Contractor, Worker or Employee?1st March 2015
In the run up to the elections all the major political parties are promising to clamp down on tax avoidance including the use of “bogus self-employment” by contractors who are, in reality, employees. In addition the Labour Party is pledging to support the growing number of people who are genuinely self-employed by granting them certain rights which are currently only available to employees or workers, including more flexible access to pensions as well as maternity leave and pay.
15% of the UK’s workforce is now self-employed (about 4.6 million people) rising from 13% in 2008 and 8.7% in 1975. The rise of technology business models such as Uber and Task Rabbit, which engage contractors rather than employees to provide services to its clients, has contributed to the surge. There is also a trend among businesses in all sectors to engage consultants in place of employees, especially at more senior levels.
Businesses can save up to around 30% by hiring an independent contractor in place of an employee, plus they have the benefit of not having to guarantee work for them which, during uncertain economic times, is particularly attractive. There are also benefits for the individual. Many contractors value the freedom and flexibility of freelancing, as well as the significant tax and national insurance savings which can be achieved by operating via a personal service company.
Nonetheless there are significant advantages to hiring employees rather than contractors. Many businesses will need to retain a certain level of control over the way workers conduct their duties, and often dependability is essential. For example, a hospital requiring nurses on a rota or a shop requiring staff to open up each day will not be able to rely on contractors who have the option to simply refuse a shift.
Beware however the risks of trying to get the best of both worlds. Even if you have agreed to engage someone on a self-employed contractor basis, if challenged, a tribunal will assess the nature of the relationship in reality, rather than the label attached to it. If it finds the hallmarks of an employment relationship then there is a good chance the individual will be found to be your employee.
Employees, and to a lesser extent workers, enjoy a whole raft of rights under English and European law, which genuinely self-employed contractors do not. These include:
- The entitlement to paid holiday (a minimum of 5.6 weeks per year for a full time worker);
- In the case of employees, the right to Statutory Sick Pay;
- The right to National Minimum Wage;
- In the case of employees, the right to maternity, paternity or shared parental leave and pay;
- The right to receive employer pension contributions in accordance with pensions legislation; and
- In the case of employees with over 2 years’ service, the right not to be unfairly dismissed and to receive a statutory redundancy payment.
If HMRC determines that a contractor is actually an employee in disguise it will pursue the business to recover historic and current PAYE deductions and may impose a hefty fine. The business’ tax affairs may also be subject to close scrutiny thereafter.
So how do you assess whether someone is truly self-employed or whether they should be classified as (and therefore paid and treated as) either a worker or an employee?
While this is fact sensitive in every case, an employment tribunal will usually take the following factors into account:
- Do they have to undertake the work personally?
- Do you ever tell them what to do, or how, where or when to do it?
- Do they have to take the work you offer them?
- Do they work a set amount of hours?
- Are they paid by the hour, week or month rather than for a specific project or piece of work?
- Do they work at your premises or at places determined by you?
- Are they prevented from working for others?
- Do they receive overtime, bonus payments or other benefits?
If most of the answers to the above questions are yes, the individual is very like to be an employee rather than self-employed.
In the recent case of Pimlico Plumbers v Smith, Mr Smith was engaged by Pimlico Plumbers as a self-employed contractor. He was VAT registered and had to raise invoices to be paid. He could reject jobs offered to him by Pimlico Plumbers, and they did not have an obligation to provide him with work. Pimlico Plumbers did however give the impression to customers that its plumbers were employees, and customers could only contact the plumbers through the company. Mr Smith was also required to wear Pimlico Plumbers’ uniform and drive a van with its logo on the side.
Mr Smith brought claims for unfair dismissal and wrongful dismissal, as well as discrimination, on the grounds that he was both a worker and employee. The Employment Appeal Tribunal held that Mr Smith was not an employee on the facts, including his assumption of financial risk and the lack of any obligation for Pimlico Plumbers to provide work or for him to accept it. The tribunal found that the contractual documentation demonstrated the parties’ intention that Mr Smith was self-employed rather than an employee. Mr Smith’s unfair dismissal and wrongful dismissal claims were therefore struck out.
Mr Smith was however found to be a worker of Pimlico Plumbers, because he was required to provide personal service and he did not have the option to appoint a suitable substitute. As a worker Mr Smith had statutory rights, including the right to receive paid holidays and pension contributions from Pimlico Plumbers and was permitted to proceed with his discrimination claim.
Ensuring you have the correct contractual terms in place will also help persuade a court or tribunal as to your intentions. Another way to mitigate risk is to require any contractors you engage to agree to indemnify you in relation to any costs and liabilities due payable to HMRC or arising out of any employment/worker claims which the individual makes against you.
If you are in any doubt about the status of any of your current or prospective workers or contractors and want to ensure you mitigate risk while still catering to the needs of your business, please contact the Hamlins Employment Team.