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The Legal Concept of Employment: Marginalizing Workers

I. Conceptual Confusion

A contemporary sociologist pointed out that “the meaning and measure of self- employment is somewhat of an enigma” (Aronson 1991, xi). Despite the long usage of the term (Linder 1992) there is no generally accepted definition. Most frequently self-employment is simply contrasted with employment, which in turn is not precisely defined. In part, the complexity of defining the terms “employment” and “self-employment” arises from the fact that their definitions depend upon the context in which they are being used. Angela Dale identified three important contexts in which the self-employed may be distinguished from employees – the sociological, legal, and statistical (1991). She also pointed out that not only is there debate in each of these literatures about how to define these terms, the predominant definitions in the different contexts are not perfectly congruent, although they overlap.

This part provides a brief overview of how employees and the self-employed are conceptualized in the sociological, legal, and statistical literatures in order to identify the rationale for drawing the distinction in a particular way and to trace the overlap in the different definitions. Despite the fact that the majority of sociologists would now agree that “it is probably inappropriate to attempt to model self employment as a single aggregate” (Meager et al. 1994), an ideal type of self-employment, marked by autonomy and control, continues to inform the legal and statistical definitions.

For many sociologists seeking to describe and understand the structure of societies, class is a key component. Both Marx and Weber regarded the ownership of means of production as crucial for understanding the nature of power and authority relationships between labour and capital (Curran and Burrows 1986; Dale 1986, 450; Elias 2000, XII). Different classes are distinguished in terms of the ownership of the means of production, autonomy of work, and expropriation of the labour power of others. Sociologists have identified three classes in capitalist societies:

1. employers (the bourgeoisie) who buy the labour power of other and thus assume some authority or control over them;

2. self-employed without employees (petit bourgeoisie) who do not sell their labour nor buy the labour of others;

3. employees (proletarians) who sell their labour power to employers and thus place themselves under their authority and control (Goldthorpe1980; Wright et al. 1982).

As an ideal type, self-employment is linked to ownership, autonomy, and control over production, clearly distinguishing crafts-people, independent professionals, and small business proprietors from waged workers (Eardey and Corden 1996, 13). Historically self-employment has been associated with independence and contrasted with the dependent status of employees (Bercussen 1996; Fraser and Gordon 1997). Two key elements defining the self-employed are their ownership of the means of their own production and self-direction or autonomy in the work (Dale 1986).

However, this ideal type is becoming increasingly distant from the reality of self-employment. Researchers in Britain, where self-employment grew remarkably during the 1980s, were among the first to identify the changing nature of self-employment. They recorded a rise in consultants, professionals, and contractors, especially in the service sector, and a decline in small business owners who employed other workers (Dale 1986; Eardley and Corden 1996; Hakim 1986; Leighton and Felstead 1992). They also discovered that a sizeable portion of the self-employed included homeworkers and labour-only contractors, as well as franchisees, freelancers, and outworkers. The employment situations of these workers differ dramatically from the ideal type of the self-employed since they do not own much by way of means of production, exercise little control over production, and do not accumulate capital (Brodie, Stanworth and Wotubra 2002; Bryson and White 1996a; Dale 1986, 1991; Eardley and Corden 1996; Felstead 1991, Lorinc 1995; Stanworth and Stanworth 1997). Studies indicate that changes in contractual relationships, specifically, the growth of “market-mediated” work arrangements and networks of firms, relate directly to the rise in self-employment; the nature of the contracts for the provision of labour are changing such that commercial, as distinct from employment, contracts are becoming commonplace (Abraham 1990, 85; Engblom 2000; Jurik 1998, 7). For many of the new recruits into the ranks of the self-employed the link between self-employment and entrepreneurship is no longer obvious.

Moreover, research by Wallace Clement (1986) on fishers in Canada demonstrated that even the paradigmatic form of self-employment, the petit bourgeoisie, is perfectly compatible with a great deal of subordination. His detailed report of the property relations in the fisheries illustrated how large capital can shift considerable risk and the supervision of labour on to direct producers. Like Clement, Rainbird (1991) also focused on the social relations of production of the self-employed in relation to larger capital, although she examined a range of self-employment and small business formation in the UK. Concentrating on self-employed who contribute both labour and capital to the production process, she found that

the majority of the self-employed earn a subsistence living only, although there is some scope for them to appropriate surplus value and accumulate capital of their own by virtue of their ownership of capital, self-exploitation and employment of labour (Rainbird 1991, 214).

These findings led her to conclude that much of self-employment could be classified as disguised wage labour. In a similar vein, Linder (1992) argued that the self-employed should not be conceived of as a class separate from employers and employees, but rather should be conceptualized as a hybrid class more closely resembling wage workers than entrepreneurs.

Sociologists now recognize a continuum of self-employment that differs in terms of the quality of, and the rewards from, the work and the chances of economic success and security (Hakim 1988; Leighton and Felstead 1992). Self-employment ranges from disguised employees (ILO 2000 a, b, 2002; OECD 2000) and franchisees through skilled crafts people and independent professionals to the owners of incorporated businesses. At best, some types of self-employment provide autonomy allowing people to realize their potential and align rewards with efforts; at worst, self-employed workers are marginal (ILO 1990). The range within the ranks of the self-employed is explained by a combination of structure, agency, and practice. The concept of “social location” has been developed to specify the ways in which political and economic conditions interact with class, ethnicity, culture, and sexual orientation to shape the meanings and strategies of working men and women (Jurik 1998; Lamphere, Zacilla, Gonsalves, Evan 1993). This framework helps to explain not only why self-employment is very different for men and women across countries, but also why the type and proportion of self-employment differs between countries (OECD 2000).

Sociological research on the self-employed suggests that the conception of self-employment that links being self-employed inextricably with entrepreneurship, ownership, and autonomy has more to do with ideology than reality. Self-employment is heterogeneous and much of it is likely to be precarious in terms of pay, benefits, and security. But despite this social reality, the ideal of self-employment continues to influence the legal norm of employment and thus is still used to justify excluding self-employed workers from labour protection and many social benefits

The legal status of being an employee is the gateway to most employment-related protection at common law and under legislation, the statutory regimes of collective bargaining, and a range of social benefits from employment insurance to pensions. The legal definition of the term “employee’ determines the personal scope of labour protection (Benjamin 2002; Davies and Freeland 2000; ILO 2003). People who work for pay but who are self-employed are treated for most legal purposes as independent entrepreneurs, who, unlike dependent employees, do not need labour protection. Instead, independent contractors are subject to the rigours of competition and the principles and institutions of commercial law.

In the conventional legal narrative, what distinguishes an employee from an independent contractor who also performs personal services is the degree of control exercised by the purchaser over the labour of the person performing the service. The importance of control, understood as authority to direct the labour process, is attributed both to the historical legacy of master and servant law with its emphasis on subordination and the nature of early production processes in which masters could directly supervise workers (Carter et al. 2002). Moreover, the common law’s emphasis on control is compatible with the view of classical economists such as Adam Smith, who regarded the key distinction between employees and independent contractors to be the fact that the former relinquish to the employer the complete disposition over their activities except for agreed upon limits (Linder 1992, 13). Similarly, the predominant legal understanding of the employment relationship as primarily contractual (England, Christie and Christie 1998; Langille 2002) reinforces the classical view of employment status as freely chosen and the terms of the bargain as the outcome of negotiation.

In assessing the conventional legal story, it is important to bear in mind the caution of Otto Kahn-Freund (1972, 116-7) the comparative labour law scholar, that “to mistake the conceptual apparatus of the law for the image of society may produce a distorted view of the employment relationship.” The origins of the legal concept of employee are much more tangled than the conventional story suggests. Recent research shows not only that the definition of employee owes much more to statute than to contract and the common law, but also that often the distinction between dependent workers and independent entrepreneurs was not particularly important or relevant. Little wonder that a prominent legal scholar complained that the cornerstone of labour law, the contract of employment, was built upon a “core of rubble” (Hepple 1986 quoting Rideout 1966, 111). Moreover, according to Simon Deakin (1997), the emergence of the control test as the key to the resolution of legal disputes over employment status in the UK was an ideological innovation to limit the extension of social legislation.

Despite new historical research on the origins of the legal concept of employment and well-established critical commentary on the conventional legal story, control continues to be critical to the determination of employment status and contract continues to be regarded as the cornerstone of employment law. According to a recent Canadian labour law text, “the test of control is of great importance today when deciding whether or not a contract of employment exists.” However, it goes on to acknowledge, “the notion of control is an elusive one” (Carter et al. 2002, 166). The contours of the legal definition of employee are difficult to draw (Davidov 2002 a, b). In a case decided in 2001, the Supreme Court of Canada acknowledged that

there is no one conclusive test, which can be universally applied to determine whether a person is an employee or an independent contractor. The central question is whether the person who has been engaged to perform the services is performing them as a person in business on his own account. In making this determination, the level of control the employer has over the worker’ activity will be a factor. However, other factors to consider include whether the workers provides his or her own equipment, whether the worker hires his or her own helpers, the degree of financial risk taken by the worker, the degree of responsibility for investment and management held by the worker, and the worker’s opportunity for profit in the performance of his or her task.[1]

Although the central legal task continues to be distinguishing between dependent employees and the independent self-employed, the question is whether this distinction should continue to be central to determining the scope of labour protection. Since 1944 the ILO has called for efforts to be made to ensure that the self-employed enjoy the same level of protection as other categories of workers regarding social security and has recently re-affirmed this position (ILO 2000a, b, 2002). What is the normative basis for distinguishing between the self-employed and employees for the purpose of legal protection and social benefits? In fact, as Part Four will demonstrate, in some areas of the law, notably workers’ compensation and occupational health and safety, the distinction is breaking down. The need to examine the normative basis for determining the scope of labour protection is particularly urgent, given the increase in the number of people whose legal and contractual status is that of self-employment but whose actual work status is very far from that of the small business owner (Eardley and Corden 1996, 14).

Even if the distinction between dependent employees and independent entrepreneurs continues to be accepted as the boundary between labour protection and commercial regulation it would still be necessary to consider whether the criteria that historically have been used to determine the scope of labour protection are still useful (ILO 2003). Currently the legal determination of employment status is extremely complex and very uncertain. There are a variety of different legal tests that can be applied, a multitude of factors to consider, and a range of different legal contexts in which the question of status is raised (Davidov 2002 a, b). Although some legal commentators have urged adjudicators to use the flexibility of the legal tests to develop a purposive approach to the question of whether a person should be treated as an employee (Davidov 2002 b; Langille and Davidov 1999), this “attempt to infuse a measure of rationality, orderliness and predictability into the law” (Carter et al. 2002, 87) has been, as will be discussed in greater detail in Part Four, more of an ideal than a reality. Frequently the purpose of the legal determination of employee status “disappears in the hodge-podge of tests and facts in each case” (Carter et al. 2002, 166).

Not only is the rationale for making the distinction between employees and independent contractors the basis for determining the scope of labour protection less persuasive now than before, the current legal tests are under considerable stress on account of the changing nature of employment relationships. According to Hugh Collins (2001, 31) “the advent of the flexible employment contract presents an even greater challenge to legal classification and the determination of the proper scope of labour standards than the earlier difficulties provoked by vertical disintegration.” Firms attempt to shift the risks of productive activity and employment onto workers by categorizing work relationships as commercial arrangements rather than employment (Beck 2000; Chaykowski and Gunderson 2001, 39; Deakin and Wilkinson 1991, 125; Beck 2000). False categorization (otherwise known as disguised employment or false self-employment) is just one problem that comes with relying on a legal definition that is out of tempo with the reality of employment relations.

At a statistical level, employment and self-employment are distinguished by their mode of remuneration, employees receiving wages and the self-employed enjoying profits (Elias 2000; ILO 1990; Loufti 1991; OECD 2000). In broad terms, self-employment can be considered to be the residual category of gainful employment not remunerated by a wage or salary (OECD 1992, 155). The distinction between employment and self-employment is also supposed to capture both the greater risk and autonomy associated with self-employment (Elias 2000 XII). However, the use of the criterion mode of remuneration is not a very precise measure of these features. As the preceding discussion of the sociological literature emphasizes and the statistical portrait of self-employment in Canada reinforces, attempts to give a generic character to the self-employed mystify a broad spectrum of socio-economic positions (Bögenhold and Staber 1991, 225).

The statistical measure of self-employment is also supposed to correspond with the legal definition. In fact, Statistics Canada (1997, 1) goes so far as to state that “in practice, the distinction between self-employment and employee status coincides with rules set out by government bodies such as Revenue Canada and Human Resources Development Canada regarding income tax liability, eligibility for regular employment insurance benefits and applicability of labour legislation.” While there is some overlap between the legal and statistical definitions, inconsistent legal determinations of employment status both within and between legal regimes as well as the problem of disguised employment means that the fit between the definitions is not as close as Statistics Canada claims. In Britain, several researchers have commented on the gap between the legal and statistical definitions (Dale 1986, 1991; Eardley and Corden 1996; Hakim 1989).

The problems with the existing statistical measures of self-employment are well known. For this reason, the ILO (1990) stated, “ideally self-employment might be defined more positively according pre-selected criteria, such as the economic criteria of ‘risk’ (to capital involved in the business), ‘control’ and ‘responsibility’.” However, as Alex Bryson and Michael White (1996b, 11) observe “it is actually very difficult to express in operational terms a definition of self-employment meaningful in labour market terms as distinct from employment which corresponds to ‘formal’ definitions used by authorities, and individuals’ perception of what it is to be self-employed.”

But despite the concerns about using mode of remuneration as the basis for distinguishing between paid employees and the self-employed, it underpins the International Classification of Status in Employment (Elias 2000, XI) as well as the majority of Statistics Canada’s survey instruments. On the basis of these definitions, in Canada and elsewhere, total employment is divided into two broad groupings: paid employees and the self-employed. The Labour Force Survey is the principal survey used to capture total employment in Canada and, hence, newer surveys conform to its definitions of self-employment and paid employment. As Figure I.1 illustrates, within this survey, the category “paid employees” includes both public employees and private employees. The self-employed, in contrast, are divided into three broad categories: working owners of incorporated businesses, farm, or professional practice (Manser and Picot 1999, 3.3; Statistics Canada 1997, 5);[2] working owners of unincorporated businesses and self-employed that do not have a business; and unpaid family workers, including persons who work without pay on a farm or in a business or professional practice owned and operated by another family member living in the same dwelling. Analysts normally subdivide the two categories working owners of incorporated and working owners of unincorporated businesses by those with and without paid help, known typically as employers and own-account self-employed. In 2000, paid employees made up 84% of total employment while the self-employed constituted 16.2%. Among the self-employed, incorporated employers represent 3.6% of total employment, unincorporated employers represent 2%, incorporated own account represent 2%, unincorporated own account represent 8.3% and unpaid family workers represent 0.3%.

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