Employed or self-employed? That is the question - but is there an answer?

Employment status matters. And not just because an outraged panel of MPs (The Public Accounts Committee) has brought it up. An employee has rights – an employer has obligations, writes Gerry Brown, technical manager of Tax & Trusts at Prudential.

It is the existence and cost, actual and potential, of these obligations and rights which concern those who “engage the services of others” - to use a neutral term. Chief among them:

  • An obligation to deduct income tax and account for National Insurance contributions
  • Pension auto-enrolment
  • Maternity pay and paternity rights
  • Vicarious liability (liable for negligent acts committed by employees)
  • An obligation to meet National Minimum Wage requirements

At the most basic level the status of an individual – employed or self-employed – is given by the answer to the question: is the individual in business on his own account? This, in turns, begs the question, what are the characteristics of being in business on one’s own account?

One key feature of being in business is control over one’s activities. In determining whether or not an engagement is an employment, it is essential to examine the degree of control the “engager” has over the “worker”. If the engager has the right to control what the worker has to do, how it has to be done, where it has to be done and when it has to be done, then the relationship will probably be that of employer-employee.

How is this applied in practice? In the recent Autoclenz case, the UK’s Supreme Court, considered the status of car valeters. The verdict from the judge states:

“In my judgment these claimants are employees. I do not think it can be said that … [they] are businessmen in business on their own account.

“They have no control over the way in which they do their work. They have no real control over the hours that they work, save and except that they can leave when their share of the work on site has been completed. They do not have any real economic interest in the way in which the work is organised, other than the fact that the more work they do the more they earn. They cannot source materials for themselves. They are subject to the direction and control of the respondent's employees on site. They work in teams and not as individuals. …

“The claimants have no say in the terms upon which they perform work, the contracts which are placed before them are devised entirely by the respondent and the services they provide are subject to a detailed specification. The invoices which they submit are prepared by the respondent. The respondent determines the deductions which are applied to those invoices and the amounts charged in respect of insurance and materials. There has been no evidence to confirm that these deductions bear any real relation to the actual cost of the services to which they refer. Rates of pay are determined by the respondent and the respondent has felt able to increase or reduce those rates unilaterally. Really there is nothing that these claimants can do to make their putative businesses any more profitable by the way in which they organise themselves.”

In addition, it’s interesting to note that the valeters were required to sign an agreement which was;

“… intended to confirm that any contractual relationship between Autoclenz and yourself is one of client and independent contractor and not one of employer/employee…”

However it was held that Courts and Tribunals “…should adopt a test that focuses on the reality of the situation where written documentation may not reflect the reality of the relationship…”

In other words, it’s what happens in practice that matters, not what the documentation says.

Of course “engagement” law has moved on from a consideration of employer/employee relationships; we are now in the Alice in Wonderland world of personal service companies and IR35.  It is important to appreciate that the “anti-avoidance legislation” only applies where a contract would have been a contract of employment but for the interposition of an intermediary entity. So an appreciation of the “control” tests and engager/worker relationships is a must, and should ideally be included in any analysis of potentially affected assignments, especially where that analysis is presented as comprehensive or critical, as MPs on the PAC sought to do.

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