The Association of Independent Professionals and the Self-Employed have condemned Lloyds Banking Group’s decision to either scrap contractors or force them into umbrella companies. I think this unfair on Lloyds and unfair on the tax-payer.

As anyone in reward knows, IR35 contracts have been adopted , sometimes for years, so that individuals can get accelerated daily rates to compensate for benefits foregone for not being on payroll. Contractors have seen the clampdown on this practice coming. IR35 contractors have lost their privileges in the public sector last year and now responsible employers like Lloyds are implementing what HMRC has asked them to.

And it’s unfair on Lloyds to characterise the options for contractors as “like it or lump it”. If contractors are really important to a business, they are invited to join the workforce. Lloyds terms and conditions for employees include excellent benefits including a very good workplace pension scheme – the largest by assets in the country.

By comparison, the workplace pension scheme offered by most umbrella companies will typically be funded at the AE minima. The challenge posed by Lloyds to its contractors is one of reward for loyalty and competence, do these contractors cut the mustard?

The Financial Times and IPSE report that working through an umbrella company may require contractors to take up to a 30% pay cut, which represents the risk that the umbrella companies see as taking these contractors onto their payroll. Instead of moaning at Lloyds, IPSE should be recognising that Lloyds has born this risk voluntarily for many years.

IPSE go on to threaten Lloyds with the prospect of lower workforce flexibility and lower productivity from the former contractors. This too looks specious. The cost of hiring former contractors through umbrella companies will likely be the same for large companies like Lloyds.  Such employers will be asking why should they stand for less in terms of output?

I think it likely that if productivity and labour flexibility drops, employers will stop using the umbrella companies and insource labour so they can have direct control. Umbrella companies will have to justify the cost of their labour and ensure that productivity and flexibility remain high.

As far as pension policy goes, HMRCs policy appears to be working. The IR5 contractors typically stayed outside workplace pensions as sole Directors of their personal service companies. They currently form part of the 9.5m UK workers who “aren’t in” and that is no good thing. Take up of “non-workplace pensions” by the pseudo self-employed is pitifully low. The IR35 in-retirement liability to the Treasury will only emerge when they find themselves under-pensioned in later life, dependent on benefits and other tax-payers in later life. That cannot be right.

Britain is right to value the genuinely self-employed, they create wealth through innovation, entrepreneurship and through independent thinking. The growth of our economy is reliant on them and I don’t deny IPSE’s estimate that they add £275bn to the economy each year. But the ranks of long-term contractors working for large employers like IR are not innovators or entrepreneurs but people arranging their work affairs to maximise their cash-flow.

IPSE fears that the decision of Lloyds not to find work-rounds to the HMRC’s rulings may be a taste of things to come next April, when the changes to IR35 become law for the private sector. They are right, where Lloyds leads, most other employers should follow.

Not to do so, will create more uncertainty for the pseudo self-employed. Better by far that they prepare for next April by having meaningful conversations with the organisations they contract to, with the hope of moving onto their payroll or accept joining the umbrella organisation as the price of failure.

As for auto-enrolment policy, April 2020 will see the elimination of one of the grey-areas of reward policy. It will then become clear just who is responsible for pensioning contractors, taking a big burden off large employers who have carried the risk of a back-dated liability to pension their IRs. Let’s hope that the quid pro quo for responsible employers will be a release from obligations in the past. That should be the reward offered them by HMRC for playing ball.