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Workers, employees and self-employed
- It is important to know if your staff member is an employee, a worker or genuinely self-employed because each category enjoy differing levels of employment law rights and duties, and attract differing tax liabilities too. For example, employees enjoy an implied duty of trust and confidence from their employers, and the right not to be unfairly dismissed, neither of which are available to workers or self-employed contractors.
- Failing to comply with the correct employment law and tax obligations could result in costly litigation and/or HMRC penalties.
- This guidance refers to employment law tests for ascertaining status which, although similar to those used by HMRC, are not completely the same. HMRC’s assessment of status is not conclusive for employment purposes although it will be considered.
- When ascertaining an individual’s status, you need to consider both their contractual terms (whether oral or written) and the reality of their day-to-day working relationship.
- The expanding ‘gig’ economy, whereby individuals are engaged by a business on a flexible ad hoc basis, and resulting litigation against global entities such as Uber, has led to greater focus by the courts and HMRC on employment status. We are likely to see changes following completion of the Taylor Review which looks at the new models of working in the gig economy.
INDICATORS OF EMPLOYMENT
- The Employment Rights Act 1996 defines an ‘employee’ as ‘an individual who has entered into or works under (or, where the employment has ceased, worked under) a contract of employment’ where a contract of employment means ‘a contract of service or apprenticeship, whether express or implied, and (if it is express) whether oral or in writing’.
- The leading authority is Ready-Mixed Concrete (South East) Ltd v The Minister of Pensions and National Insurance which set out the following test:
- Obligation to provide personal service: individual required contractually to perform the services personally in return for payment
- Control: individual is told which work to complete, how to complete it, where to do it, and when by the business
- Mutuality of obligation: individual must perform the work given by the employer, and the employer must provide work for them to do
- Other relevant factors consistent with employment:
- individual is obliged to attend work or work for a certain number of hours
- they are required to wear a uniform or drive a company car, for example
- they may have restrictions on what they can do after the employment ends
- they receive typical “employee” benefits e.g. employee car parking spaces
- they are paid through payroll and taxed at source
- For convenience, we have applied the above test to each category below to highlight the differences.
INDICATORS OF A ‘WORKER’
- Various statutes define a ‘worker’ as follows: ‘an individual who has entered into or works under (or, where the employment has ceased, worked under) (a) a contract of employment, or (b) any other contract, whether express or implied and (if it is express) whether oral or in writing, whereby the individual undertakes to do or perform personally any work or services for another party to the contract whose status is not by virtue of the contract that of a client or customer of any profession or business undertaking carried on by the individual’.
- The contract normally says they are a worker and not an employee of the business.
- Typically short contract or on assignment by assignment basis.
- Obligation to provide personal service: individual must perform the work personally in return for wages or benefit in kind although they often have a limited right to subcontract the work to someone else.
- Control: business typically tells the individual what work to do, where to do it, when to do it and how to do it.
- Mutuality of obligation: for so long as the contract lasts, the individual must perform the work when asked to do so, and the business must provide work for them to do.
- Other relevant factors:
- payment upon submission of timesheets often.
- paid through payroll typically.
- working as an integral part of the business’ operation.
- limited number of the business’ policies will apply to them.
- individual is not doing the work as part of their own limited company in an arrangement where the ‘employer’ is actually a customer or client.
- For example, a cycle courier was held to be a worker in 2016 following analysis of her written contract and the actual working relationship. The courier’s contract was to ‘supply services’ and stated that she was not obliged to work for the particular company, that she could use a substitute and was not entitled to holiday, maternity or sick pay. However, the company required its cyclists to log into its tracking system when they were available to work and to wear its uniforms. They were also expected to work when they had said they would and were directed by a central controller.
INDICATORS OF SELF-EMPLOYMENT
- Contract says they are self-employed, whether they are operating as an individual contractor or via a personal service company.
- No obligation to provide personal service: if the contract states that a ‘named consultant’ will provide the services this will not necessarily be fatal to the situation though.
- Control: although the consultant may agree to meet deadlines or work on client sites from time to time, they are able to choose when, where and how to perform the services.
- Mutuality of obligation: client is not required to provide work for the individual to do and the individual can refuse to perform services.
- Other relevant factors:
- responsible for their own tax and payroll
- can subcontract their services without penalty. The EAT, in Community Dental Centres Ltd v Sultan-Darmon, said that an unlimited right to appoint a substitute for any reason without suffering a penalty or sanction will mean that they are unlikely to be a worker. Preferable that this right is exercised
- not required to work from client site or be available at specific times. Requiring a consultant to attend site visits (for example) at specific times to meet stakeholders will not be fatal to their being genuinely self-employed
- actively marketing their services within the marketplace
- typically project-based fees and contract duration
- payment upon completion of services or milestones, with the consultant issuing invoices to the client
- equipment supplied by the consultant not the client
- consultant takes a financial risk, e.g. they have to rectify errors at their own cost
- not integrated into the client’s business
- not treated as an employee or receive any employee type benefits
- consultant indemnifies the client in respect of any losses arising out of the consultant’s failures or omissions