In-house Agencies Using (Permanent) Freelancers For Creative & Marketing Resourcing Face A Looming Tax & Legal Nightmare

Keywords : #inhouse #creative #freelance #tax #brand #creative #resourcing

Executive summary : In an effort to recover their finances from coronavirus pandemic, advanced economies are making significant changes into how they treat freelance and self-employment, estimating that around 1/3 of self-employed are actually fake or disguised freelancers. New laws have been passed in United Kingdom, The Netherlands and tax authorities are announcing stricter supervision with criteria that may put many of freelancers currently used by in-house agencies into employee status, triggering a looming threat of legal and tax burden in back payments and back-taxes. Faced with additional (re)classification burden which will entail financial impact, in-house agencies might need to reconsider their creative resourcing strategies.

Reading time : 7 mins

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On June 6th the G7 group of advanced economies agreed on a global minimum corporate tax rate of 15%, aimed at ending a decades long multinationals' practice of legal, yet morally questionable, practice of siphoning off global revenue and profits through low-tax jurisdictions with sole purpose of depressing their effective tax rate. Even though it has been labeled as 'historic' by media, this event has actually been just one milestone in the line of slow, but inevitable, process of legislators and tax authorities' catching up with the new reality of digitally transformed economies, marketplaces and labour markets, whose resources multinational companies have been successfully, and to some extent unfairly, leveraging to their customers and shareholder's favour. Corporate tax isn't the only tax multinationals corporates were shy about in past decade.

Aside of global ruling on corporate taxes, 2021 will mark the beginning of an end of disguised self-employment

The (in)famous gig economy spearheaded by ride-hailing apps, food delivery apps, and holiday rental apps, while delivering innovation and increased productivity in the markets, has also raised questions about levels of consumer and worker protection - employment benefits & taxes. Innovative technology fuelled business models which quickly outgrew the existing labor legislature and tax codes, brought digital platform based companies in a direct clash with legislators across the world, but especially in Europe, over gig workers (mis)classification and (the absence of) employee benefits and corresponding tax payments.

Aside of global ruling on corporate taxes, 2021 will mark the beginning of an end of disguised self-employment, as the UK’s Supreme Court landmark ruling from February 19th says that the Uber drivers must be treated as workers, not self-employed. While the ruling has significant implications for the estimated 65,000 drivers working for Uber in the UK – namely entitling them to rests, national minimum wage and holiday pay – it will also send shockwaves through the wider gig-economy, which an estimated 5m people work in only in UK. This ruling also leaves behind $2.1 billion tax question and liability for back-taxes. The answer lies in Her Majesty’s Revenue and Customs’ interpretation of where Uber workers fit within its definition of employee. If HMRC decides that the drivers are indeed employees, campaigners like Good Law Project estimate that Uber could owe as much as 1.5 billion pounds ($2.1 billion) in back taxes.

Marketing & Creative Resourcing Freelancing Boom - Was It All A Smokescreen?

Digital platform business aren't the only industry that has heavily relied on gig workers. Construction industry, IT industry and creative industry became heavily reliant or freelancers that have been providing their services more less on continuous basis, on their premises, using their equipment and within office hours. What drove this surge and freelancing boom in creative and marketing resourcing? It was both macro and market developments, but also intentional corporate cost optimisation in marketing resourcing.

Rapidly changing consumer behaviour, caused by technology-driven shifts in the digital media environment, required an agility and flexibility of marketing activity that the traditional agency business model didn't easily allow. As a result, a trend towards bringing certain marketing tasks in-house and increased demand for project work over retainers have been underway for some time, meaning that many agencies fell short of emerging client needs. However, many companies which sought to expand their in-house marketing capabilities found that it was taking too long to fill certain positions due to the lack of available talent. In addition, increased competition for marketing professionals has been putting upward pressure on wages and taking many potential hires over budget.

Clients got wiser and decide to cut out the middleman and began hiring freelancers on permanent basis as a cost-effective alternative to hiring an agency.

Many freelancers’ biggest customers were also agencies. As agencies struggled with resourcing themselves, many have had having to hire freelancers to cover the shortfall. But, clients got wiser and decide to cut out the middleman and began hiring freelancers on permanent basis as a cost-effective alternative to hiring an agency. Freelance marketing professionals were thriving because they offer a cost-efficient and flexible solution to marketing resource problems which were abundant the pre-covid climate. Just in the U.K. it estimated that freelancers accounted for an average of 43% of employment across all the creative sectors, with women occupying an average of 39% positions.

However, the coronavirus pandemic uncovered the smokescreen behind this type of 'permanent' freelancing, as unusually high numbers of freelancers applied for social assistance. Just in Amsterdam, Netherlands more than 50% of self-employed applied for social help.

Just in the U.K. it estimated that freelancers accounted for an average of 43% of employment across all the creative sectors, with women occupying an average of 39% positions.

According to Eurofound, 25 per cent of freelancers in Europe have no savings at all, with 30 per cent having just enough to last three months. Creative industries are known for having tight working cycles, where high-intensity moments are intertwined with periods of downtime or even breaks (‘from feast to famine’). However, Covid?19 generated a disruption much greater than the usual ups and downs, and this has had an adverse, if disparate, impact on various professions within the creative industries. 

The corporate clientele behaviour didn't help either. Outsourcing work and framing it into work 'projects' are often employer strategies aimed at reducing costs by making their employees self-employed and thus avoiding all social costs that a regular employment relationship implies. Such strategies have proven to be particularly harmful in the face of the economic collapse that followed the health crisis, which has left freelancers, often working for a sole employer, at the mercy of policymakers implementing (or not) extraordinary solutions. 

Outsourcing work and framing it into ‘projects’ are often employer strategies aimed at reducing costs by making their employees self-employed and thus avoiding all social costs that a regular employment relationship implies

The Taxman Is Coming for Disguised Freelancers and Their Employers

Government actions towards employers or freelancers who are actually in disguised employment haven't surfaced yet. But that is about to change. Coronavirus pandemic has emptied government budgets and after long standing uncertainties how to implement tax rules more rigorously many countries are starting with active supervision in 2021. In U.K, after being postponed because of the pandemic, changes to the IR35 tax legislation changes which scrutinise freelance work and aim to unmask false self-employment have come into effect on 6th of April 2021. In the Netherlands Dutch Tax Authority has started piloting a tool for voluntary self-evaluation (DBA act) , but have been carefully enforcing compliance by heavy offenders since 1 January 2020 and it is expected, based on its auditing plan, it will audit compliance heavily after Q2 2021.

In U.K, after being postponed because of the pandemic, changes to the IR35 tax legislation changes which scrutinise freelance work and aim to unmask false self-employment have come into effect on 6th of April 2021

As stated on their website, Dutch Tax Authority, will enforce compliance (fines) if they see you as malicious - if you 'deliberately allow a situation of apparent bogus self-employment to arise or continue because you know – or should have known – that there is in fact an employment relationship'. If it sees malicious intent, the client may receive a fine and freelancer need to pay social security premiums retroactively. You as a freelancer (zzp’er) will need to stop working for them, and will lose your right to tax benefits such as the private business ownership allowance and SME profit exemption.

Around one-third of freelancers may be disguised employee

The U.K law goes further and makes companies who hire freelancers / self-employed decide (and declare) on status of their vendors, while making them aware that they will have to provide evidence if audited. The need for proving goes through the entire supply chain as elaborate hiring schemes which proliferated (through agencies, umbrella companies etc.) are also to be put in order. According to the Financial Times, "HMRC says hiring companies will need to prove they have taken “reasonable care” to assess the IR35 status of their contractors. If they fail to do so they risk being liable for any shortfall in tax and national insurance". HMRC estimates around 230,000 personal service companies used by contractors may be affected by the rule change. It believes that while two-thirds of these people are genuinely self-employed, around one-third may be disguised employees

Hiring companies will need to prove they have taken “reasonable care” to assess the status of their contractors. If they fail to do so they risk being liable for any shortfall in tax and national insurance.

The status of false self-employment is differently tested and checked in different countries, but common to all of them are level of control between 'the client' and 'the vendor'. Tax authorities have listed on their websites the indicators they'll judge a certain relationship but summary (to be used only as guidance) roughly looks like this:

Netherlands

If a your client determines how you do the assignment - they have the authority, if you have committed to doing the job yourself, you cannot send someone else as a replacement, if you receive a salary from the client, a fixed wage per month, or even when you are sick a Dutch Tax Authority will see this as employment, not self-employment. Moreover, they advise that you should have (at least) three clients, invoice each assignment separately, invoice clients directly, document which assignments you confirm and which you reject, invest in your own work equipment and use it in the assignments you carry out, both at home and on location.

United Kingdom

In the UK, Tax Authority (HRMC) will rule you are falsely self-employed : if activity is carried out on a permanent basis and essentially for just one customer, more than five sixths of the turnover is from a single customer, work is carried out according to instructions and integrated into the client’s organisation, prescribed place of work with work equipment provided, no personal entrepreneurial action – you do not have the appearance of your own company with letter paper or business cards, none of your own employees permanent employees are also employed by the client for the same task, independent contractors with the same tasks have been made permanent employees by the client.

Same principles are also found in Germany, Australia, USA - basically all advanced countries.

What's The Size of The Problem For In-House Agencies?

By just looking at indicators of authority, location of work (the business premises), prescribed work hours and usage of materials, tools and equipment (digital tools included!) and inability to send a replacement - the freelancer has do to the job himself, it would be safe to assume that more than 25% of currently engaged freelancers with in-house marketing agencies would fall under the employee status, triggering a looming threat of back-taxes and fines for in-house agencies and for freelancers.

Just like Uber drivers won in court, freelance creatives and marketing professionals who have been actually employed in disguise by in-house marketing agencies, could easily ask and be awarded in court for back payments for all the previous years

Furthermore, aside of looming taxes, in-house agencies could find themselves in legal challenges by those freelancers who they've hired as disguised employees. Just like Uber drivers won in court, freelance creatives and marketing professionals who have been actually employed by in-house agencies, could easily ask and be awarded in court for back payments for all the previous years. The reason why they already haven't is most probably because of lack of knowledge and because they're well paid. However, the spill-over effect is already seen in UK in the professional service / beauty industry where a hairdresser in July 2020 won a court case over 'false self-employment' in a hair salon.

According to the state of in-house agencies reports, 90% of in-house leaders say they plan to utilise contractors/freelancers to support their growing body of work.

2021 In-House Creative Industry Report published by Cella Consulting provides a great insight into a state of in-house creative agencies, revealing the scale of reliance on freelancers by in-house creative teams. 90% of in-house leaders report that they plan to utilise contractors/freelancers to support their growing body of work.

Resourcing remains the top challenge. Cella, Inc., 2021 In-House Creative Industry Report, April 2021

Majority leverages freelancers and contractors to temporary bridge the creative resourcing gap. Cella, Inc., 2021 In-House Creative Industry Report

According to the same report 88% of IHA leaders are using freelancers/temporary/contract workers while only 10% has planned to decrease spend with them in 2021. However, the freelance creative & marketing resourcing as a first choice for in-house agencies might change when one considers the administrative compliance burden changed laws and intensified supervision will entail for them.

However, the freelance creative & marketing resourcing as a first choice for in-house agencies might change when once considers the administrative compliance burden changed laws and intensified supervision will entail for them.

A survey of 500 companies by Brookson Legal Services also suggests blanketing (applying one size fits all) will be commonplace. It found that across industries 59 per cent of companies were considering taking a standardised approach to assessing their contractors — because they did not have the time to make decisions about them individually. Many businesses will reconsider hiring contractors all together.

Financial Times published survey reports

Reclassification will obviously have a financial impact, so companies will have to chose if they will foot the bill - and pay freelancers as much as they pay full-time employees or, depending on their bargaining power, will pass on the reductions, up to 25%, to the contractor. Increased administrative and financial costs, compounded by looming legal and tax threats in back taxes will probably make some in-house creative agencies to reconsider their creative & marketing resourcing strategies.

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