You may wonder why it makes any difference whether the person you are working with is deemed a subcontractor or employee?
However, the rights of an employee are significantly greater than those of independent contractors or workers. Equally, HMRC treat them differently, and may expect additional payments from you.
So, let’s start by looking at the differences between the different categories…
Independent contractors or freelancers: People who are self-employed individuals delivering services under a contract, although a written contract is not essential. This is a purely commercial relationship and you are not liable for anything other than their fee.
Worker: Someone who works for you on an occasional basis – you are not obliged to give them work, and equally they are not obliged to accept that work. They may have a contract with you, but this is likely to refer to zero hours, casual, freelance or as required. Workers have greater protection and rights than independent contractors or freelancers, for example:
- Payment of the national minimum wage, currently £7.20 per hour
- No discrimination on grounds of age, disability, gender, marriage, race, religion, sex or sexual orientation
- Working Time Regulations 1998 – working time, rest breaks and paid holiday entitlement.
- No unauthorised deductions from pay for working part-time
- Whistle blower protection
Employees: Perhaps the most straightforward – an employee is someone you have employed under an employment contract. Employees have the most protection – all the rights of a worker plus additional rights, such as:
- No unfair dismissal
- Protection from illness or injury – it is a legal requirement you have employer liability insurance
- Should your business fail they would be deemed preferential creditors and their wages would be protected
- Entitlement to statutory maternity, paternity or adoption pay, statutory redundancy pay, sick pay, parental leave
- Flexible working requests
- Time off for emergencies
- Option to join your company pension scheme
Surely this is all covered by a contract?
Not necessarily, as HMRC can overlook written contracts and refer to actual working practices to determine the employment status of an individual.
Even if you make payment to an individual you have classified as an independent contractor, it could be proven the person should be treated as a worker or employee. In which case, you may be liable for:
- National minimum wage
- Registration into PAYE scheme and submission of Real Time Information for salary paid
- Deduction of PAYE and NIC before payment
- Payment of statutory entitlements as mentioned above
Still struggling to determine what category somebody is?
Considering the following might help you:
- Control: Do you have control over the individual, deciding when and where they work? Does the individual have to request when they can take time off? Is the individual subject to management and supervision by you or somebody else in your business?
- Economic reality: Does the individual use their own equipment? Do they work from their own premises? Do they provide services to many other clients? Do they have a business set-up and overheads indicating they run a separate company?
- Right of refusal: Are you under obligation to provide work, and is the individual under obligation to perform whatever work is required of them?
- Right to substitution: Can the individual sub-contract the work or hire helpers?
- Payment: Is the individual paid by the “hour, week or month’ basis, or are they paid on the basis of work performed?
However, we want to flag up to you that you may be liable for PAYE and National Insurance payments, plus other obligations that you may not have considered.
As tax advisers, we can help you determine the correct status for the person working for you, and make sure you comply with all the tax and employment law formalities.
We recommend you contact an HR expert or legal advisor to draft the appropriate employment contract, and obtain specific employment advice for your business.
As always, we are happy to talk this through with you in more detail – so please contact us on 01256 406 601.