Self-Employment – Labour’s Five Tests

On Monday 14th November 2016 I gave a speech as Shadow Secretary of State for Work and Pensions at SoHost, London, on self-employment. The text of the speech is below:

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I’d like to start by thanking the Federation of Small Businesses for their help and support for the Labour Party’s commission on self-employment. It is fantastic to be able to work with you again.

As some of you will know, we worked together on combatting the scourge of Late Payments in small business, which although we made considerable progress in amendments to the Small Business Act, is still a huge issue with £26 billion currently owed to small businesses include sole traders by large contractors.

So I am absolutely delighted that in my role as Shadow Secretary of State for Work and Pensions we are able to team up again using the FSB’s expertise to help develop fair and coherent policies that support and enable self-employed workers to prosper and thrive. The economy rests on the backs of small businesses including our self-employed and we need to recognise that in taxation policies, industrial strategy and also in our social security system. And that’s what my focus will be on today.

I’d also like to thank SoHost for having us here today. Places like SoHost provide opportunities for self-employed people to network and work together in a shared, creative space, helping talented Britons to build the new industrial revolution that we so desperately need. Thank you again for your hospitality.

In so many ways, self-employment is characteristic of both the opportunities and the challenges faced by our society.

It brings to the individual a combination of great freedom with great risk, an ability to build one’s own enterprise and to work flexibly around other priorities. It can offer great prosperity for some, but poverty-pay for others.

Since the 1980s the number of self-employed people has risen dramatically. There are now nearly 5 million, accounting for 15 percent of our workforce

Self-employed people work across a wide range of trades, industries and sectors, and an array of occupations from skilled, professional and managerial, to manual, service and administrative.

We cannot view the self-employed as a homogenous group, but must instead recognise the vibrancy and diversity of this important part of our workforce.

However, while self-employment can offer vast earning potential, it is a sad fact that the overall trend in recent years has been towards low pay.

The self-employed have seen falling incomes since the recession, with the average freelancer earning about £11,000. Roughly half the average wage in the wider workforce. The Resolution Foundation reported last month that the self-employed are earning less than they did 15 years ago.

In a recent study, the Social Market Foundation estimated that 45 percent of self-employed people earn less than the National Living Wage.

The TUC and others analysis suggests these trends in rising self-employment is more about the lack of alternative, quality jobs.

As Frances O’Grady has commented, “Britain’s new generation of self-employed workers are not all the budding entrepreneurs ministers like to talk about. While some choose self-employment, many are forced into it because there is no alternative work.”

This trend towards lower incomes at a time when inequalities between the 10 percent of households earning less than £10,000 a year and the 1 percent earning over £250,000 a year is growing presents risks to both our economy and our society. These inequalities are not inevitable; they are down to political choices. And I want to set out an alternative to the unfair tax and social security measures that this Government and the previous coalition has implemented particularly as they applied to self-employed workers.

To fully take advantage of the potential freedoms that starting your own business provides, we must ensure that there is a strong social security system in place, one which allows us to take risks, to venture, or to start anew, secure in the knowledge that we will not fall too far, should we suffer setbacks.

For the self-employed they face multiple risks:

Housing

· The trend towards low pay in the labour market as a whole leaves many self-employed people without the financial buffer to soften a volatile income. The savings that a secure income allows many employees, are hard to match within the short, cycles in and out of work experienced by many of the self-employed.

· Owning your own home has become increasingly difficult. The Deane Review found that 55 percent of self-employed people felt that their employment status had made getting a mortgage more difficult. With house prices continuing to outpace wages, housing security is a huge challenge now faced by the majority of our society, one accentuated by self-employment status.

Maternity leave

· Starting a family can also be a frightening prospect, more so without the secure income, adoption pay or paternity pay offered through an employer.

Last year a report from the Citizens Advice Service confirmed that many self-employed parents with new babies can struggle to balance the needs of their family with those of their work. It found that three in every five self-employed parents take less than seven days off after their baby is born. This has concerning implications for family life and child development.

Savings

· Those who can’t save now are very unlikely to be saving for the future. Research by the Association of Independent Professionals and the Self-Employed found that four in ten self-employed people don’t have a pension.

Likewise, a report from the New Policy Institute found that the self-employed are not only less likely to be participating in pension saving, but that they tend to save less as a whole when they do.

Auto-enrolment does nothing to improve this worrying picture as self-employed people are not currently eligible to be automatically enrolled into pension saving.

Without action, the rise in self-employment could therefore present a very serious challenge to the long term sustainability of our pension provision.

The last Labour government has a proud record on pensioner poverty, we are committed to ensuring that those gains are defended, and that working people are offered full support to build a dignified retirement.

To minimise these risks, and build a secure future, we need our social security system to responds to this new economic reality.

In some areas there is sufficient provision; Contributory Employment and Support Allowance, Maternity Allowance and our State Pension are proof that the social security system is able to respond appropriately to boost protections for Britain’s entrepreneurs.
But in many areas there is much more work to be done.

The self-employed currently have very poor income protection to smooth the ups and downs of their small business. While some risk is inevitable in any enterprise, but our social security system must ensure that people feel confident to act in their longer term interest, safe in the knowledge that they will be able to get by.

The diminishing value of working age benefits, along with the barrier to accessing contributory Jobseekers’ Allowance is no comfort to those managing the risks of a small business.

Likewise, the self-employed have no recourse to Sick Pay should they fall ill. In a recent study by the then Department for Business, Innovation and Skills 30% of self-employed workers cited ‘not getting paid when ill’ as a key concern.

Sickness can affect each and every one of us, regardless of employment status. As with employees, the social security system must ensure that those who fall ill temporarily are still able to meet their basic living costs.

Similarly, those who face longer term injury through accident, have little in the way of additional provision. While employees can access Industrial Injury and Disablement benefits, this is not currently extended to those working for themselves.

Finally, the state has always played an important role in nurturing family life. While the self-employed can access the Maternity Allowance, provision for new fathers, or for those wishing to adopt lags remains out of reach. There is a clear precedent here for state support, one which needs to be realised.

Of course, a number of more recent reforms have been put in place in our social security system. It is important that we examine these new policies to get the fullest picture of provision.

Labour supported the principles of the Government’s flagship programme, Universal Credit, when it was first introduced, firstly to unify a complex system into one single payment to social security claimants, and secondly to ensure that work always paid.

However, since its inception, Universal Credit has gone from damage-limitation to outright disaster. Full-roll out has been delayed seven times, the cost of implementation has ballooned to £15.8 billion and deep cuts to the system mean that many users will now be worse off under Universal Credit than under the previous system.

In particular, apart from the Government’s gross incompetence, the £3.8 billion cuts to UC Work Allowances significantly undermines the principle that work will always pay under the scheme. Research by the Resolution Foundation showed that these cuts will leave 2.5 million working families on average £2,100 worse off.

Alongside the damage done to Universal Credit by the Tories failing austerity agenda, there are significant issues faced by self-employed people trying to access support through the scheme.

A 2014 report by the Social Security Advisory Committee found that there were major problems with the way that Universal Credit responds to business decisions made by self-employed people, with its confusing accounting rules, and with poor information and guidance for those navigating the programme.

Given the rapidly increasing numbers of self-employed people, we are facing a very real danger that Universal Credit will not be fit for purpose for large swathes of the workforce by the time it is eventually implemented.

Labour will consider the full set of recommendations for Universal Credit made by the Social Security Advisory Committee as part of our review of self-employment.

So what about the self-employed in other parts of the world? Has anyone else got this right? What’s the international evidence on how to better support the self-employed through our social security system?

As you would expect, arrangements for meeting the social security needs for the self-employed in Europe are varied and complex.

While overall there is reasonably extensive coverage against the risks faced across the continent, the question of who is eligible, what support they can access, and how, varies widely.

An investigation by the Social Security Advisory Committee found that 25 out of the 27 EU states provide cover for illness or disability two thirds help with occupational injury or disease and just under half make provision for unemployment for freelancers.

Three states – Hungary, Luxembourg and Slovenia – provide compulsory cover for all of the above.

Broadly, the Committee’s investigation found three approaches across the continent. A series of occupational schemes, providing for workers within a specific sector of the economy, such as farmers or artists. Like those used in Germany, France or Spain.

Separate and dedicated social insurance schemes for the self-employed as a whole, such as in Belgium. Or, those who protect the self-employed through general social security arrangements, such as Denmark.

As these international examples show, there are various options available to policy-makers to strengthen social security for the self-employed. So how should we determine the best way forward?

The scope of Labour’s Commission on Self-Employment will look at the issues self-employed workers face in the round, and this will include how we strengthen our social security system.

I believe that there are five tests that any new social security policies for the self-employed must meet. Tests of adequacy, fairness, equality, responsibility, and respect for the existing principles in our social security system.

ADEQUACY

After six years of Tory rule, the adequacy of social security support has suffered a steep decline.

The freezing of working age social security support, as part of a multi-billion pound slashing of a vast array of entitlements has left the safety net frayed, and for some non-existent.

This is a slap in the face to anyone who, like the overwhelming majority, comes to require social security after years of paying into the system.

Providing social security to the self-employed must form part of a wider shift to improve the adequacy of support, reflecting the contribution that we all make to the social security system over the course of our lives and ending the Tories’ policies of destitution by design.

EQUALITY

Secondly on equality, we must ensure that there is greater parity in the social security support offered to the self-employed and those who are employed.

There is clear and inherent injustice in the current system, and in our transformation of our social security system, Labour will ensure parity for workers of differing status.

At a time when some employers are being exposed for imposing false self-employment on workers who should really be employed, any new policy needs to ensure that employment rights are respected.

FAIRNESS

On fairness, trust in the social security system is vital if we are to defend the gains made by working people over the last century.

Currently, the different levels of National Insurance contributions paid by the self-employed when compared to the employed, alongside the mix of entitlements that each are eligible for, make for an opaque and confusing system.

We cannot expect employees to continue to pay more into the system while offering equality of entitlements across employment status.

Likewise we cannot ask the self-employed to increase their contributions, and to continue to take additional risks, if we are not willing to offer a stronger safety net in return.

A transparent and fair settlement, will help to rebuild trust where it has broken down and ensure that everyone can rely on help in times of need.

The recent landmark Employment Tribunal ruling, which found that drivers for the app Uber can claim fuller employment rights, highlighted not just the exploitation of these workers, but the need to develop a clearer legal definition of self-employment, upon which to base a better framework for enforcement.

Associated with this is the need for clarity in the respective responsibilities of employers, workers both employed and self-employed and the State.

Finally, any extension of social security for the self-employed must recognise the importance of the existing values underpinning our system.

Those mutually re-enforcing principles of contribution, universalism and means-testing.

It is clear that there are those in the Conservative party, and other parties too, who are committed to a private insurance model for healthcare. The 2012 Health & Social Care Act has laid the foundations for that – soon we will not just be hearing of private healthcare providers NHS and care services but of how individual budgets can be used for health insurance. And these ambitions don’t just lie in health and care.

Alarm bells should ring on moves to expand the role of private insurance into the social security system too.

We must see behind this thin veneer of compassionate rhetoric to the true motivations for this change.

By allowing wealthier workers to buy out of our collective approach to security into a privatised model of individual insurance, May’s government plans to erode public support for the principles of universalism and means testing in our social security system. This would create political opportunities for continued attacks on the safety net which belongs to us all.

Labour will never let that happen. Any policy to strengthen social security for the self-employed will seek to re-enforce the current mix of contribution, universalism and means-testing, without allowing one to dominate at the expense of the others.

Any measure that we introduce, will be set within the strong existing foundations of the welfare state, still as relevant for us today as they were when they were established.

These five tests form the basis of our commitment to ensure the social security system is dynamic and responsive to the 21st century labour market, including the rising numbers of self-employed workers.

As part of Labour’s self-employment commission we will develop policies and assess them against these tests, to ensure a strong and secure safety net for our self-employed, particularly for the low paid. Our economy depends on our small and micro-businesses and we must put the support into ensure that they thrive.

And we will do so while building on the principles of social security – inclusion, support and security for all – that have guaranteed our collective wellbeing for so long.

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