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Gig workers and the tax web

The gig economy is changing how labour is taxed, affecting employers, workers and public finances. This is why.

When is a worker an employee? That’s a multi-million dollar question these days, especially for government tax revenues.

Take the growing gig economy, spurred by the digitalisation of the economy. Think of food delivery services, ride-hail cab companies, and babysitters, whose services you may have hired with a tap on your phone or click of your mouse. Gig workers are usually considered self-employed, freelancers or independent contractors rather than as employees in the traditional sense.

Classifying such workers as “independent contractors” rather than as employees might make hiring more flexible, but also means workers may not be receiving the social protections and benefits that employees generally do, such as minimum wages, unemployment insurance, health insurance, or paid leave. Employers that choose to hire workers as independent contractors may avoid the costs associated with many labour protections, lowering their tax bills at the same time. But this could also cost the rest of us, in the form of lost public revenues.

In some countries, this may not be the case much longer. The status of gig workers as independent contractors has recently been challenged in California, where a new law aims to put an end to such practices, under certain criteria. Similar measures have been proposed or put in place in several other US states and some European countries. This is an area where the law is evolving rapidly.

A recent OECD working paper digs deeper into the tax implications of different forms of work, comparing how tax systems treat independent contractors and other non-standard workers in eight countries, looking at whether the differences in treatment permit firms to reduce their tax obligations.

Such potential for tax arbitrage across various kinds of employment may mean that firms and individuals carry out similar activities yet be taxed differently. This can undermine the effectiveness of tax systems and has important implications for equity too.

As the working paper highlights, firms that contract labour from self-employed workers instead of hiring standard employees generally face lower tax burdens per worker hired.

For example, in the Netherlands, the tax cost of hiring an independent contractor is 37% lower compared to the cost of hiring a standard employee, reflecting a substantial labour cost savings for firms. This is because the employer of an independent contractor is not liable for social contributions for the worker and also because such contractors are entitled to make certain deductions from their income tax, lowering both their own tax burden and their employer’s.

The Netherlands is not alone in this. In fact, employer liability for social insurance does not extend to self-employed workers in most of the countries analysed in this paper. One factor contributing to more equal tax treatment across employment forms is higher social contribution requirements for independent contractors compared to those for employees. In both Italy and in the United States, independent contractors must contribute at higher levels, replacing the foregone employer’s contribution. In such countries, there is less of a threat to the financing of social protection.

Policymakers need to evaluate and re-evaluate tax systems to ensure that they keep pace with today’s evolving labour market. To date, labour taxes have been the largest tax category in almost every OECD country. This means that, in countries where the difference in the total employment cost savings between employees and the self-employed is large, firms have strong incentives to hire workers on non-standard contracts. In these cases, the tax systems may be driving up demand for non-standard work.

The digitalisation of the economy has ushered in a variety of business models centred on intermediation between consumers and contractors. Many of them harness differences in taxation across employment forms to achieve tax-related labour cost savings. Yet there are important implications for workers, employers and the state alike. While firms are naturally motivated to save on tax-related labour costs, this dynamic could threaten public revenues and may lead to a world in which workers in precarious positions lack important social protections. Tax and benefit systems should be reformed to ensure that firms are not unduly encouraged to use independent contractors as a way of lowering their tax bill.

At the same time, legitimate self-employment should be encouraged. Nor should all forms of work be taxed in the same way. While tax design principles suggest that tax systems should be neutral across employment types, there may be differences between workers in terms of the benefits and other entitlements they receive, which may merit different tax treatments, if there are sound policy rationales.

References and further reading

Visit www.oecd.org/taxation

Milanez, A and B Bratta (2019), "Taxation and the future of work: How tax systems influence choice of employment form", OECD Taxation Working Papers, No 41, OECD Publishing, Paris, https://doi.org/10.1787/20f7164a-en.

Milanez, A and B Bratta (2019), "Annex-Taxation and the Future of Work: How Tax Systems Influence Choice of Employment Form", OECD Taxation Working Papers, No 42, OECD Publishing, Paris, https://doi.org/10.1787/6b20cce5-en.

Young, Clara (2019), “Are platform workers really their own bosses?”, in OECD Observer No 317, Q1.

©OECD Observer 319 Q3 2019