rest with the platform to prove that it is not the employer.
The Commission has denied that it is trying to end the gig economy model. It has argued that platforms that do not want to have to reclassify scores of workers will be able to adapt their systems and tweak their models to reduce the level of control they apply, so workers can be deemed genuinely self-employed.
Valdis Dombrovskis, executive vice president of the Commission, said: “Platforms may react to this by adjusting their relations with their contractors if they prefer to keep self-employment status — but it means less systemic control over those independent contractors…Or if they think that their specific circumstances merit it they may still challenge this presumption but at least it sets clear criteria which would be uniform criteria across the EU.”
Statement of work arrangements
In other words, we will probably see a growth in genuinely output-based statement of work arrangements. But this will not be a simple tick-box exercise: moving to output-based statement of work arrangements (and away from timesheet-based systems) will be a major transformation for many organisations. It is a good thing that there has been an increase in the functionality of software designed to help organisations monitor the output of their workers. Any steps to move to output-based supply will probably need widespread adoption of that technology.
The proposed legislation would also impose a transparency obligation on digital labour platforms. The platforms would be required to provide workers with specific information on the monitoring and decision-making systems used and the impact these systems have on the workers’ working conditions, such as their access to work assignments, earnings, working time, occupational safety and health, etc.
What happens next?
The legal status of platform work is a complex issue and constantly poses challenges to traditional labour and employment law across the EU and beyond. At the moment, there is no clear timeline for this to become binding law. The directive will need the backing of the European Parliament and Member States’ governments, via the European Council, (likely with amendments) before it can become EU law. But the Commission has noted widespread support from MEPs for legislation to protect gig workers.
The Commission has indicated that it wants this to become law by 2024, when the current legislative session ends. If it does pass, the practical impact may still take some time to be enforced as EU member states would have a two-year period to incorporate the legislation into national law. This is because the proposed legislation is a directive not a regulation (such as the General Data Protection Regulation, which would be directly applicable in Member States' law), and, therefore, must be implemented into national law by each Member State. But, in some countries, implementation may happen quite quickly.
The directive is not yet law. However, it seems to have widespread support and is likely to be adopted and implemented in each EU member state. Non-EU countries may decide to follow suit. For example, any new government in the UK may decide to adopt a similar approach.
Will this, in due course, lead to a reversal of the burden of proof in relation to the tax status of independent contractors in areas like IR35 in the UK and international social security regimes as well? We suspect tax authorities like HMRC would love that to happen.
We would recommend that all involved in use of contingent workforces familiarise themselves with the proposals and consider what actions they may need to take to deal with the risks.