United Kingdom / Analyst Insights
The Future of the Gig Economy

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by John Griffin, Industry Analyst
Oct 12 2020

The gig economy was popularised during the 2008 financial crisis and in the subsequent recovery, as firms that were low on confidence turned to freelance workers as a means of managing fixed costs amid significant economic uncertainty. It has since grown notably in size, supported by the proliferation of app-based platforms such as Uber and Deliveroo. A survey of 2,235 UK residents conducted by Trades Union Congress and the University of Hertfordshire suggests that the number of people working for online platforms at least once a week more than doubled from 4.7% of the adult population (2.3 million people) in 2016, to 9.6% of adults (4.7 million people) in 2019.

COVID impact

Gig economy workers have been among the hardest hit during the COVID-19 (coronavirus) pandemic, with a large share of the workforce unable to meet the criteria for the UK government’s self-employed support scheme despite a dramatic fall in consumer demand for services that are typically associated with gig economy such as transportation, accommodation and physical retail. Nevertheless, the increased flexibility associated with hiring freelance workers rather than full-time employees has continued to appeal to upstream firms, particularly in sectors that have recorded short-term swings in demand as a result of the coronavirus pandemic. For example, in response to a surge in online shopping, major delivery company Hermes has announced plans to hire an additional 9,000 freelance workers, in addition to creating 1,500 full-time roles. Meanwhile, following a boom in business during the coronavirus lockdown, online food delivery company Deliveroo has announced plans to recruit 15,000 new couriers by the end of the year, which will bring the total number of riders to more than double the amount the company worked with at the start of 2020.

Future prospects

Despite facing continued challenges, the gig economy is expected to continue to grow in the coming years. In many ways, the coronavirus crisis has shone a light on how gig economy workers can increasingly penetrate industries across the economy. A necessitated jump in remote working in line with strict public health restrictions has spurred significant change in business processes over the past few months, and these seem likely to persist to a certain extent in the long term. Proof that productivity within project teams can remain high without the need for face-to-face contact, and in some cases without any prebuilt social capital, adds further value to the argument for a more dynamic staffing model. Greater acceptance of remote working also removes prohibitive geographical barriers to a finite talent pool, facilitating and elevating the use of gig economy workers in higher paid roles, such as in the professional services sector.

Heightened legislation

A long-standing criticism of the gig economy model has been that of workers’ rights. Issues faced by gig economy workers, such as limited access to unemployment benefits and sick leave, have come to the fore during the coronavirus crisis, even spurring online food delivery giant JustEat to announce plans to move away from the use of gig workers and employ staff with more workplace protection. This has placed increased pressure on companies to improve their treatment of freelance workers, with Hermes announcing that all new self-employed workers will now get holiday pay. Such policies are expected to become the norm in the coming years, with minimum rights and demands for zero-hour contract workers, including increased eligibility for holiday and sick pay, already enforceable from April 2020. However, these reforms are likely to increase costs and reduce the economic efficiency of gig economy services, lessening the incentive for firms to hire freelance workers.

Meanwhile, with HMRC stating that only 10% of private sector freelancers currently pay the right tax, likely changes to tax legislation will also reduce the benefits of freelance work for some gig economy workers. For example, the extension of the IR35 anti-avoidance legislation to medium-size or large private-sector firms from April 2021 is expected to reduce the income of limited company contractors, with employers, rather than the contractor themselves, deciding the tax status of the contractor, leaving them subject to largely the same income tax and National Insurance Contributions as if they were employed. Given that the new legislation only applies to contractors who work like employees, as opposed to a fully compliant self-employed person, it should not directly prohibit growth within the gig economy. However, it is expected to spur a more risk-averse approach to freelancers, as already evidenced by companies such as Barclays, HSBC and Morgan Stanley putting all contractors on PAYE, regardless of whether they fall within IR35.

Brexit implications

The outcome of the current the ongoing Brexit negotiations is also likely to have a notable bearing on the future prospects of freelancers, with a potential no-deal scenario likely to stem the growth of the gig economy in Britain. One of the key benefits associated with being a freelancer is having the increased mobility to be able to find work, with several highly skilled freelancers attracted to the United Kingdom due to its reputation as a financial powerhouse. Therefore, any damage to this reputation incurred as a result of Brexit and the potential for global banks to relocate jobs from the United Kingdom to mainland Europe could provoke a drain of highly skilled freelancers back to the continent. Potential changes to taxation, most notably in the form of exiting the EU VAT refund regime, in which contractors can claim a refund on VAT paid on business activities in an EU country where they are not established, are likely to present significant administrative burdens, particularly for EU freelancers based in the United Kingdom and vice versa. Meanwhile, the proposed introduction of a points-based immigration system would also limit the scope for EU migrants to attain lower-skilled freelance work, with long-term visas only granted for jobs at an appropriate skill level and points towards a visa only awarded for jobs above a minimum salary threshold of £23,040, or £20,480 for roles in a shortage occupation. Natural income fluctuations associated with gig workers make this threshold significantly more difficult to achieve for freelancers, with a 2018 report published by the Department for Business, Energy and Industrial Strategy estimating that 87% of gig economy workers had earned less than £10,000 in the previous 12 months. The introduction of this system would likely constrain growth in industries reliant on gig economy workers, such as the Online Food Ordering and Delivery Platforms industry, which IBISWorld currently forecasts to grow at a compound annual rate of 7.2% over the five years through 2025-26.

Conclusion

In summary, a long-term trend towards more flexible working is expected to facilitate growth in the use of freelance workers in previously less penetrable industries and sectors. As gig workers move from being associated with lower-ranking roles towards traditionally higher-paid jobs, more and more employees are expected to be enticed into joining the gig economy. Meanwhile, increased minimum rights for gig economy workers should only provide further incentive for people to join the gig economy, further incentivising freelance work in the coming years. However, the introduction of heightened legislation is also likely to increase fixed costs associated with the use of freelancers, potentially reducing the benefits associated with a gig economy model for employers.

 

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