14 June 2018

A successful economy requires a flexible labour market


The Supreme Court yesterday handed down its judgment in the case of Gary Smith and Pimlico Plumbers.

Despite being registered as self-employed for tax purposes, the court ruled that Gary Smith was entitled to workers’ rights. The court held that an employment tribunal was “entitled to conclude” that Mr Smith was a worker. As a worker Smith would be have employment rights, such as holiday and sick pay.

The Supreme Court ruling means that an employment tribunal can now proceed to examine his action against Pimlico Plumbers as a worker, including a claim that he was unfairly dismissed.

The ruling could have negative consequences for businesses, consumers, workers on low pay, and the economy as a whole. Although this is just one case, it sets a precedent which is likely to be followed in the future.

Whereas the traditional strength of English commercial law has been, in Lord Bingham’s words, “the quality of certainty”, yesterday’s ruling creates ambiguity. Business owners who had previously regarded contractors as being just that, are now faced with the question of whether or not to start regarding them as employees — with all the extra work and expense that entails. It will also cause them to ask questions about future projects. Should they, for example, use the services of more contractors if they are to be regarded as workers with the same benefits as their employees?

One of the many benefits of using contractors has been the flexibility it offers to companies. Instead of having a permanently large workforce, which is often impractical and not financially viable, it has allowed businesses to use the services provided by contractors when they need them. Imposing extra restrictions on companies about the employment status of contractors will restrain and restrict their opportunities for growth.

Extra costs for businesses means higher prices for consumers. This is the case with both small entrepreneurial firms which disrupt industries, and also larger, more established, companies. It can also lead to a decrease in the quality of goods and services provided by businesses. For example, a recent study found that an increase in the minimum wage resulted in a decrease in the quality of care provided by care homes.

The move could also have a negative impact on workers, especially those on low incomes. Imposing new restrictions on firms will make it less profitable for firms to use the services of contractors and casual workers.

The UK has witnessed the rise of the gig economy, where many people choose to undertake work on a casual basis for firms such as Uber and Deliveroo. These roles can be a great way to make some extra money as they may be unable to commit to the demands of a regular job due to other commitments. Many of these workers are on low incomes and so the money which they make from working in these roles can make a real difference.

There is a great deal of evidence which suggests restrictive labour markets can lead to the relegation of new entrants and, to a disproportionate extent, new entrants who are women or immigrants.

It is also bad news for the economy as a whole. The UK economy has been performing relatively well since the Great Recession, with new companies being formed and with record levels of employment. Many of these new companies use contractors and casual workers and so it is these companies which are likely to be most adversely affected as a result. As such, any increase in regulations which restricts labour market flexibility could damage the economy by reducing growth and increasing unemployment.

The UK is heavily reliant on foreign investment, and the importance of a flexible labour market for that investment cannot be overstated. An academic study found that investors view it as an incredibly important factor when it comes to deciding whether or not to invest in a country. As we prepare to leave the EU, with all the challenges and opportunities which this offers, it is vitally important that the UK signals that it is still open for business; a flexible labour market is a great way to do this.

The importance of startups and entrepreneurs to the economy has been recognised recently by the Home Secretary Sajid Javid who has called for the creation of a new visa route specifically designed for people who want to start a business in the UK.

The last few years have seen how the UK’s flexible labour market has led to record levels of employment and the creation of new and exciting companies. However, perhaps one of the best examples of the benefits of flexible labour markets is found in the story of Pimlico Plumbers itself.

Margaret Thatcher’s government brought in widespread reforms, many of which had a dramatic impact on the labour market. Increased labour flexibility allowed people to start their own business, or to work in sectors which had previously been closed to them such as finance. This gave them the opportunity to become wealthy and to dramatically improve their standard of living. Among them was Charlie Mullins, from a council flat in London and who left school at 15 with no qualifications, and went on to found Pimlico Plumbers. He is now a multi-millionaire.

The Supreme Court’s judgment is worrying, especially at a time when the UK needs to signal that it is open for business and ensure that our labour market remains as flexible as possible.

Ben Ramanauskas is Policy Analyst at the Taxpayers' Alliance.