Rebuilding Ireland: It’s time to end bogus self-employment in the construction industry

James Wickham: As far as the tax system is concerned, many workers on Irish building sites are not workers at all.  Instead of getting wages for doing a job, they are receiving a fee for a contract.  Yet many of them are working in exactly the same way as if they were being paid wages.  Indeed, many building workers can only get jobs if they agree to work as self-employed sub-contractors rather than PAYE workers.  They are in other words, some of the new ‘bogus self-employed’.  In a recent report from the Working Conditions in Ireland project TASC documented the growth of this practice and highlighted its negative consequences for workers, for the state’s finances, and indeed for the industry itself.



Today governments and policy-makers want to facilitate ‘entrepreneurship’ and self-employment is often presented as a solution to unemployment.  What has happened in the building industry shows how much of this enthusiasm is misplaced.  For several decades empirical social researchers have suggested that much self-employment occurs simply because people cannot find a proper job.  The novelty is that now some people are being defined as self-employed so that employers can avoid paying wages and taxes.

At its simplest, an employee is somebody who works for somebody else; so long as the employment lasts, the employee is subordinate to the employer’s instructions.  This is an inherently unequal relationship, and restraining this inequality of power is a fundamental rationale for labour law and employment regulation.  By contrast, the self-employed person sells a product or a service to customers: it is the self-employed person who decides how the work is to be actually done.  This is a much more egalitarian relationship, and it is governed by the law of contract.  Dependent or bogus self-employment occurs when the self-employed person is not actually independent but is paid – and taxed -  as if they were.  By contrast,  the ‘really’ self-employed worker is independent.  According to a frequently used definition the self-employed worker:
·    has more than 1 client
·    is able to hire employees (even if s/he does not currently have employees)
·    can make important decisions about the work.

Using the 2010 European Working Conditions Survey, Eurofound (2013) defines ‘dependent workers’ as those self-employed without employees who do not meet at least two of these conditions (see also OECD 2000).  All in all, such dependent workers amount to 0.9% of employment in the EU27.  They are especially concentrated in the ‘other services’ sector, followed by the construction and transport sectors.  In terms of occupation, dependent workers are concentrated in elementary occupations.  While they have higher autonomy at work than employees, their crucial distinguishing feature is that they are most likely of all employment statuses to report ‘difficulty making ends meet’ and are over-represented in the lower third of the income distribution.  These workers are the ‘bogus self-employed’.

Employment in construction is usually pro-cyclical, growing disproportionately when the overall economy expands and falling disproportionately in a slump. This high level of fluctuation and uncertainty is one reason why self-employment is so widespread in construction generally.  Firms try to minimise long-term commitments  -  especially by sub-contracting as much work as possible.  A firm to which work is subcontracted will in turn do the same thing and subcontract its work, so that subcontracting chains develop. 

The last fifteen or so years in Ireland have been a dramatic example of how boom and bust in construction employment magnifies changes in the rest of the economy.  Using index figures (1998=100) Figure 1 shows how between 1998 and 2007 employment in construction more than doubled, whereas in the economy as a whole in the same period employment rose by only about 50%.  In the next four years employment as a whole fell, but employment in construction more than halved.

Source: CSO Statbank

In the collapse Irish building firms became essentially project management companies.  Whereas previously they had a core workforce which would move from one project to another, now they use subcontractors to find and deploy almost all the labour used on the building site.  In this situation the proportion of self-employed in the industry has risen dramatically, from less than a quarter of those at work in 2005 to well over a third today (Figure 2, left axis).    Of these self-employed, around 70% are ‘solo self-employed’, i.e. they have no employees themselves (Figure 2, right axis).  At the bottom of the subcontracting chain labourers or ‘general operatives’ are often now employed by some form of agency company, while trade workers (e.g. bricklayers) are often self-employed.

Source: CSO Statbank

All this means that there are not only far fewer people working in construction than in the boom, but that for those who remain the employment relationship has changed. Figure 3 looks at the three main manual occupational groups in the industry: craft workers, plant operators and so-called elementary occupations.  In each group the numbers at work have at least halved between 2008 and 2015.  However, amongst the largest group, the craft workers,  there are now about as many solo self-employed as there were in 2008.  In 2008 these self-employed without any employees made up 21% of all craft workers, in 2015 this had risen to fully 38%. 

Source: QNHS (own analysis)

It is clear that many of these solo self-employed are in fact bogus self-employed (dependent workers in Eurofound’s terminology).  This has actually been facilitated by changes in the Irish tax system:  the employer (or contractor) can now simply designate workers as self-employed.  Until 2012 workers who wanted to define themselves as self-employed for tax purposes completed a paper form.  The system was then moved on-line.  Under the ‘Relevant Contracts Tax’ system the employer (in Revenue’s terms, the ‘Principal’) enters the value of the contract on-line and gives the subcontractor’s name and tax number.  This makes the worker into a self-employed subcontractor.  The ‘Principal’ has to tick a check box confirming that the contract is ‘not a contract of employment’ and later confirm that ‘the contract is NOT a labour only contract’.  In fact our interviews for the Working Conditions in Ireland Project make clear that these checks are treated as carefully as the usually totally unread ‘Terms and Conditions’ beloved of internet product suppliers. 

The on-line system allows employers to become principal contractors and employees to become subcontractors at the click of a mouse.  If the principal has the subcontractor’s name and tax number, no active consent from the subcontractor is even necessary.  Notionally the subcontractor can complain to Revenue that (s)he has been wrongly classified, but we have no evidence that this actually happens.  It is unlikely to, for the simple reason that acceptance of self-employment status is now often a condition of employment.  The regulations which purportedly prevent workers being wrongly deemed as self-employed are now formulaic decoration.   Indeed, as of now (15 April 2016) the Revenue RCT website contains a link to the ‘Code of Practice for Determining Employment or Self-Employment Status of Inviduals’ which contains out of date information such as a reference to the now abolished National Employment Rights Authority.

This imposed self-employment has kept down earnings in the sector.  However, far more is involved.  With workers paid for the job rather than by the hour, pay is now irregular even in the short term: the ‘self-employed’ worker gets no pay during bad weather, no holiday pay, etc.  Furthermore, those who are defined as self-employed pay PRSI at the ‘Class S’ rate rather than at the ‘Class A’ as do PAYE workers.  While the self-employed worker pays marginally more PRSI than the PAYE worker, there is of course no employer’s contribution.  This is very convenient for the employer, who is now in taxation terms not even an employer but a ‘Principal Contractor’.  It is not very convenient for the worker, who now has no access to invalidity pension, occupational injuries benefit,  and above all, no right to Jobseeker’s Benefit.  And though the state has fewer obligations since there are fewer people entitled to insurance-related benefits, there is also a massive shortfall in the state’s PRSI income.

The consequences don’t stop there.  Bogus self-employment means that more and more workers on building sites are receiving different rates of pay for doing the same job, except that since they are not officially being paid wages they have no grounds for complaint.   The growth of self-employment has also undermined trade unions in the industry and not surprisingly, union density has fallen even amongst those who remain employees.   Furthermore, self-employed workers are excluded from the Construction Workers’ Pension Scheme, an industry-wide pension funded by contributions from both workers and employers.

The growth of bogus self-employment, along with the spread of agency work, is a process whereby work in the construction industry is being turned into casual work based on short-term employment relationships.   This is now undermining the long-term strength of the industry – and of its leading firms.  In the crisis firms let apprentices go and so ensured that the moment there was any recovery there would be yet another skill shortage.  More generally, an industry which relies so heavily on self-employed workers and on temporary agency workers will find always find it difficult to develop any long term training.  Firms which have few permanent employees are hardly likely to provide good apprenticeships or be able to update their key workers’ skills.

In recent decades the Irish construction industry has been shaped by short-term fluctuations in the housing sector and a stop-go policy of state infrastructure.  While the construction industry is probably always going to be more cyclical than most other sectors, the international evidence shows that the extent of fluctuation is shaped by national policy.  For example, in the post-World War II period in the UK the long-term state housing programme helped smooth fluctuations in demand (Hervey 2003: 188). 

Uncontrolled fluctuations push the industry towards short-term solutions to labour issues and make it difficult to maintain and develop the skill base.  For example, the National Transport Authority has just released its Greater Dublin Transport Strategy 2016-2035 which calls for major investment in the Luas and DART systems in Dublin.  Without a state commitment to a long-term plan showing when and how such investment is going to be made, the workers and engineers needed to actually plan and lay the tracks will not be around.  By contrast, a coherent long term infrastructure policy and a long term state commitment to a home building programme would go a long way to stabilise demand.  It would enable firms to develop their skill base and reduce their reliance on bogus self-employment.  Time to rebuild Ireland – with real jobs…

References

Eurofound (2013) Self-employed or not self-employed? Working Conditions of 'Economically Dependent workers'. Dublin: Eurofound.
OECD (2000). ‘The Partial Renaissance of Self-Employment’, Employment Outlook 2000, Paris: OECD, pp. 155-199.
Harvey, Mark (2003)  ‘The United Kingdom: Privatization, fragmentation and inflexible flexibilization in the UK construction industry’.  Gerhard Bosch and Peter Philips, Building Chaos: An international comparison of deregulation in the construction industry. London: Routledge, pp. 188-209.