Preview: Undermining Construction

undermining construction

The corrosive effects of false self-employment

by Dr Mark Harvey

This publication was commissioned from the Institute of Employment Rights by the Union of Construction, Allied Trades and Technicians (UCATT). The author of the report, Dr Mark Harvey is Senior Research Fellow at the ERSC Centre for Innovation and Competition at the University of Manchester. He has researched on construction industry labour markets for a number of years, including comparative European Projects and has published in this area, including a previous report for the Institute. email Mark.Harvey@man.ac.uk This publication, like all publications of the Institute, represents not the collective views of the Institute but only the views of the author. The responsibility of the Institute is limited to approving its publication as worthy of consideration within the labour movement.

ISBN 1 873271 91 3 November 2001 published by the Institute of Employment Rights 177 Abbeville Road London SW4 9RL 020 7498 6919 e-mail ier@gn.apc.org www.ier.org.uk printed by Upstream (TU) 020 7207 1560 ÂŁ8 for trade unions and students ÂŁ30 others

THE

INSTITUTE OF

EMPLOYMENT RIGHTS

foreword Construction has an image problem. The industry is not attractive to anyone considering a career when leaving school, college or university. This is a matter of concern to government, the industry and of course the trade unions. So why has construction developed such a bad reputation? This book, by Dr Mark Harvey, highlights one of the critical factors in understanding the roots of the construction industry’s problems, false self-employment.

The term false self-employment may be new to some, but the problem has been around for over three decades. Contractors and sub-contractors used selfemployed labour, rather than direct labour, to avoid their responsibilities as employers. The effect has been to fragment the industry; dismantle the apprenticeship structure; confuse responsibilities for safety on sites; and deny workers their employment rights. Quite simply, false self-employment has undermined the construction industry.

The costs of false self-employment are not confined to the construction industry; tax-payers have lost billions of pounds directly in unpaid tax and National Insurance, and indirectly through income support for sick and injured building workers. Every year £2 billion is wasted on subsidising false self-employment rather than improving public services.

Undermining Construction is a comprehensive analysis of false self-employment, offering clear, concise proposals to tackle the problem. The evidence in the report illustrates that there is still a huge problem in the industry and that government needs to find the political will to end the practice.

There is a broad consensus in the industry that the industry needs to build a new culture. Part of that new culture must be the eradication of labour practices that rely on tax evasion and a denial of basic employment rights. To transform the industry’s image, the people who build Britain’s schools, hospitals, roads and cities should be given real respect and value. The first step will be finding a unified approach to government with a proposal to end false selfemployment. We hope Undermining Construction will generate a positive discussion presenting a powerful case to government in favour of reform.

George Brumwell UCATT General Secretary

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acknowledgements I would particularly like to thank Jonathan Green, Research Officer for UCATT, for his sustained help in gathering material and obtaining contacts for this report. I would also like to thank Regional Secretaries, and Full Time Organisers of UCATT, in particular Lou Lewis, John Gould, Jerry Swain and Chris Orme for their help.

I would also like to warmly thank Simon Deakin for his very helpful comments, especially on questions of employment law.

The responsibility for the report and the views and proposals expressed in it, however, is entirely my own.

Mark Harvey

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contents executive summary

5

CHAPTER ONE

undermining construction

7

CHAPTER TWO

the confusion of self-employment the confusion of precedents the four tests worker or employee? the conflict between law and taxation the added confusion of construction the atomistic assumption economic incentives to take advantage of confusion false, bogus or illegal self-employment?

11 11 13 15 16 16 18 19 21

CHAPTER THREE

taxation and the growth of mass self-employment in UK construction introduction taxation and self-employment in construction

23 23 24

CHAPTER FOUR

evidence of mass false and illegal self-employment in the UK construction industry introduction the economic organisation of production on construction sites historical evidence from 1995 evidence from today provided by UCATT a mini-survey for CIS4 workers in London evidence from interviews evidence from the Construction Confederation evidence from interviews and documents concerning Inland Revenue’s failure to enforce compliance summing up the evidence postscript

29 29 31 32 33 36 37 38 39 42 43

CHAPTER FIVE

the fiscal black hole introduction the fiscal black hole

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44 44 45

CHAPTER SIX

proposals for reform one form of self-employment in the construction industry the ‘economic reality’ test postscript

48 48 51 53

references

54

recent publications

56

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executive summary I The present case law on employment status, employment legislation and taxation classification system has created a confused labour market institutional framework, which has in part promoted the expansion of ‘grey areas’ where employment status is unclear.

I Given this confusion, the economic incentives of the taxation system have stimulated the growth of ‘false’ self-employment, particularly in the construction industry. The result has been market institutional failure where the competition induced by taxation has led the industry down a low cost, low skill and low productivity route.

I In the construction industry, the consequences have been particularly severe with the growth of false self-employment on a large scale. A variety of evidence from statistics to small scale interviews provides the evidence of mass false and illegal self-employment, with adverse effects on economic efficiency.

I The false self-employed bear the full long-term employment-related risks for sickness, accidents, retirement and economic inactivity when they are often in the least favoured circumstances of irregular, casual, and unstable working.

I The direct fiscal loss from false self-employment, both in terms of tax and national insurance, was estimated to range between £1.1 billion and £2 billion per annum, with the most likely figure identified as being around £1.5 billion.

I An estimate of the number of false self-employed is put moderately at 361,000 construction workers. Assuming that the ‘core and majority’ of workforces on construction sites are properly employees, structural reform rather than compliance to existing regulations is deemed appropriate.

Evidence is given of the systemic failure of the Inland Revenue and Contributions Agency to adequately enforce existing law, leading to significant irregularities.

I Two proposals for reform are presented. The first proposes that the anomaly of self-employed in the construction industry who have tax deducted at source by their employers be ended, leaving a single tax and legal status for genuinely independent construction workers. The second proposes an integration, simplification and clarification of statutory, common law on employment status, and taxation classification. It is suggested that a test for economic independence becomes the sole test for this status.

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