Government proposes significant employment status reforms

The government has launched a consultation which proposes ambitious employment status reforms, to tackle various issues it has identified, including a rise in ‘bogus self-employment’, ‘worker exploitation’ and the increased use of substitution clauses in order to defeat employment status claims. This article explores the consultation and the government’s rationale for proposing reform.

Why does the government think reform is needed?

The consultation indicates that the government considers that the current three-tier framework of employee, worker and self-employed status has become increasingly difficult to apply in the UK’s modern labour markets and is therefore in need of reform. In particular, new technology is rapidly transforming how, when and where we work, and the gig economy has changed the ‘certainty and stability’ previously provided by employment.

The government is also concerned that a significant proportion of the 4.4 million people currently classified as self-employed have been ‘misclassified’. As a result, although many are working in ‘highly controlled’ working conditions, they miss out on key statutory protections associated with worker status (eg national minimum wage, paid annual leave and pension entitlement) due to their ‘self-employed’ classification.

What reforms is the government proposing?

The government says that its longer-term ‘goal’ is to create a single status of worker, although it recognises that achieving this will take time. Therefore, in the meantime, it is proposing the following reforms to the law relating to employment status:

• Introducing a new statutory ‘presumption’ of worker status: the burden is currently on the individual to prove they have ‘worker’ status. The consultation proposes the creation of a new statutory ‘presumption’ of worker status, which places the burden on the employer to prove an individual is genuinely self-employed as opposed to a worker. It is proposed that this presumption of worker status should extend to all employment law rights which depend on ‘worker’ status, including holiday pay and pension entitlement (a similar statutory presumption already applies in relation to entitlement to National Minimum Wage). The consultation argues that this statutory presumption of worker status will reduce the risks of misclassification/bogus self-employment, and over the longer-term could potentially enable the Fair Work Agency to get involved in the future enforcement of employment status disputes taking pressure off the employment tribunals.

• Amending the ‘worker’ status test to reduce the emphasis on personal service: the consultation proposes rebalancing the ‘worker’ status test to place less emphasis on the need for the individual to provide ‘personal service’ and instead elevate the importance of the degree of ‘control’ they are under. The government takes the view that ‘personal service’ should not be the sole determinative factor in identifying an individual’s employment status. Where significant ‘control’ is being exercised over the person carrying out work, the fact that their contract contains a valid substitution clause should not leave them denied access to core employment rights. It is proposed that the ‘worker’ status test would be rebalanced, so that the employment tribunal would consider: (1) ‘does the individual personally provide services and/or are they under a significant level of direction or control by the employer/engager?’; then (2) whether the individual was carrying on a business or profession on their own account and whether the other party to the contract is their client or customer. Alternatively, the government could legislate to clarify that a right of substitution is not the sole or overriding factor preventing an individual from establishing that they are a ‘worker’.

• Penalties for employers who repeatedly misclassify their workforce: currently, even if one individual’s claim for worker status is upheld, some employers refuse to re-classify their workforce. Forcing colleagues who are still classified as ‘self-employed’ to bring their own claims, which places pressure on the employment tribunal system. To combat this issue, the consultation proposes strengthening and clarifying existing employment tribunal powers to order a losing employer to pay a financial penalty by classifying repeated failures by an employer to recognise employment status in its workforce as an aggravating factor justifying the imposition of a financial penalty.

• Additional protections for the genuinely self-employed: the consultation suggests the introduction of further protections for the genuinely self-employed, including: (1) the introduction of a new right to receive a written statement providing key details about each contract for services entered (subject to qualifying criteria); (2) extending protection against blacklisting; and (3) extending some health and safety protections.

What can affected employers do now to prepare?

In our experience, the potential future impact of these reforms will vary significantly between employers. Some employers have fully employed workforces, with no ‘self-employed’ individuals. Others rely heavily on a self-employed model, often quietly acknowledging behind closed doors the questionable legal basis of this ‘self-employed’ classification. In part, this reflects the fact that the individuals carrying out the work are often themselves keen to retain their ‘self-employed’ status due to the tax advantages this attracts.

Those employers for whom these reforms are likely to have a major impact may want to being to prepare now by:

• identifying all ‘self-employed’ individuals in the workforce (eg contractors, freelancers, consultants)

• assessing their genuine working practices, not contractual labels, focusing on personal service, substitution, control, integration, financial risk and independence

• assessing the potential risk of each of them having ‘worker’ or ‘employee’ status

• avoiding the temptation to merely relabel relationships or rewrite contracts without changing actual working practices

• train managers, HR and procurement teams to avoid operational practices that undermine genuine self-employment

• prepare for increased enforcement scrutiny, and financial penalties, particularly where misclassification is widespread or repeated.

The consultation closes on 8 January 2027. There is currently no clear date when these reforms may be introduced.

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