Sharing economy platforms: current employment law and tax challenges – and a way forward?

Published on 1st Oct 2015

Many sharing economy platforms involve “buying” personal services. This relates to tasks ranging from cleaning, caring, driving, meal deliveries, valet parking, shopping and odd jobs to IT services and “professional” services. In this regard, the sharing economy is about sharing skills as much as it is about sharing assets.

Some governments (including the UK government) realise that these platforms may increase workforce efficiency by enabling “hirers” more easily to find the right skilled labour at the right time and at the right cost. Governments are also aware that these platforms improve access to remunerative work for various groups which might otherwise be excluded from work, such as disabled home workers picking up IT projects via a portal or primary carers and students able to book odd jobs in their spare time via online care sites or taxi sites.

McKinsey suggested in June 2015 that by 2025 these online platforms could raise global GDP by $27 trillion and increase employment by 72 million full-time equivalent positions.

Employment status is a high profile question

Anyone who follows the news cannot have failed to notice the media coverage recently around the employment status of people who work via sharing economy platforms. This has included Hilary Clinton vowing, in July when talking about “gig economy” jobs, to “crackdown on employers who misclassify employees as independent contractors” and so denying them employment protection rights. Two well-known ride-sharing services have been involved in numerous court hearings about employment rights of drivers, including one potentially large class action. Home cleaning platform Homejoy closed this summer due, in part, to pending legal action by its cleaners claiming employment rights in California.

The central dilemma

At the heart of this issue is a dilemma: if you want to build a successful business with high customer satisfaction levels, then it is often a good idea to train your staff and thereafter make sure they work to certain standards when delivering services. However, in most countries, the greater the control you exercise over how someone performs a service the more likely that person will be deemed to be your employee for tax and employment law purposes.

This immediately causes a problem for sharing economy platforms as, in order to be attractive to users and be able to scale up quickly, they can ill afford the cost (including obligations in many EU countries to account to the tax authorities for income tax and social security charges e.g. PAYE and NICs in the UK) and administrative burden of being “employers”. Nor would they want their users (in the form of hirers of personal services via their platform) to be hit with such obligations. (It’s all very well hiring a cleaner for a fixed price via a platform and getting a fantastic service, but you don’t want a letter from the tax or social security authorities 12 months later asking for the tax or social security you should have deducted from the cleaner’s pay.)

Minimum employment rights can also be a danger area with, for example, special employment rights for certain domestic workers in countries like France and Italy. That is why most platforms operate on the basis that service providers are “independent contractors” or “self-employed”.

The “self-employment” test is becoming harder

In countries such as the UK, USA, Germany and the Netherlands it is getting much harder to argue, for tax and other purposes, that someone is self-employed.

For example, in the UK the old self-employment tests are being replaced. Unless the hirer/platform can prove that the individual did not work under the “supervision, direction or control” of any person, then they are liable for UK income tax (PAYE) and social security (NICs) in respect of individuals paid/engaged via the platform.

The UK tax authorities are also currently looking to increase their power to gather data from online exchanges about payments made through them, and there is only one reason they want that data! The authorities would, we assume, prefer to only have to chase the platforms for PAYE and NICs rather than each user individually.

The challenge of “seller monetisation”

It gets worse: many successful online exchanges will at some stage wish to explore monetisation of the “seller” in a transaction, whether by membership fee, transaction fee (i.e. a % of whatever they get paid or fixed fee per transaction), or a fee for access to particular opportunities to sell (akin to an advertising fee). That all makes economic sense and works well in asset sharing exchanges. However, any exchange or platform which acts as a market place in the UK for something involving personal services immediately falls foul of a range of legislation designed to protect vulnerable work-seekers from exploitation by “cowboy” recruiters. Breach of this legislation, which prohibits any charge to work-seekers for work-finding services, is a criminal offence and the UK authorities have confirmed that the activities of online exchanges do fall within the ambit of recruitment regulation.

Arguments by online exchanges via which people offer personal services that they are “nothing more than a neutral technological platform” and should not be subject to normal tax, employment or recruitment laws have so far tended often (but not always) to fall on deaf ears in the US and UK.

The way forward?

Given that consumers do wants these platforms, and people do want to find ways of supplementing their income through them, what is the answer?

For the moment these are areas of likely development for platforms providing services to users in EU countries:

1.   Employment: Engage at least some of the service providers as your employees. Apoorva Mehta, founder of online shopping and delivery platform Instacart, has looked at this solution: “What we have found is that our shoppers require training and supervision, which is how you improve the quality of the picking. You can’t do that when they are independent contractors”. As a result, some of Instacart’s workers are now employed by Instacart. Other platforms have also gone down this road in the USA. It’s not such an easy option in the UK, due to the big differential in tax and NICs between employment and self-employment, but we believe that some platforms will look at an employed solution, perhaps in partnership with employment intermediary or payroll companies.

2.   Franchising: Develop a franchise model under which service providers are helped in setting up their “business”, for which it is legitimate to charge the service provider a franchise fee and which will usually help establish that service providers are genuinely self-employed.

3.   Legislative change: Lobby for an exemption for online exchanges from recruitment regulation. The UK Government has been looking at this for over a year, and the delay suggests that there are concerns that any exemption will become a loophole for cowboy recruiters.

4.   Status checking: Become much more rigorous in terms of checking the self-employed status of service providers, taking heart from the fact that the recent decisions in California about the employment status of drivers would probably not be followed by courts and tribunals in the UK and some other countries (Californian employment status tests being very harsh). On this there is some good news for platforms – in a case involving an online platform and a skilled worker in New York, the platform (US industry leader elance-oDesk, now called Upwork) was dismissed from the lawsuit and deemed free of all liability in the case less than two months after the company was served with proceedings. In other words, not all courts think the platforms create employment relationships. More promisingly still, the Belgium authorities have recently stated that they accept that Uber drivers can be self-employed.

5.   New times, new provider categorisation: (Possibly) an acknowledgement in law of a “new” (less regulated) category of service provider who finds work via online exchanges and is neither an employee or self-employed. This has been called the “third way” by many commentators. We are not optimistic about this, not least because governments would be concerned about the substantial loss of tax revenue and, tellingly, the UK Office of Tax Simplification has recently suggested that it would not work.

If there were an easy answer, certain well-known online exchanges would have found them already, and Homejoy might still be in business. However there are some good strategies which should work for most platforms.

This article is the first in a series of six weekly articles on the legal issues affecting the sharing economy.  Register here for future sharing economy updates.

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* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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