Companies that operate in the "gig economy", using a largely self-employed workforce, have enjoyed enormous growth in recent years but in the UK, these companies have come into conflict with long-established UK employment law. In our view, current laws are not fully equipped to deal with new staffing models in which staff and companies alike are looking for more flexibility than the traditional "master-servant" employment relationship affords. Private equity deal teams should closely consider employment status when they evaluate deals, particularly if a significant proportion of the workforce is self-employed. This is not only an issue in the newer gig economy sector but also in industries that operate a self-employed model, particularly where small, independent businesses become part of larger corporate entities, as we have seen with the dental industry in recent years.
Recent cases have challenged whether self-employed staff are entitled to the enhanced employment rights associated with worker or employee status. Gig economy contractors have taken successful legal action against companies, with tribunals ruling that self-employed contractors were entitled to "worker" status. Worker status is a "third way" employment type unique to the UK, and deal teams should be aware of differences with other employment types. Businesses that have set up contractual arrangements and pricing formats on the basis that staff are self-employed may find a company's business model adversely impacted and valuation damaged by a reclassification of staff as workers. In addition, if self-employed contractors are reclassified as employees (rather than workers), costly retrospective national insurance contributions will also arise on their earnings.
Currently, there is no single factor which determines employment or worker status, and the legal tests are complex. Reform of gig economy related employment laws has been predicted for some time but a change in law could still be some way off. Although the government published a review of employment status in February 2017, the review was ordered under the previous Conservative government and whether Theresa May has the appetite for a radical overhaul of employment law remains unclear. In the recent Spring 2017 budget, the Chancellor commented that some self-employed individuals ought to have employment status suggesting that any move by the current government will likely be to make it harder for companies to convince the courts that their staff are self-employed. For now, private equity firms will have to assess investment decisions on a case-by-case basis.
Buyout teams looking at deals in the gig economy should scrutinise employment relationships. If a business has a large self-employed workforce, deal teams should take care to analyse the true nature of the working relationship, both in terms of how it is documented, and (more importantly) how it operates in practice. Drafting contractual terms will only go so far. Recent cases dismissed contractual arrangements, looking instead at the true nature of the working relationship.
Amid the uncertainty, private equity firms can reduce the likelihood of being hit with litigation by monitoring the overall level of remuneration received by portfolio company staff. Incentivised contractors are likely to be content with the flexibility that self-employment can provide, and less likely to initiate claims demanding employee or worker status. While the gig economy offers some exciting deal opportunities for private equity, the level of risk in these transactions may not work for everyone.
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