No 40: How the social protection system can fail the self-employed

Delivery drivers are amongst those harmed by Universal Credit's failure to adequately support the self-employed.
(detectandpreserve/Wikimedia Commons)

by Kevin Caraher and Enrico Reuter

Rachel Mantell, a self-employed management consult, earns more than £100,000 per year, can afford to spend £6,000 on holidays, and is sharing her good fortune by hosting refugees in her home. At the same time, Don Lane, a self-employed “franchisee” of the delivery company DPD, died in January 2018 because he had no sick leave and no one to replace his work shift and thus missed an urgently needed hospital appointment.

These admittedly extreme examples illustrate the differing experiences and outcomes that come with self-employment. In some cases, self-employment can be the foundation for a fulfilled work life with a generous income, a high degree of autonomy and the ability to flexibly pursue other non-work interests. In others, self-employment can be the foundation for a life of misery, marked by poverty, precarity and the loss of control over one’s personal circumstances. Self-employment is thus diverse and ambivalent in at least two ways: First, with respect to the working conditions of the self-employed, notably the ‘economic security issues’ that are caused by irregular income. Second, regarding access to the collective social protection system, in particular for those self-employed whose income is insufficient to shield themselves individually from the vagaries of the work life by saving money or accessing private insurance.

The rise of vulnerable self-employment

Across both the 28 member countries of the European Union and in the United Kingdom, the self-employed account for approximately 15 per cent of those in work — a fact unlikely to change anytime soon. This substantive share moreover underlines that the widely debated ‘gig economy’ only represents one small facet of this form of work. Since the global financial crisis of 2008, self-employment has represented “nearly half of the increase in total employment since the recession”, with the largest rise among those who are solo self-employed — a trend that is one of the main drivers behind the low unemployment rate in the UK. While a large majority report high levels of job satisfaction, the average income of the poorest 20 per cent is below that of the poorest 20 per cent employed persons, and overall precarious forms of self-employment are a key facet of contemporary labour markets. In this sense, as we have argued before, vulnerable forms of self-employment epitomise the long-term structural changes in employment conditions towards higher levels of precarity and a process of subjectivation that is built around the impossible demands of the ‘entrepreneurial self’ — to be permanently committed, flexible and original. And for that reason, this type of employment raises fundamental questions for social policy, both with regards to the regulation of labour markets and the design of the social protection system.

Social protection for the self-employed: A safety net with holes?

With lower National Insurance contributions than employees, the self-employed can access some elements of the social protection system (such as the state pension) at an advantage, with the flat-rate pension providing a modicum of income security in old age. At the same time, being self-employed implies usually no sick pay and no paid leave, no limitation of working times and no occupational pension. While high earners, like Rachel, can easily compensate for these gaps in social protection via private insurance, savings and investments, the vulnerable self-employed, like Don, are at risk of falling through the cracks of a social protection system that is not designed with their particular needs in mind. This is a problem from a social justice view, but also a policy dilemma. While the welfare state should protect individuals against social risks, it cannot be the task of the welfare state to indefinitely prop up unsuccessful businesses. When it comes to the most vulnerable self-employed — those reliant on income support benefits that are in the process of being merged into Universal Credit — the picture is even more problematic.

Universal Credit fails the self-employed

As Jane Millar wrote in this series, Universal Credit is “one of the most challenging and increasingly controversial social security policy developments of recent years”. With its monthly payment schedule, Universal Credit has been designed to mimic paid employment, but this only really works for those able to take up or already in steady employment. It takes little account of the needs of those starting a business and generating income, and little account of both the administrative burden of the monthly reporting of income and fluctuating incomes. In short, Universal Credit currently takes little account of these specific circumstances of the self-employed, despite the explicit recommendations of the Work and Pensions Select Committee to the DWP to address these easily identifiable holes.

A minimum which is less than it should be

Arguably one of the trickiest features of Universal Credit for the self-employed is, however, the Minimum Income Floor (MIF) — a blunt tool that is badly designed with respect to the situation of the self-employed. It works in the following way: Anyone starting a new business can be supported for up to 12 months by Universal Credit if profits are too low to get by. After this period, DWP assumes a level of income broadly equivalent to the national minimum wage. If a self-employed person earns more than this level of income in one month, they lose some of the benefit, in line with the usual withdrawal of benefits in the case of rising income. If however, they earn less in a given month and thus fail to reach the Minimum Income Floor, for example, because the MIF doesn’t take account of fluctuating incomes, Universal Credit payments are not increased to meet that person’s needs.

In other words, the gap between actual income and the level of income needed to meet minimal social needs is not filled by the benefit system. As illustrated by the Low Income Tax Reform Group, this could mean a reduction of annual income in the order of £2,000 for someone who is self-employed compared to someone in similar circumstances who is an employee. For the self-employed with precarious income, Universal Credit, therefore, represents an insufficient safety net, full of holes, contrary to the rhetoric used by the government.

Filling in (some) of the holes?

Self-employment can be a positive choice for many and, as the figures suggest, this is a choice that individuals are increasingly making. At the same time, the rise in self-employment, especially in its more vulnerable or less sustainable forms, raises questions for social policy-making. Recommendations by the Taylor Review and DEMOS — such as a statutory definition of self-employment in order to begin tackling the problem of bogus self-employment, a longer start-up period for newly created businesses, greater expertise and tailored business and tax advice from Jobcentre Plus Work Coaches — would certainly be a start. But to properly support the self-employed, social security provision must take greater account of non-standard employment circumstances, providing a reformed, flexible safety net for this type of employment. Only in this way can the vulnerability of those whose choice of self-employment is in part a response to ongoing structural changes and increased labour market insecurity, and who remain affected by these precarious conditions, be reduced. But finding the right balance between individual and collective forms of protection against social risks is an intrinsically complex endeavour, in particular when it comes to self-employment.

Kevin Caraher is Lecturer in Social Policy at the University of York. He tweets @k_j_caraher.

Enrico Reuter is Lecturer in Public and Social Policy at the University of York. He tweets @ReuterEnrico.

A special issue on self-employment for the Journal of Poverty and Social Justice, guest-edited by both authors, is due to be published in summer 2019. They are also currently working on a book on the same topic, for Policy Press.

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