At a simple glance, hiring employees appears to be a nightmare with so many things an employer has to consider. Business owners regularly ask me “can’t I just bring them on as self-employed, then they are responsible to figure out their own taxes?” It’s a simple solution right? Unfortunately there is no such thing as a simple solution to a complex problem.
A person’s employment status is determined by law, not by self-determination. This means that just because you say someone is self-employed, doesn’t make it so, and both HMRC and Employment Tribunals are keen to flush out people who deliberately use the wrong status to avoid their duties.
This is a very complicated topic, so I will stick to just some of the basics, but you should always seek advice from both an employment expert and your accountant because not understanding the rules is not a defence if you are facing claims.
Self-employed- the definition
A self-employed contractor runs their own business. They are responsible for the success/failure of that business and as such, they determine who they work for and how and when the work gets done. They should provide their own contract, business terms and conditions and are responsible for their own expenses and paying their own taxes. A genuine contractor will work for more than one client and can substitute someone in to complete the work; they operate with minimal supervision and control.
Employee- the definition
An employee works for one business. They are told when they are needed and for how many hours a week. They use the business’s tools to do the work and the business itself (manager) has a significant amount of control over how, where, when the work is done.
Power and control are the key features in employment law so it is important to understand how this differs between statuses.
A Business needs someone to manage their HR functions.
The business finds Sally who is skilled at doing this work. They ask her to work Mon-Thur 9-4pm for a set rate. They provide her with the contract and explain to her what her functions are, who she reports to and she is given their HR plan to work to. She is required to follow their policies and rules regarding reporting to work and meeting their performance targets. Regardless of her status, this is highly likely to be classed as an employee. The business has all the control; the tools are theirs and the decision about how and when the job is done is made by them. In order to have other clients, Sally would have to schedule it around this agreement.
However, the same business needs someone to manage their HR functions.
The business finds Sally who is skilled at doing this work. They have conversations about what they need handled with their HR functions and Sally puts together a proposal about how she would do that. She recognises that they need some intensive support; however she has other clients she works for and therefore says she will schedule the work around her existing workload. She provides her own contract and business T&C’s which the business approves. She produces a project plan and uses her own tools to do so. The business has no control over how she does her work or what policies she operates under. Sally could be called a contractor as she performs these functions for many businesses at the same time.
What are the consequences of getting it wrong?
For the employee, they will have paid the incorrect tax, incorrect NI contributions and have no access to employment rights they might have wanted, like protection from being dismissed. Typically this is the point that the “contractors” start looking for remedies in employment law against the business.
For the business, there are the tax and NI consequences and they have exposed themselves to an Employment Tribunal claim. If it is found that a person should have been classed as an employee then the Tribunal can go back to the start date of the employment and hold the business responsible for all the holiday pay they would have earned, and hold them liable for damages for unfair dismissal, wrongful dismissal and failure to provide a written contract.
As a cautionary tale read this recent article on such a claim:
These are complicated issues that require both employment advice and tax advice. Thinking that you have found a shortcut around employment law is the fastest way to a legal headache. Prevention is always the best cure. These issues have heated up in recent years, so rather than take unnecessary risks, please discuss these issues with both D&K Accounting and Ella Stockdale – Employment expert to make sure you have the right understanding of your situation.