As The IR35 Repeal Hits the Headlines… , is it Time for Governments to Rethink Legislation?

The latest news from the UK is the repeal of IR35. This legislation previously shifted the responsibility of classifying independent contractors from the workers to the company. As of next April, contractors will take back control over determining their status and their tax liability. 

As independent contractors and companies rejoice — Stoke asks, if IR35 wasn’t the right move by the government, what is? 

This article is part of our guide on independent contractor taxes.

The Workforce is Changing: How are Governments Responding?

Freelancing is growing three times faster than the traditional workforce, and by 2027, independent contractors will be the majority in both the US and the UK. It’s no wonder that the past few years have seen a wide range of legislation aimed at controlling and managing independent contractors.

Unfortunately, any new regulations that we’ve seen up until now are focusing on the wrong areas. IR35 was a great example of this.

The goal of IR35 (part of the off-payroll working rules) was to stop employers from defining workers as independent contractors when they were actually working as employees, either by mistake or intentionally as a way to avoid paying PAYE. You don’t have to be cynical to see that the UK government was trying to ensure it didn’t miss out on any owed taxes. 

However, by enforcing the government’s own definition of independent contract work on businesses, , they caused friction between businesses and contractors, and made it much harder for business owners to work with their clients compliantly. 

As the UK Chancellor stated in his speech, “In practice, reforms to off-payroll working have added unnecessary complexity and cost for many businesses.”

Is There an Equivalent in the USA?

If you’re US-based, you’re probably more familiar with the California-based law AB5, and you’re likely following the evolution of Biden’s latest bill that aims to roll out very similar rules across the country. 

AB5 aims to make more independent contractors into full-time employees, ostensibly to ensure better wages and fairer benefits for workers. The only problem? The workers are happy with how things are. 

While the original bill was aimed at blue-collar workers such as ride-share drivers and food delivery companies, it has had an immediate and devastating impact on knowledge workers, too — from journalists and business consultants, to photographers, designers and more. 

Unfortunately it doesn’t even protect blue-collar workers as companies like Uber, Lyft and Doordash made sure to pass Prop22 to exempt them from AB5.

As well as not achieving what it intended, in many cases, AB5 has made companies resistant to hiring Californian freelancers, and that’s costing contractors money — rather than helping to provide greater stability. 

The law also caused many protests, lawsuits and dismissals, and even the amended version released in 2020 that comes with 75 additional exemptions has not eliminated the complexity, confusion and disruption to the labor market. 

Understanding the Difference Between Blue Collar and Knowledge Workers

One of the main problems with legislation like IR35 and AB5 is that it sees the workforce as black and white. A worker is either an independent contractor or an employee. In reality, there are many different kinds of independent contractors, and each will have their own needs in terms of protection. 

If you consider low-level independent contractors like security teams, drivers, cleaners and more, you can understand how they might need support to ensure they don’t get taken advantage of. Employers could hire them to do the same role as an employee, and yet avoid paying them the right benefits such as pension or in the USA — healthcare. 

In these cases, where Gig workers are exclusively working for a single company like Uber or JustEat, misclassification is a real risk. 

However, for independent knowledge workers — consultants, journalists, programmers, engineers, scientists, design thinkers, accountants, lawyers, academics and more, the last thing they want is to be forced to be an employee. They are highly skilled business owners who work for multiple clients, take control over their tax obligations, and want the autonomy to decide if they are an independent contractor or not. 

Governments: What Can You Learn from the Repeal of IR35? 

Rather than focus on potential missed taxes, it’s time for governments and municipalities to think bigger. If independent contractors are going to make up more than 50% of the workforce, they can’t be forced into an employee-shaped box, they need their own strategy and governance. 

Repealing IR35 is a strong message to the rest of the world that regulations that focus on potential missed tax revenues won’t play out for the long term. Instead, governments need to be adjusting labor laws and tax regulations to protect the freelance workforce. 

One great example is the recent expansion of the Freelance Isn’t Free Act, passed by the New York State Senate to cover the whole State as of June 2022. It mandates that any company hiring a freelancer for more than $250 must give them a contract and pay them in a timely manner, within 30 days of the completion of work unless otherwise specified.  

According to Eric Thurm, communications chair of the Freelance Solidarity Project, “Freelance Isn’t Free is a major step toward making sure everyone is treated fairly, no matter what tax forms they file. As the boundaries between traditional employment, freelancing, and gig work become murkier, we must fight for workers who have been unfairly excluded from U.S. labor protections.

A Call to Action for Government Authorities

Independent contractors aren’t a problem to be fixed by trying to classify as many of them as possible as employees. It’s time for governments to wake up and realize that a shift has happened in the labor market, and legislation needs to catch up. 

First, make sure you’re thinking about the freelancers, not your own lined coffers. Look at the data from independent contractors and see what they need. 

For example, in the UK, all workers receive healthcare no matter the status, and in the US, independent contractors pay social security taxes and Medicare and get the benefits on retirement or when in need, just as employees would. 

According to a recent BrainTrust survey, only 4% of knowledge workers say that health insurance and 401k are a reason to stay in traditional employment. Instead, one of the top issues holding them back is handling complex administrative duties. Ask yourself: 

How can we help independent contractors remain independent, and simplify the collection of taxes and contributions?

Is there a way to offer the right social benefits in a non-traditional way, such as regulating for contractors to obtain their own unemployment insurance?

Will any specific proposed legislation limit worker flexibility — the key benefit for independent contractors of all kinds?

Contractors Want Control

Canceling IR35 has shifted back the responsibility onto contractors to take back control over their own status and tax liabilities. This is a strong sign that the UK government has had a wake up call. 

Limiting flexibility in the labor force and making it harder for companies to work with contractors is going in the wrong direction. This is especially true if the goal is internally-focused, to scrape back lost taxes. 

Instead, by broadening the opportunities and benefits available to workers, giving them support from their municipalities, and greater control over their income, governments will be seen as an enabler, not a blocker, championing a flourishing Gig economy.

Written by
Stoke Talent

Team