Employers using ‘bogus self-employment’ to face heavy penalties

Contractual terms need to reflect true employment relationships.

In the run up to the general election, all the major political parties are promising to clamp down on tax avoidance, including use of “bogus self-employment” status by contractors who are, in reality, employees. That makes it all the more important for employers to be clear about the difference between contractors, workers and employees, and when it is appropriate to hire people from each category.

The benefits of taking on an independent contractor in place of an employee include greater freedom and flexibility, as well as significant tax and national insurance savings. However, there are still real advantages to hiring employees rather than contractors. Many businesses need to retain a certain level of control over the way workers conduct their duties, and dependability is often essential. For example, a hospital requiring nurses on a rota or a shop needing staff to open up each day may not want to rely on contractors who have the option to simply refuse a shift.

Risk

Beware, however, the risk of trying to get the best of both worlds. Even if you have agreed to engage someone as a self-employed contractor, if you are then challenged, a tribunal will assess the nature of the relationship, 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, with all the rights that employees, and to a lesser extent, workers, enjoy under English and European law, and which self-employed contractors do not. These include:

  • 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 the case of employees with over two 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 tax affairs of the business may also subsequently come under closer scrutiny.

Employment status checklist

So how do you assess whether someone is truly self-employed or should be classified – and therefore paid and treated – as either a worker or an employee? While this will depend on the facts of each case, an employment tribunal will usually take the following factors into account:

  • Does the individual 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 likely to be an employee, rather than self-employed.

Ensuring your business has the correct contractual terms in place will be crucial in persuading 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 payable to HMRC or arising out of any employment or worker claims, which the individual makes against you.

Businesses in any doubt about the status of current or prospective workers or contractors, should always take advice before changing the status of their staff.

This article first appeared in People Management magazine on 24 March 2015.