We’ve been here before. Back in 2018, the government launched a consultation on employment status, promising to finally clear up the mess. Contractors, advisers, and professional bodies spent time submitting detailed responses. Four years later, the only outcome was a thin piece of updated guidance – no legislative changes, no clarity, no progress. It’s no surprise that many in the sector came away feeling it had been a completely wasted exercise.
Now, under Labour, we are once again being told that an employment status reform is on the table, and this time feels a bit different because it sits within the party’s flagship Make Work Pay plan. In a Lords debate in July, Ministers committed to publishing the consultation by the end of 2025, with full stakeholder engagement and impact assessments. Is this finally the moment when change will happen?
What do know so far?
According to Ministers, the consultation will look at:
- Reviewing the current three-tier framework (employee, worker, self-employed) and deciding whether to keep and improve the “worker” category.
- Clamping down on sham substitution clauses used in contracts to distort status and deny individuals the protections they should have.
- Enhancing rights for the self-employed, with potential new safeguards in areas such as health and safety.
- Improving recognition and classification of freelancers, self-employed people, and sole traders across sectors, instead of grouping them together under broad labels.
We’re told this will be a “full” consultation, not a rushed job, and any legislation will come with impact assessments.
“Single Worker Status” now unlikely
Although not explicitly ruled out, after much speculation the idea of a “single worker status” now appears unlikely. In the Lords debate, the preference was to retain and reform the existing “worker” category – for example, by considering the concept of a “dependent contractor” within this catergory – rather than merging workers and employees into a single status.
Employment law vs tax law
Perhaps the biggest question of all is whether government will use this consultation to tackle the mismatch between status for employment rights and tax status. At the moment, the two systems operate in parallel and often contradict each other.
That’s why we see the absurd situations contractors know too well: taxed as employees under IR35, but without any of the rights that go with employment. Or being classed as a “worker” for employment rights purposes, but treated as self-employed for tax. It’s inconsistent, confusing, and a huge driver of expensive disputes.
Previous reviews of the IR35 rules have repeatedly highlighted this misalignment, but government has so far failed to come up with a suitable solution. Aligning tax and employment status would be complex and politically fraught – but if Labour is serious about simplifying the framework, it has to at least confront the issue.
This is an area to pay close attention to when the consultation is published. If it does propose aligning the two frameworks (status for employment rights and status for tax), it would be the single biggest change to contracting since IR35 was introduced.
The “Dependent Contractor” question
We expect another key aspect to be the so-called “dependent contractor” issue. This middle ground between employee and self-employed has never been well defined, but is where many gig workers and long-term contractors end up sitting. The consultation could try to formalise this category, perhaps with criteria around control, economic dependency, or whether the individual is genuinely in business on their own account.
For PSC contractors, how that line is drawn could have big impacts on IR35 status. It will require careful consideration to ensure the definition is not so broad that it incorrectly brings more individuals within the scope of employment status.
Could a definition for “Self-Employed” be on the cards?
Another recurring issue is the lack of a statutory definition of self-employment. This gap is why disputes so often end up in court, and why accusations of “false self-employment” persist. A clearer dividing line could be good news for those running genuine businesses, because it would help weed out disguised employment without pulling everyone else into the net. But achieving that and effectively erasing decades of case law is a tall order, and previous governments have not succeeded.
What contractors and engagers should do now
While we wait for the consultation, there are steps both sides of the contractor market can take:
- A while off, but never too early to prepare. Nothing will change overnight. With consultation responses unlikely before 2026 and legislation after that, we’re looking at 2027 at the earliest for implementation. But keeping an eye on developments now will help avoid being caught off guard.
- Engagers: review your workforce. Businesses that depend on contractors, freelancers, or long-term temps should think about how any shift in status rules could impact their workforce. Roles that look like regular employment, with economic dependence on a single client, are likely to face scrutiny.
- Contractors: watch IR35. Even though the Lords debate didn’t focus on IR35, it’s inseparable from employment status. Any move to clarify how employment status is decided will spill into IR35. Being able to demonstrate genuine independence in how you operate is going to be more important than ever.
- Look at your substitution clauses. PSC contractors should check their contract wording around substitution now. Is substitution genuine or restricted? Could you show it works in practice? The days of relying on “paper-only” clauses may be numbered, with far greater scrutiny likely on whether they could genuinely be exercised in reality.
- Have your say. When the consultation opens, get involved! This is your chance to help shape what will possibly be one of the biggest shake-ups of the flexible working market we have seen.
Cautious but Optimistic
The 2018 consultation went nowhere, and it’s right to be cautious. But Labour has made reform of employment status part of its wider employment rights agenda so there is some hope for meaningful change.
At Bauer & Cottrell, we’ll be keeping a close eye on developments and will share more once the consultation is published. In the meantime, please get in touch if you require support.
