What the 2025 employment status review means for contractors

Not before time according to some, ministers have confirmed that the UK government will publish a consultation on simplifying the employment status framework by the end of 2025.

Depending on where this review of employment status goes, it could be one of the most important developments for contractors since the IR35/Off-Payroll Working reforms, writes Charlie Hemsworth, director of status specialists Bauer & Cottrell.

Labour’s employment status review: 4 things we now know

Thanks to the confirmation, which came in a House of Lords debate in July, we now know that the scope of the consultation will extend to (at least) four things:

1. Simplification of the current three-tier status system (employee, worker, self-employed), and whether to retain and reform the “worker” (limb b / ‘dependent contractor’) category.
2. Preventing the use of sham substitution clauses by engagers to skew status and deny worker protections.
3. Strengthening protections for the self-employed, possibly new self-employment rights in areas like health and safety.
4. Clearer recognition of the distinction between freelancers, self-employed and sole traders across sectors (currently, these three are all lumped together), and better classification of these roles in official data.

What the 2025 review of employment status will cover

Labour says the consultation will be published by the end of 2025; it will be “in the fullest sense” (i.e. wide stakeholder engagement), and will be accompanied by impact assessments for any legislative proposals.

Technically, Labour’s until-now-showpiece in the status ‘space’ -- Single Worker Status -- which would effectively collapse ‘employee’ and ‘worker’ into one category, has not been ruled out. But ministers now appear to favour retaining and reforming the current three categories.

Will the government align employment status with tax status?

For contractors and Personal Service Companies (PSCs), the consultation matters because how employment status is decided sits at the heart of IR35.

But it’s important to be clear. Employment status and tax status are not the same thing, and herein lies the problem.

Right now, we have the bizarre situation where you can be taxed as an employee under IR35 but have no employment rights. You can be a worker in employment law but taxed as self-employed. It’s a nonsense system that causes confusion, with disputes having to be hashed out in lengthy and expensive tribunals.

The biggest change to contracting since IR35? Very possibly…   

If the government uses this consultation to bring employment law and tax law closer together, that could be the biggest change to contracting since IR35 was introduced in 2000. After all, the mismatch has been acknowledged in almost every official review of IR35 since its implementation.

A close eye should be kept on how the employment status review deals with “dependent contractor” status.

It could try to pin down who ‘dependent contractors’ are with clearer criteria around things like Control, Client Dependency and whether someone is running a real ‘business.’ For PSC contractors, how that line gets drawn could have huge impacts on IR35 positions.

Equally, many in the contractor sector, such as IPSE, have previously called for a statutory definition of “self-employed.” For contractors running genuine businesses, having a clearer dividing line would make it easier to expose ‘false self-employment’ without dragging everyone into the net.

But will such a drastic step that would effectively wipe out years of employment status case law ever really be possible? 

As always, the devil will be in the detail, and we’ll need to wait until the 2025 employment status review is published -- “by the end of this year” -- to see the government’s real intentions.

Five recommendations in wake of Labour’s employment status review

But here are five things that, as specialists on IR35 and status, we believe to already be clear about the review/consultation or that ought to be kept in mind:

1. Be aware, this won’t be an overnight change. A consultation towards the end of this year means stakeholder responses are likely in early 2026, then a government reply, then draft legislation. Realistically, any changes to the UK’s status rules and framework probably won’t bite until 2027 at the earliest.
2. End-hirers/ engagers should prepare. Even the possibility of employment status reform will make some end-hirers nervous. Those organisations relying on contractors or temps, particularly in long-term,  dependent roles, should start thinking now about how changes to status rules could affect their hiring decisions and workforce strategy.
3. Keep an eye on IR35. Nothing in the Lords' debate mentioned changing IR35 or the off-payroll working rules directly. And that’s a bit reminiscent of how the government ducked IR35 in 2018! But you can’t reform employment status and leave IR35 alone. Even if tax status will remain separate, any attempt to further pin down employment status will inevitably shape how IR35 is applied. PSC contractors should consider their current positions and how they can demonstrate independence, because this is likely to be a key aspect.
4. Check your substitution clauses. PSC contractors should also look carefully at how substitution clauses are worded in their contracts. Are they fettered, or actually exercisable in practice, and how could you prove it? This could spell the end of relying solely on clauses as a defence. If you’re not sure, get your contract reviewed.
5. Speak up. Finally, get involved when the consultation opens before 2026 arrives! This is a chance to have your say and if you don’t, others will shape it for you.

A little bit of status history repeating itself?

Remember, this isn’t the first time we’ve been here. Following the 2017 Taylor Review, we had an employment status consultation in 2018 under the previous government, which unfortunately fizzled out into nothing more than updated guidance some four years later in 2022.

So while it’s a boon that the framework is to be looked at again, employment status (as a policymaking area) has historically been kicked into the long grass, and labelled ‘Too Difficult To Fix.’ The government must go further this time and act on the feedback it is repeatedly given -- the current framework is broken and needs drastic reform.