Five Criteria to Define Freelancers in the Revised European SME Definition

13/06/2017 |

Euro-Freelancers-SMEs-SupportThe European Commission has called to revise the European SME Definition in a recent Inception Impact Assessment.

The original definition dates back to 2003 and has been widely adopted throughout the EU as an important tool to determine whether enterprises fall within the scope of certain legislation and to provide legal certainty.

This is a relevant opportunity for the EU Institutions to acknowledge freelancers as a stand-alone category within the definition and legitimise the smallest of small businesses, those who – with a 45% increase since 2000 – are the fastest growing segment of the EU labour market.

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The number of freelancers (also called independent professionals) in Europe has nearly doubled between 2000 and 2014 and this growth has far outpaced the growth of any other relevant segments of the EU labour market (Data from Eurostat, 2015).

In its Resolution on Atypical Contracts the European Parliament has called the Member States to “recognise and support freelance workers as a vital force in economic recovery; believes that freelancers should be treated as a unique subset of micro-businesses; calls for measures to be taken to minimise the burden of regulation and to encourage freelancers in launching/growing independent businesses and to promote lifelong learning for this group”.

Freelancers are highly-skilled and well-educated self-employed workers without employers nor employees. They offer specialised services of a knowledge-based nature and work on a flexible basis in a range of creative, managerial, scientific and technical occupations, primarily in B2B.

Freelancers challenge conventional notions of entrepreneurship, and don’t conform to traditional images evoked by terms like startup, scaleup or founder.

As the economy continues to shift in ways that make independent work more commonplace and desirable, freelancers’ experiences should inform and shape our understanding of the future of work. Many freelancers are one-person enterprises, and face very different challenges from even a ten-person micro-enterprise. Yet, most government programs for small businesses tend to be siloed and overlook the needs of these solo-entrepreneurs, focusing instead on helping small businesses become big businesses by offering low-cost loans and assistance related to hiring employees.

There are instances in EU legislation where the SME Test included in official impact assessments for policy proposals fails because it is neither adapted nor it measures impacts on one-person enterprises.

According to the European SME Definition, one-person enterprises are included into the micro-enterprise category (<10 staff, < 2 million Euro balance sheet, <2 Million Euro Turnover). However, and in practical terms, policy measures for all kind of SMEs – for instance in terms of administrative burden reduction – remain unbalanced in many Member States as they often fail to take into account the impact on the smallest businesses of one, a very diverse group in a continuously evolving environment.

Freelancers can only rely on themselves to fulfill administrative duties and run their businesses. They do not have internal resources nor can delegate to anyone else, which is still an option for “larger” micro-enterprises and SMEs. Many of them are unincorporated, and as such do not have a legal entity that allows them to benefit from the provisions included in the European SME Definition.

The influence of public policy is felt heavier on freelancers than on any other small businesses, so that exemptions, thresholds or lighter regimes should be considered on a case by case basis.

Whereas making a distinction between large companies and SMEs has been a step in the right direction of EU policy, it is key to recognise within the SME group, there are important differentiations.

What is easily manageable for an SME with 250 employees, can be disproportionately onerous for an SME with 10 employees and simply impossible for a one person-SME with zero employees. Nevertheless, all 3 fall under the European SMEs Definition and must comply with the same legislation.

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A freelancer, limited in his/her resources, is himself/herself who plays the role of accountant, health and safety department, HR manager, web developer, data protection officer, secretary and so on. The more time a freelancer spends on compliance, paperwork and other red tape, the less time he/she has to cultivate the business and generate growth.

Since the term “freelancer” is understood differently in the Member States, a common European definition of this term is crucial.

Policymakers should recognise freelancers as economic agents in their own right, providing an important and distinct function to employees and employers.

The revised European SME Definition should include a definition of freelancers as a highly-skilled segment of the self-employed and a unique subset of micro-enterprises. This definition should also include a shared terminology for the various sectors, in accordance to the Eurostat LFS economic activity classification.

According to the European Forum of Independent Professionals, the definition should be based around five key criteria:

  1. A high degree of autonomy. Freelancers exercise control over their workload and can decide how to complete their tasks and the hours and location they choose to work.
     
  2. Payment by task, assignment, or sales. Freelancers are paid for their output – the completion of a project, rather than their input – number of hours worked.
     
  3. Short-term relationship with clients. Freelancers perform fixed assignments. They can begin to work immediately without infrastructures, funding, a business plan and often learn business skills as they go.
     
  4. Measuring growth in unconventional ways. Freelancers want to keep their business at a manageable size, balancing income generation with creativity, freedom, self-reliance and well-being.
     
  5. Taking on business risk. Freelancers are owners of nano-businesses and take responsibility for their financial, social security and tax duties.

Further, policymakers should produce better regulation and simplified policy for freelancers with the SME Test and impact assessments adapted to self-employment. This should give the right incentives for people to become self-employed, remain self-employed and for companies to engage them.

With the upcoming revision of the European SME Definition, the Commission wants to: “ensure that available support measures to reduce administrative burden are focussing on those enterprises that are most in need of it”.

Freelancers are those enterprises!

They no longer occupy niche categories. With a growing 10.5 million freelancers in Europe, contributing to more than 9 billion euro in EU GDP (Eurostat, 2014), the Commission has a great opportunity to update its policy as to reflect current changes in the labour market shaping the future of work.

This will in turn help freelancers to unleash their full innovation and job creation potential.

Marco Torregrossa is Secretary General at the European Forum of Independent Professionals and Managing Director at Euro Freelancers.

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