Employment status defines the rights and responsibilities of a worker and is a key consideration for an employer in its relationship with that worker. Getting the status wrong can be costly financially as well as reputationally.
Every individual who provides services to an organisation will engage with it either as an employee, an officer, a worker or as a self-employed contractor.
The employer needs to understand the rules and rights that apply to the relationship with the individual from both an employment law and a tax law perspective.
In employment law, there are three main categories of employment status:
• Employees working under a contract of employment, who have full employment rights.
• The genuinely self-employed, who are independent contractors.
• Workers, who have a status in between employment and self-employment.
An employee or worker will be paid net of tax through the payroll and employees will have employment rights. Self-employed contractors will be paid gross via invoices they submit and have no employment rights.
Simply labelling someone as employed or self-employed does not determine their employment status, as this will depend on the terms of the contract and how the arrangements operate in practice on a day to day basis. Just because a written agreement states that a person is self-employed, does not make it so; HMRC will want to look at the actual working relationship to see if that differs from the agreement.
Employees work under a ‘contract of service’; whereas the self-employed work under a ‘contract for services’.
The dividing line between employment and self-employment can be a fine one and will depend on various factors, including the intention of the parties concerned.
Why is this important?
The recent announcement from Uber that it will give its UK drivers a guaranteed minimum wage, holiday pay and pensions is a key status development in the gig economy and comes after the company lost a legal battle in the UK over drivers’ status.
Following on from the Uber case, private hire firm Addison Lee has also been told to provide employment law rights to its workers, even though for tax purposes they remain self-employed.
Status has an impact on employment rights and pay, entitlement to the national minimum wage, holiday pay, pension provision and protection against unfair dismissal. Incorrectly categorising a worker’s status can lead to claims from HMRC for up to six years of unpaid PAYE and national insurance as well as interest and penalties. It can also result in employers having to pay significant back payments for e.g., holiday pay.
If you need help working out status, get in touch with us to use our Status Audit or for help with any queries you.