Freelancer conundrum: what the Dutch can teach the UK

In recent years, the rise of the freelance economy has brought forward numerous challenges related to benefits and social security. For example, people wonder which pension systems support hybrid careers, which healthcare coverage is available and how to address income protection against sickness and accidents.

These obstacles are not new, but their significance has been highlighted recently due to the sudden increase in self-employed workers in the logistics, food delivery, and ride-hailing sectors. These workers encounter even more daunting challenges, including fair wage issues and work-related accidents, which have led to heated discussions and new regulations in several countries, including the UK, Spain and the Netherlands.

However, regulations designed to safeguard these workers may potentially affect a much larger group of self-employed workers - the "freelancers" in the talent economy. This highly skilled independent workforce, which includes developers, consultants and creatives, has seen a significant increase in Europe, growing from 4.5 million to 7 million individuals from 2007 to 2022, driven by a robust economy, talent shortage, and individuals' desire for work-life fluidity.

I've realised that the market dynamics can significantly vary from country to country. Over the past few years, I’ve been overseeing the growth of the freelance market in various countries – an experience that helped me discover distinct strategies to handle the rise of independent workers in these regions.

The infamous IR35 approach in the UK

Surprisingly, the UK has witnessed a decline in the number of freelancers since 2018. British people still appreciate the freedom and autonomy that come with freelancing, so the decrease can only be explained by two factors - changing economic circumstances and the implementation of IR35 rules, also known as the off-payroll working rules.

IR35 is a UK tax legislation introduced to counteract tax evasion by workers who operate via their own limited companies (contrary to sole traders) and compensate themselves through dividends, which are taxed significantly lower than a regular salary. The enforcement of these new rules, initially planned for April 2020, was postponed until April 2021 due to the COVID-19 crisis. However, IR35 has faced considerable criticism since its inception, with critics highlighting that it's confusing, unjust, and challenging to enforce. Moreover, they fear it could escalate employment costs and decrease labour market flexibility.

Indeed, the data reflects these concerns (Table 1 and Table 2)

In addition to the higher cost of hiring a freelancer, the principal problem remains the rules' ambiguity. Freelancers and their clients must use CEST (Check Employment Status for Tax) to determine whether the freelancer is outside the IR35. Yet, 60% of the results remain "undefined."

The implications of IR35 have significantly impacted the market, specifically in the public sector, where it has been active since 2017:

• Organisations have invested thousands, if not millions, of pounds to understand and adjust to the new rules;
• As the data above shows, the number of freelancers in the UK has decreased, making it one of the few countries worldwide to face such a drop at a time when workers are seeking more freedom to work how they want to;
• New stakeholders, such as umbrella companies, have emerged to capitalise on this situation by taking a portion of freelancer earnings;
• Certain companies have resorted to blanket rules where all freelancers are deemed inside IR35, increasing their "cost to hire" in some instances by up to 30%.

What’s the solution? To address worker shortages and the rising cost of living, the government should reconsider the IR35 rules currently penalising the flexible workforce and hindering UK businesses. Greater flexibility and freedom could incentivise more professionals to bring their valuable skills to businesses and projects in the UK.

The Dutch ‘blanket’ rule

In comparison, the Netherlands has seen a noticeable increase in the freelance workforce, accounting for 14% of the highly educated working population.

Over the past few decades, the Dutch tax authorities have been involved in an extended dialogue with independent talent to clarify their relationship with clients. As a result, multiple regulations were introduced - VAR in 2005, Waadi in 2012, and Wet DBA in 2016 - to prevent false self-employment and ensure fair compensation and working conditions for freelancers. The regulations are primarily designed to protect lower-wage workers, with a proposed law that could set the limit at 35€ per hour. Notably, the Netherlands is the only country that separates the "gig economy" and "talent economy" based on hourly rates - a distinct approach which, while not perfect, adds clarity to the situation.

More recently, the Minister of Social Affairs and the State Secretary of Tax announced new measures that will impact all freelancers, including highly skilled consultants. These include reducing the differences in tax and social security contributions between employees and freelancers, implementing mandatory disability insurance for the self-employed (a system already introduced in Belgium and Denmark) and clarifying the assessment of employment relationships. Whilst this approach is not perfect, it is a significant leap forward and could potentially influence policies in other countries. Here’s why:

1. Lowering the tax and social security gap can make full-time employment more appealing (or less of a deterrent) for long-term commitments. Given the current pressure on the job market, with a mere 3% unemployment rate among highly skilled workers, employees have considerable leverage in negotiating employment conditions, including their employment status. However, it's only fair that some gap remains; after all, freelancers have fewer safety measures. They lack access to unemployment benefits or a steady income, are not engaged full-time, and sometimes face long payment delays. The greater the risk, the greater the reward!

2. Implementing compulsory disability insurance is innovative and a first of its kind in Europe, to my knowledge, only available in Belgium and Denmark. Disability insurance coverage is a standard in permanent contracts but is often overlooked when transitioning to independent work. This protective measure could also become a core argument advocating for the employment status of food delivery personnel due to their risk of work-related injuries and economic vulnerabilities. According to an upcoming European Directive, platforms should contribute to their users’ disability insurance proportional to their earnings on each platform – a contrast to the Dutch approach. However, this could lead to complicated data sharing and does not account for work done outside platforms. The Dutch approach appears more practical and protective.

3. Finally, the million-dollar question remains: how do we define an employment relationship? Similar to the IR35 rules in the UK, clarity in relationship assessment within the Netherlands may improve, but grey areas will persist, such as:

a.     Is there a significant authority, or are instructions provided and work supervised?

b.     Is the work organisationally embedded in the company?

c.     Is the contractor an entrepreneur?

However, the definition of "giving instructions" remains unclear. If you hire a freelancer to design your website or paint your living room, you need to provide instructions on the expected end result. Does that make them an employee? In my opinion, it does not.

It appears no country has yet devised a comprehensive approach that simultaneously advocates for and safeguards independent workers to the same extent as salaried employees. However, one may question how much freelancing or independent work will peak. Freelancing as a concept is not novel. On the contrary, full-time employment is relatively recent, gaining prominence since the Industrial Revolution. In the early 20th century, independent workers comprised over half of the active working population, compared to approximately 10% today. Could we potentially see a return to the previous times by 2050? Is the current status quo really sustainable?

Personally, I appreciate the practicality of the solutions proposed in the Netherlands. I hope this approach will resonate with other nations contemplating freelancing and independent work policies – or even impact the European Commission’s strategies. I also hope the UK's IR35 rule serves as a reminder that lack of clarity can have detrimental effects on business operations.