The way you work – and the way people work for you – have very important legal implications.
There are four categories of employment recognised by the law and the tax system. A person could be classed as a self-employed person, a worker, an employee or a director.
There are also essential tax and National Insurance contribution (NICs) differences for different categories of employment. As an employer, you must recognise which category the people who work for you belong to, to ensure you fulfil your legal and tax obligations to them.
It should be noted that while an individual’s tax arrangements can be a factor in determining their employment status in relation to employment rights, the fact that HM Revenue & Customs (HMRC) have, for example, taxed an individual as an employee does not automatically determine that person’s employment status.
This guide provides a general overview of the different employment status categories and what they mean.
Workers and employees
All employees are entitled to employment protection rights – though some rights require a minimum period of continuous service.
A number of core rights, such as the national minimum wage and regulations on working time, including rest and paid annual leave, are also available to the wider category who qualify as workers.
Contracts
A person’s employment status will depend on whether their contract is a contract of service, ie employment (employee), a contract for the personal performance of work (worker) or a contract for services (self-employed).
An employee is someone who works for you under the terms of an employment contract. A contract of employment could be written, oral or implied. See nibusinessinfo’s guide on the employment contract.
The category of worker is wider and includes any individual person who works for you, whether under a contract of employment or other type of contract, but is not self-employed. This category can include casual workers, agency workers or some freelance workers but the terms of the contract will determine their employment status.
The law
For the purposes of income tax and National Insurance contributions (NICs), the agency (when acting as an employment business) providing an agency worker or casual worker is responsible for operating PAYE (Pay As You Earn) and accounting for NICs for that worker.
If there is a dispute about employment status and employment rights (or taxation), this can ultimately only be decided by the courts. The courts have devised a number of tests which examine the individual’s circumstances and consider all aspects of the relationship – including what a contract may or may not say – to establish employment status.
There are five key tests the courts will consider:
- control – whether you as an employer can instruct them how and which tasks to perform
- integration – whether they are an integral part of your organisation
- mutuality of obligations – whether they are obliged to carry out the work offered, and whether you are obliged to offer work to them
- substitution – whether someone else can be sent by the worker to do the job
- economic reality – whether they are in business on their own account, eg where they bear the financial risks of failure to deliver the service or can profit from their own sound management of the task
Recent trends have been towards the application of a ‘multiple test’ which takes account of all relevant factors. However, if you are unsure of the employment status of someone who works for you or have concerns, you should seek advice.
Read more: nibusinessinfo.co.uk
