In his report, Matthew Taylor, chief executive of the Royal Society of Arts, said the current labour market in the UK "doesn’t work for everyone", and highlighted an "imbalance of power" between individuals and employers.
Taylor recommended reforms to make it clearer whether people in work qualify for full employment rights, should be classed as self-employed, or otherwise fall into a new category of 'dependent contractor' he said should be established.
"The employment statuses should … be distinct and not open to as much interpretation as currently, nor be so ambiguous that only a court can fully understand the basic principles," the Taylor Review of Modern Working Practices report (116-page / 3.94MB PDF) said. "The law should also ensure that where individuals are under significant control in the way they work, they are not left unprotected as a result of the way their contract is drafted. It should not be as difficult as it is now for ordinary people or responsible employers to seek clarity on employment status."
"The focus should be clarifying the line between ‘worker’ status and self-employment as this is where there is greatest risk of vulnerability and exploitation," it said.
The changes in the law should clarify that 'dependent contractors' are entitled to the national minimum wage, statutory sick pay and holiday pay entitlements, Taylor said.
The changes are necessary to reflect the rise of the so-called 'gig economy' and other changes in working practices that have been brought about by evolving business models, he said.
"Over the coming year, government should develop legislation and guidance that adequately sets out the tests that need to be met to establish employee or dependent contractor status," Taylor said. "This should retain the best elements of case law and better reflect the reality of modern day casual work in terms of the control exercised by employers over their staff."
Taylor also said every individual in work in the UK should be provided with a statutory right to receive information setting out what their rights are.
Employment law expert Diane Nicol of Pinsent Masons, the law firm behind Out-Law.com, who was appointed to the Taylor Review, said: "Shedding light on how workers and the self-employed are defined will be an important gate way to addressing rights, like holiday pay and national minimum wage for example, which workers are often deprived of."
"We see time and again that the majority of companies, particularly those with greater resources, have the appetite and drive to protect workers’ rights and want to operate by the book, but some employers lack awareness of what should be done, how and why. Of course, a minority do exploit their workers. They, together with those who lack awareness, are stifling progress – this needs to be addressed as a matter of urgency," she said.
Nicol said that the report's recommendations on clarifying worker status, considering enhancing rights for the most vulnerable atypical workers, overhauling legislation designed to promote more effective consultation with workers and educating businesses and individuals about their rights and responsibilities would "help create the foundation of success for the future".
Nicol said: "The UK’s flexible approach to engagement and employment has benefited the economy in recent year. But the UK faces a productivity puzzle. Workers in the UK work the longest hours in Europe, and productivity is the lowest of any EU member state. To close this gap we need a shift in attitude towards employment in general and modern industry."
"New business models, such as the gig economy, must include appropriate protection for workers enshrined in law while supporting the entrepreneurial spirit that forms the backbone of UK business. Achieving a balance between protecting our workers’ rights to earn an honest wage and not impinging on flexibility, dynamism and innovation of new businesses is crucial," she said.
Tax expert Chris Thomas of Pinsent Masons said changes brought forward to individuals' employment status and rights could have tax implications for businesses.
"The report rightly highlights the difficulties and confusion caused by the differences in the tests used in employment law and by HMRC, and most people would agree with the concept of 'merging' the two in one legislative test – although the transitional period could be messy, and putting the burden of proof on the employer to show that individuals are genuinely self-employed may tend to play in HMRC's favour if also applied for tax purposes," Thomas said.
"However, the suggestion of treating dependent contractors as employees for tax purposes, and moving towards one global tax treatment of 'labour', however engaged, is likely to be more controversial. There are certainly good arguments for doing this, as the current differential undoubtedly distorts the market and encourages avoidance, with wider knock-on implications for the worker. The costs to the Exchequer are also significant and increasing, which may prompt the government to act, and there seems to be a momentum building for reform," he said.
"However, it is also likely to substantially push up the cost of engagements for businesses who engage workers through 'off payroll' structures and have built their business models on that assumption – so any change can expect to be met with stiff resistance from certain sectors. It remains to be seen whether the current government is willing to bite the bullet, or whether the tax reform 'can' gets kicked down the road. Nonetheless, engagers would be well advised to start reviewing the risks which they would face in the event that the proposed changes are pursued, and how they can 'future proof' their engagement structures," Thomas said.