Companies operating in the “gig economy”, using a largely self-employed workforce, have enjoyed enormous growth in recent years and have made popular M&A targets. In the UK, these companies have come into conflict with long-established employment law. In our view, current laws are not fully equipped to deal with staffing models in which staff and companies alike seek more flexibility than the traditional “masterservant” employment relationship affords. For M&A deals in which business models operate on the basis that a significant proportion of the workforce is selfemployed, acquirers should consider the real nature of the working relationship to assess the risk of staff being reclassified as workers or employees. Reclassification is not only an issue in the newer gig economy sector but also in industries operating a self-employed model, particularly if small, independent businesses become part of larger corporate entities.
Recent Cases Challenging Employment Rights May Impact Business Models
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 M&A teams should note differences with other employment types (see box). Businesses that have set up contractual arrangements and pricing formats on the basis that staff are self-employed may find business models adversely impacted and valuation damaged by a reclassification of staff as workers. If self-employed contractors are reclassified as employees (rather than workers), costly retrospective national insurance contributions will also arise on their earnings.
The Taylor Review and Contemplated Government Reform
Currently, no single factor determines employment or worker status, and the legal tests are complex. Industry stakeholders have long predicted a reform of gig economy related employment laws, but a change in law could take some time. The “Taylor Review” of modern working practices suggested changes including a new “dependent contractor” classification to distinguish between workers (who should have greater employment protection, albeit not full employment rights) and genuinely selfemployed contractors. Dependent contractors would have a right to a written statement, setting out key terms and entitlements. However, government’s muted response indicates that there does not appear to be appetite for prioritising employment reforms while Brexit negotiations occupy government focus and resources.
What This Means for Corporates and M&A Deals
Until government demonstrates a commitment to introduce reforms, M&A teams looking at gig economy targets should scrutinise contractor relationships. If a business has a large self-employed workforce, deal teams should analyse the true nature of the working relationship — both how it is documented, and (more importantly) how it operates in practice. Recent decisions ignored contractual arrangements and drafting contractual terms will only go so far. Amid the uncertainty, employers operating with a large number of self-employed contractors can reduce litigation risk by monitoring the overall remuneration of contractor 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 exciting growth opportunities and flexible working models, investors must enter into this space with eyes open to the risks.