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The rise of the independent professional:
The regulatory and managerial challenges in the context of financial crisis

Professor Patricia Leighton

Paper for the International Finance Colloquium, Tunisia, 10-11 March 2011

Abstract

This paper draws on recent and current research into self-employment, primarily among skilled professional workers. It argues they are a vital group within the labour market to provide flexibility and innovation. However, it notes several of the confusions, misconceptions and problems surrounding such a way of working and argues for a clearer, robust and appropriate framework for them encompassing legal, fiscal and societal issues and for a re-assessment of their effective management so as to produce maximised outcomes.



The rise of the independent professional:
The regulatory and managerial challenges in the context of financial crisis

Background: Establishing the context

There is universal growing interest in those who work for organisations but not as employees. This interest has grown during the current economic crisis and business restructuring. The self-employed may be referred to as, for example, freelancers, contractors, agents, consultants or own account workers: they may be members of liberal professions. Some are known by names particular to specific employment sectors or occupations, such as in the construction, publishing or financial and professional services sectors. They may obtain employment through agencies and/or other intermediaries, may operate through their own limited company or business structure and may or may not be subject to a regulatory regime.

To date, the discourse surrounding self-employment has been dominated by the issue of defining self-employment and the perceived problems associated with 'sham', 'false', or disguised' employment, leading, it is argued to vulnerability and denial of access to employment and other protective rights for many(Casale,2011).We know that courts across the EU and wider have struggled to find coherent and compelling tests to differentiate the employee from the self-employed, against a backdrop of increased complexity and diversity in employment relationships generally.(Leighton and Wynn, 2011). However, relatively little interest and policy development has focussed on the voluntarily and genuinely self-employed who are, typically, well educated and highly skilled as, say, IT specialists, engineers, researchers, journalists and others providing specialist services to clients. Many work on a short term or project basis which clients find beneficial (Burke, 2010), matched by the self-employed themselves who report in far higher numbers than employees that they have a 'Feeling of a job well done'. (Eurofound, 2010)

In the current moves out of recession and in the context of global competition, there is increasing recognition of the innovation and creativity they bring to the workplace (Bridges,2011). However, such workers do not employ others (Though their work may lead to their clients employing more staff) and it is factually inaccurate to categorise them as SMEs, especially for research and policy development reasons. Nonetheless, it is important to have regard to the literature on 'entrepreneurism', for there is much of relevance there, despite the fact that some 'entrepreneurs employ others and might thus be correctly viewed as micro-businesses. (EC,2010).

Research on self-employment

Around 15% of the EU's labour market is reportedly self-employed, though there are major variations as between member states. The percentages for the US, China and several other emerging economies are far higher and growing faster. Data are drawn from the ILO(ILO,2011 ;See Casale. 2011) and OECD (OECD,2010 (a)) and provide information from a wide range of countries. However, relatively little research is qualitative. We therefore have limited information on the work experiences of self-employed people, their aspirations and, importantly the difficulties they may face and the obstacles to maximising their effectiveness . Such qualitative research as has been undertaken ( For example, McKeown, 2005; 2009: Monash University 2010: PCG, 2009;2010: has focussed on the motivation, priorities, aspirations and robustness of the self-employed themselves,(As opposed to their clients) rather than the framework within which they operate.

An important recent survey, that covers 36 states, including EU, EFTA, US, Japan and China, has revealed some worrying data (EC,2010). The backdrop to the study is the European Commission; Green Paper (EC.2003)that explores why, relatively, few businesses are set up and grow in the EU, The 2010 study reveals some positive data such as the fact that almost as many would prefer self -employment as employment; that over 90% consider that the self-employed bring benefits to society and that they are viewed more favourably than a range of occupational groups aside from members of liberal professions. Despite this, the survey highlights a major gap in all states, other than Denmark and Iceland, between those who would prefer to be self-employed and those reporting they considered it 'feasible'. For example, in the Netherlands, 38% would prefer self-employment but only 15% considered it feasible. For the UK the equivalent responses are 41% and 31%; for Germany 36% and 30%; for France 48% and 31%; for Portugal 48% and 16% and for China 66% and 49%..Overall, in the EU, of those who wanted to be self-employed, 66% considered it not to be feasible, a percentage that is on the increase.

The reasons given for not considering self-employment a 'feasible' option are instructive. Unsurprisingly, lack of finance featured strongly, as did a lack of information and perceived lack of skills. However, some 61% reported they were deterred by 'complex administration', including fiscal matters but also a wide range of regulatory issues. Interestingly, almost half of the respondents reported that their schooling had helped to foster an interest in self-employment (Again with huge variations across the EU states) but these percentages are low compared with the US, China, Korea etc Worryingly, the EU percentages reporting that school has a positive effect are in decline.

This research not only illustrates major variations across EU states as regards attitudes towards self-employment but also that significant numbers of EU citizens are interested in becoming self-employed but perceive a range of barriers, not least bureaucratic ones. And the barriers themselves are seen as becoming more formidable. Overall, we are faced with a conundrum. There is considerable interest in self-employment, especially in Portugal, Greece, Ireland, Poland, Bulgaria, France, Italy and the UK, with people clear about the opportunities as well as risks. However, more so than in the US, China and many other non-EU states, there are increasing deterrents, despite the general political and policy rhetoric that seems to see self-employment and entrepreneurism as a key aspect of the Europe 2020 Strategy and an envigorated competitiveness from the EU.

Self-employment in the EU: Some key indicators

Recent research from the EU, (Eurofound, 2010) as well as revealing small, rather than dramatic overall increases in self-employment, indicates a strongly varying incidence of self-employment across member states, even where states have broadly similar economic features. In some states, self-employment appears to be declining. The major increases over a five year period to 2010 have occurred in the Netherlands (9%), Czech Republic(6%), with steady increases in Germany, Luxembourg and Sweden(Averaging 2%) and smaller increases in the UK, Estonia, Finland and Denmark. There have been significant declines in Spain(10%), Poland(6%) and Latvia(5%) with major declines in Lithuania, Slovenia and Hungary(Averaging 2%) and small reductions in France, Belgium, Austria Portugal, Ireland, Bulgaria, Greece . Other countries have remained stable.

However, when the data is disaggregated by occupational group (High Skilled Clerical-HSC (Including professional occupations), Low Skilled Clerical;-LSC; High Skilled Manual-HSM and Low Skilled Manual-LSM) it is clear that the growth s and declines in self-employment within states are closely related to skill level.1 This is a significant insight and is illustrated well by taking the two groups of Highly Skilled workers. Some clear tends are observable. For example, let us take the ten year period from 2000 to 2010 in the Netherlands. In 2000 87% of HSCs were employees but by 2010 the percentage had fallen to 79%. Unsurprisingly, for self employed HSCs the percentages were 9%, rising to 29% for 2010. For Austria, even though there was an overall slight decline in self-employment, for skilled workers there were significant increases, with a decline in employees in HSC from 90% to 66% and rise in self employment of 23% ; for HSMs there was a 12% decline in employees and a 17% increase in self-employment.

Further, some of the most dramatic increase in skilled self-employment have occurred in the Nordic states. For example, in Finland there has been a 21% increase in HSC self-employment and a massive 30% in HSM self-employment. Some countries with a strong tradition of well rewarded and protected employment have also seen major changes. For example, there has been a growth in HSC self-employment in Germany of 24% over the decade, but with HSM remaining static. In France, the growth for HSCs was20% and for HSMs 19%.

For the UK, the more dramatic changes have been for HSMs (30% increase) with growth for HMCs running at 9%.And even some countries that have seen major reductions in recorded self-employed, skilled self-employment is increasing. For example, Spain saw a 10% decline in self-employment overall, but HSCs saw a rise of 11% and HSMs a rise of 5%.

These results provide the essential context for policy challenges, as they reveal that there has there has been a significant growth in skilled self-employment, balanced by a decline in less skilled occupations. The growth in skilled self-employment has occurred in many states regardless of overall decline in self-employment and it appears, it is not correlated with geography, industrial relations traditions and economic polices. However, it must also be re-iterated that although the overall level of self-employment is 15% across the EU there are massive differences as between member states, both in the incidence of self-employment and trends within it. For skilled workers the percentage averages above 20%.What might explain these differences and what are the policy and practical implications of these developments?

We know from research in the USA, Australia as well as parts of the EU that the motivation for self-employment is both clear and general. People turn to self-employment for reasons of choice, freedom, variety and opportunities to experience different work environments, along with opportunities to earn higher pay. We also know that self-employment requires individuals to be resilient to economic downturns and work uncertainties and therefore they carry considerable risk. (PCG, 2010; McKeown, 2009). Indeed, it is noteworthy that few self-employed seek social benefits or the perceived greater security of employment as employees when there are problems in gaining work contracts. There appear to be powerful psychological factors that differentiate the work motivation of the self-employed when compared to employees. And these appear to go beyond the perceived greater loyalty of the self-employed to their skill or profession as compared with the employees' engagement or psychological contract with their employer (Rousseau and Schalk, 2000).

Despite these differences, responses to some questions in the European Foundation survey, 2010, are intriguing and thought-provoking. All respondents were asked whether the organisation people worked for motivated them to 'give my best performance' ? Perhaps counter intuitively, the responses by the self-employed were significantly higher than for employees.(Broadly, a 20% 'gap'). There were again major differences between member states. Responses to the question; 'Are you involved in improving the work organisation or work processes of the department or organisation' a far higher percentage of the self employed responded positively than employees. For example, the relative percentages for France were 86% and 51%; for Austria 84% and 39%; for Portugal 82% and 39%; the UK 86% and 49% and only in the Netherlands were the responses similar (70% and 66%).

What appears to be emerging is a picture of increasing and increasingly skilled self-employed people who appear well motivated by their client organisation and well able to contribute to its well being. However, surveys also confirm that a high percentage of self-employed people pay for their own training, with evidence in some countries that little training is being undertaken. For example, although in Austria 45% reported they had undertaken training that they had paid for, and in Finland 30%, in France, the percentage was only 21%, 21% also in the UK and only 9% in Greece. Concerns about job/work loss were also revealed but again insofar as people expressed confidence in finding new work, the self employed and employees were broadly in line (31% employees, 30% self-employed).

Some important challenges

It is increasingly evident that despite some emergence from the recession from 2008 in the EU and other developed and developing economies, some major underlying issues remain. Perhaps the most significant issue is that of demographics, such that the cost of an ageing EU population will likely be ten times more costly than the recent recession (EPC,2010). There is also the issue of immigration into the EU, where 85% are unskilled (In he USA 85% of migrants are skilled) and some argue that emigration, especially of skilled workers is also a major concern. In any event, immigration into the EU has recently been considerably curtailed, such that skill needs are less easily provided for by migrants.

It might also be noted that growing numbers of especially young people, women and skilled people are rejecting standard employment, rejecting its bureaucracy and lower benefits, and are expressing cynicism around the practices of Human Resource Management (Lammiman and Syrett, 2004; Leighton et al, 2007; Legge,1995).

However, there are also some areas for concern, not least the need for upskilling and professional development. There are also major issues around pension provision, with relatively few self-employed people making adequate provision for their retirement, ill health or other problems. There are also, as the research referred to earlier makes plain, many perceived barriers to becoming self-employed. This puts the EU in stark contrast to many emerging and dynamic economies, where self-employment is a more established feature. Indeed, there is a considerable contrast between the claimed support for self-employment and entrepreneurism by national and pan-national governments and the realities in the labour market and wider society. Impressions still exist and are sometimes promoted by politicians and commentators, that self-employment is quasi-deviant, with its main driver being the avoidance of paying taxes! There is therefore an urgent need to clarify attitudes towards the self-employed, attitudes that must be addressed in education systems as well as in workplaces.

Two fundamental issues

Although there are many policy and practical issues to be addressed, two have been selected as fundamental. The first is the need to define and implement an appropriate regulatory framework for the self-employed, and second, is to question whether current management systems ensure the maximisations of the skills, creativity and innovation of the self-employed.. This is especially people management that requires strategies for managing self-employment which have, necessarily, to be distinctive from those for managing employees.

The first is a major task. Most legal systems have struggled to provide convincing definitions of self-employment and have also struggled to differentiate the employee from the self-employed.(Leighton and Wynn,2011) The legal tests themselves are not substantially different across jurisdictions and tend to see the genuine employee as dependent on or subordinate to the employer, whereas the self-employed have more autonomy and assume more risk. The central problem has been inconsistent and variable application of legal tests. This has led to an inevitable uncertainty, to disputes, litigation and disruption. Fiscal authorities have often also had major difficulties in defining employment relationships. The problems are compounded by a major schism between those who see self-employment as simply a different form of interpersonal work relationship from standard employment and those who see it as a business- to- business transactional relationship.(Philips, 2008) . Matters are further compounded by an established paradigm that considers the self-employee as vulnerable workers and who are simply provided with 'sham' self-employed status as a means for employers to evade legal and protective responsibilities. (ILO, 2011)

The position is, therefore, that there has yet to be agreement politically and legally as to what, precisely, self-employment is. We know it is not generally SME status, as the independent professionals discussed in this paper do not, typically, want to take on staff themselves. Is self-employment defined by economic factors, such as investment and risk which might well lead to fluctuating incomes and also unemployment? If risk and opportunity are the key features of self-employment, why are bankers with their massive bonuses not classified as self-employed? Focussing on the economics of the relationship may not anyway be entirely appropriate, as 'investment' is now more likely to be long term with regard to training, qualifications, networks and personal marketing of the self-employed.

Is the defining feature of self-employment more in terms of psychological factors? Are certain backgrounds, personality traits, such as high levels of self-reliance, self-motivation attitudes to reward, etc key?

A way forward?

Assuming the value of skilled self-employed people in, say, engineering, publishing, media, construction, design, professional services there appears a need to establish the basic facts about the key features of the self-employed themselves(For example, how many have limited companies, work through agencies, what is the gender distribution, age distribution etc?). We need to know whether and how they are currently regulated by law, professional and other bodies and any restrictions on the way they work. We need to know about their education and training, how they obtain work and their networks, and what impacts on their ability to work at maximum efficiency. If the skilled self employed are, indeed, vital to translate recovery into success, they need a more carefully thought through framework to operate within.

As to their management, research indicates that so often this is 'hit and miss'. Misunderstandings and disputes are often 'resolved' through terminating the relationship, There are often poor communication systems and uncertainties about payment. It is clear that the way the HRM has evolved in recent years makes it unsuitable for application to self-employed people, whose notions of engagement differ so dramatically from those of the employee. To date relatively little research has concerned the client/employer end of the relationship and there is much work to be done to identify what factors determine success or failure. This is a big agenda but is vital in a context of continuing financial and other pressures.



Note

1. It should be noted that as the data also includes Other Groups, such as trainees, volunteers, the percentages do not always add up to 100%.

Sources

    Bridges, S (2010) Re-thinking Enterprise Policy: Can Failure Trigger new Understandings PalgraveMacmillan.

    Burke, A (2010)The Economic Role of Freelance Workers in the Construction Industry Hudson/FreelanceBuilders.

    Casale, G (ed) (2011) The Employment Relationship: A Comparative Overview ILO/Hart Publishing.

    EC (2003) Green Paper on 'Entrepreneurism in the EU ' European Commission, DG Enterprise.

    EC (2010) Entrepreneurship in the EU and Beyond Flash Barometer 2010 No 283 European Commission DG Enterprise/Gallup.

    EC (2010) Employment in Europe European Commission, DG Employment.

    Eurofound, (2010) 2010 Survey of Working Conditions in the EU European Foundation for the Improvement in Living and Worklng Conditions.

    EPC(2010) Challenge Europe European Policy Centre.

    ILO (2011) Employment Trends 2010 International Labour Office.

    Lammiman, J and Syrett, M (2004) CoolSearch: Keeping Your Organsation in Touch and on the Edge CapstoneWiley.

    Legge, K (1995) Human Resource Management: Rhetoric and Realities Macmillan.

    Leighton, P, Syrett, M , Hecker, R and Holland, P (2007) Out of the Shadows;Managing Self-employed, Agency and Outsourced Workers ButterworthHeinemann.

    Leighton, P and Wynn,M (2011) ' Classifying Employment Relationships: More Sliding Doors or a Better Reguatory Framework?(Forthcoming) Industrial Law Journal, 2011.

    McKeown T (2005) 'Non-standrad employment: When even the Elite are Precarious' Journal of Industrial Relations 47(3) 276.

    McKeown T , Connelly,C and Gallagher,D (2008) The Forgotten Workforce Working Paper 13.08 Department of Management, Monash University, Australia.

    McKeown T (2009) The IPro Index Entity Solutions.

    Monash (2010) A Desk Audit into Research and Data on Micro-business Profiling in Australia Monash University, Melbourne, Australia.

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    Rousseau,D and Schalk, R (Eds) (2000) Psychological Contracts in Employment: Cross National Perspectives Sage Publications.


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