Labour’s proposed changes to “worker” status and unfair dismissal law

The next general election in the UK is now less than year away, and the opposition have published an Employment Rights Green Paper outlining their commitment to radical reform of employment laws, if elected. The Labour Party have said they will prioritise re-shaping employment rights with a particular focus on “pay, security, inequality, and discrimination”, and they plan to do this by bringing forward a bill within the first 100 days of entering office. This “New Deal for Working People” covers increases in wages and Statutory Sick Pay, more robust Health & Safety obligations, flexible working rights, parental leave and support, and an expansion of trade union rights (amongst other proposals). However, perhaps the most interesting development for employers to take note of is Labour’s plan to consult on the creation of a single “worker” status and expand unfair dismissal protections to cover all “workers”. This article examines the massive impact such proposals could have on employment rights in the UK, the subsequent changes that we could see in the UK labour market, and the effects these might have on employers operating in the UK. 

A single “worker” status for all but the genuinely self-employed

Unlike the two-tier employment status categories seen in the US, France, and Australia, of employees and the self-employed, UK employment law recognises three types of employment status: “employees”, the “self-employed contractors” and “workers”. 

Employees are entitled to a wide scope of employment rights and protections not afforded to those who are genuinely self-employed. “Workers” are an intermediary category that benefit from some (but not all) of the statutory rights afforded to employees, such as national minimum wage, paid holiday, and protections against unlawful deductions from wages, discrimination, and whistleblowing.  Unlike employees, workers do not have statutory unfair dismissal rights, and do not qualify for statutory sick pay or maternity, paternity, shared parental or adoption leave and pay.  The genuinely self-employed are not covered by the statutory protections afforded to employees or workers. 

The statutory definitions of each category are not comprehensive (or even consistent between different pieces of legislation), and differentiating between them is often difficult.  Ultimately, the assessment of whether someone is employed, self-employed or a worker is a holistic and highly fact-specific exercise, and there is a very significant amount of case law on the distinctions between each category (the recent leading cases on worker status are Pimlico Plumbers v Smith [2018] and Uber BV and others v Aslam and others [2021]). 

The three main principles derived from case law key in determining employment status are personal service (i.e. whether the individual contracts to perform work personally with the employer), mutuality of obligations (i.e. whether the employer is obliged to offer work and whether the individual is obliged to accept it), and control (i.e. whether the employer exercises a level of control over the individual by providing them with company equipment, uniform, an email address, bespoke training etc.). 

The intermediary “worker” category first appeared in the Employment Rights Act 1996 (“ERA”) as the UK entered an era of economic and technological expansion, which drove the need for a more flexible workforce and the emergence of the “gig” economy.  In ERA, a “worker” is defined as someone who either has an employment contract or any other contract whereby the individual provides personal services to the other party, and the other party is not a client or customer of any profession or business undertaking carried on by the individual.  However, the line between employment and worker status is extremely hard to draw and the Labour party feel that subsequent litigation over employment status, and an increase in “bogus self-employment” contracts has resulted in a level of inequality and mistrust between individuals and employers. Labour therefore plans to launch a consultation on having a single “worker” status for everyone, except for those who are genuinely self-employed, thus removing any ambiguity and extending statutory rights (such as sick pay and family leave) to all of those who currently fall into the worker and employee categories. They consider that taking this step to simplify the framework could increase transparency and help to unclog the Employment Tribunal from status disputes.

Alongside this proposed merging of worker and employee status, Labour plans to expand “day one” rights to include protection against unfair dismissal and the right to redundancy pay (both of which are currently only available after two years of service with an employer), as well as committing to ending zero-hour contracts. Together, these proposals open up the UK’s workforce to a wide range of new rights and protections (with no qualifying periods), with very significant additional costs to businesses.

It is worth mentioning that the Conservative government consulted on employment status issues as part of the “Good Work Plan”.  The results of consultation were published in July 2022, with the government concluding that the current three-tier approach to employment status was appropriate and brought flexibility to the labour market.  If a new Labour government press ahead with reform in this area, employers will need to implement a number of operational changes. Initially, employers will need to do an analysis of their current workforce to ascertain the makeup and ratio of current employees, workers, and self-employed (and zero-hours workers) to identify where changes may need to be made to working arrangements and/or contracts. They will then need to conduct an impact analysis of employment status changes to their HR processes and policies, employee benefit schemes, risk and compliance procedures, and any payroll considerations. Should the proposals come to fruition, employers may need to act quickly to amend employment contract templates and internal policies and rules to encompass the new protections that a merged category of worker would bring.

Plans to expand unfair dismissal protections for all workers 

The proposed changes to unfair dismissal law, as set out in Labour’s Green Paper, could also have a resounding impact on employers across the UK, forcing them to not only reconsider how they approach dismissals but also their recruitment processes. The proposed reforms currently include the following changes: 

• ending the two-year qualifying period for employees to bring an unfair dismissal claim, and making it a “day one” right;  
• removing the statutory caps on the compensation workers can receive if they successfully bring a claim for unfair dismissal; 
• extending the limitation periods for claims in the Employment Tribunal (currently the limit is generally three months from the date of effective termination or the act complained of); and 
• merging the categories of employment status to extend unfair dismissal rights to those currently classified as “workers” (as discussed above). 

These proposals would mark a landmark shift in government policy and protection of workers. Since unfair dismissal protection was originally introduced under the Industrial Relations Act 1971, there have been a number of changes and additions to the legislation (now set out in ERA). The Conservative government last amended the qualifying period in April 2012, increasing it from one year of service to two years. Labour’s plans to scrap the qualifying period altogether, combined with the removal of statutory limits on compensation and the extension of the limitation periods in which employees can bring claims, not only mark a huge policy shift but will also likely be a catalyst for an influx of unfair dismissal claims being brought in the Employment Tribunal.  This will of course result in a financial burden on employers dealing with litigation, but also an administrative burden in terms of the steps they will need to take to safeguard their businesses.

Employers will firstly need to take greater care when recruiting new employees to ensure they are the right fit for their organisation. This could manifest itself in more stringent hiring procedures such as numerous interviews, lengthy assessment processes, and longer probationary periods. It might also lead to employers reviewing the length of notice periods for new hires, and shortening the length of notice required to be given by the employer (subject to the statutory minimum). Secondly, employers will need to ensure that internal performance management structures are in place to closely monitor and record employee capability (one of the most common “potentially fair” reasons for dismissal). HR departments and line managers will also need to take care that they are providing additional training and support (such as Performance Improvement Plans) as an alternative to dismissing someone straight away for poor performance. Finally, employers will need to ensure that they are following formal processes and fair procedures when dismissing employees. They will need to review dismissal, disciplinary, grievance and redundancy rules and policies to ensure they are sufficiently robust, and afford a “fair” process to all workers regardless of tenure. The proposed changes are likely to lead to employers having to offer larger termination payments when seeking to settle potential unfair dismissal claims, to reflect the shift in bargaining power that would be triggered by possible uncapped compensation for unfair dismissal. 

Other proposals

Whilst the expansion of employment rights to workers and extended unfair dismissal rights are perhaps the most eye-catching of Labour’s proposed reforms, there are others, all of which will create significant additional protections for workers and corresponding compliance burdens for employers, including:

• a ban on unpaid internships;
• the introduction of “Fair Pay Agreements”, negotiated through sectoral collective bargaining;
• a prohibition on “fire and rehire” (the practice of dismissing employees and offering re-engagement on new terms of employment, as a way to change terms and conditions);
• the introduction of a “right to switch off”;
• a review of the shared parental leave system to incentivise the sharing of leave;
• the creation of new rights and protections for trade unions and simplification of the law around industrial action and union recognition; and
• a review of health and safety law.

Of course, it remains to be seen whether the Labour Party will in fact win the next election, and indeed whether they will bring in all of the currently proposed employment law reforms within the time they have in office. It seems likely that a new Labour government will have a long list of policy decisions to prioritise and tackle periodically if they come to power. With their Green Paper they have made clear their commitment to making sweeping landmark changes to workers’ rights, but it may take some time for any consultation or legislation to come into effect. That said, it is important that employers are ready to react to big changes if and when a future government decides the time is right.