We frequently get clients who say they only want to hire someone on a casual basis, or they have someone who they want to hire but who wants to be self-employed. But is employment status something employers or workers can decide or agree on?
The simple answer is no. Employees can’t sign away their rights, so even in circumstances where both parties agree that self-employment or casual status would suit them, if the reality is that the relationship is really one of employment, then that’s what it is, and no consultancy agreement or casual worker contract will change that.
So if you can’t decide, who does? Well it really depends on the context. Employment status will usually come up or be challenged in two circumstances. Firstly, where there is a tax issue or investigation, by HMRC. HMRC will look at the overall picture with regards to an individual (or series of individuals) and decide whether tax and National Insurance should have been paid in respect of those workers. Tax benefits is often the reason an individual will want to stay self-employed, so HMRC investigations into employment status might come from looking into the individual’s tax affairs, or alternatively if they conduct any kind of audit or investigation into the business’s affairs.
Secondly, employment status could be decided by an employment tribunal in the event of the individual claiming employment rights. Even if there is an agreement that the individual was self-employed, if a tribunal finds that the relationship is one of employment, they should have therefore benefited from all the relevant employment rights and will consider the claim accordingly.
HMRC and tribunals will both look at the overall picture, and will use several different factors as guidance, and although a decision made by one is not binding on the other, it is unlikely they would disagree.
So bearing in mind the decision is not made by you or your worker, what are the implications of mutually agreeing to conduct the relationship as self-employment where in fact HMRC or a tribunal would disagree?
Well, when things are going well and amicable, and where both parties agree, the risks would seem minimal, however in fact the consequences can be significant.
Amicable relationships can disintegrate fast, and you are in a very vulnerable position if a person you’ve engaged as being self-employed should have been employed and is unhappy with you. If the relationship has ended, you may find them claiming unfair dismissal (assuming you haven’t used a fair employment dismissal procedure), or alternatively you may find them claiming back pay for a lot of accrued holiday or claiming pension rights or similar.
Even where it is amicable, individual circumstances change, and if the worker for example chooses to start a family, they may decide they would like to exercise rights to maternity, paternity or adoption pay and other family related rights.
You are obliged to give people employed in your business certain rights whether they want them or not and would be held liable if these rights were withheld.
From a tax point of view you are ultimately responsible for ensuring tax and National Insurance payments are made on behalf of workers for whom these are owing so you could find yourself with a big tax bill as well.
The safest way to protect your business and comply with your obligations and duty of care, is to ensure that the relationships you have with workers engaged in your business is accurately reflected in the contracts you have with them.
If you’re not sure of the status of some your employees or would like more general advice on employment status, do get in touch.