In that case we are all employed really!
Well I'm self-employed. I negotiate the rate I am to be paid with each company I work for, and this is not always the same as they pay others. If other people want to work for less, then thats fine by me, but I never seem short of work. I also charge VAT. I quote a vat exclusive price to flying schools, but I quote a vat inclusive price to my own students. Oh, and I decide when and where I work, but once I have agreed to fly for someone on a particular day, I never let them down.
It can be done. I think the mistake many instructors make is not believing in themselves and so lacking the confidence to ask for and expect a sensible rate. If you don't ask, you won't get, or in other words, if you seem happy working for peanuts, why should anyone offer you more?