The worker's issue
Issue July 2019 SPECIAL EDITION ON IR35 AND EMPLOYMENT STATUS Your guide on and how to prepare for the IR35 reforms
The tax law reforms to be implemented from 6th April 2020 will have a huge implication for employers in the private sector. The reforms are designed to tackle even further "disguised employment" where an employee tries to exploit the tax benefits of working through a personal services company (PSC).
What is the definition of a 'worker', an 'employee' or a 'self-employed'?
Workers are individuals who work under an employer (e.g. an agency) and where the contract is for the completion of a specific task without the master/servant dynamic typically seen for employees. Those under zero-hour contracts often fall under the worker category. A zero-hour contract is where the employer does not have to offer work and the worker does not have to accept the work offered. Other examples include agency workers or short-term casual workers. There are often restrictions placed on workers, unlike the self-employed, such as having to work a minimum number of hours (as seen in the Pimlico Plumbers case) or to not work for anyone else. Workers' rights are a very trendy topic in UK Employment Law, with big names such as Uber discovering that their people were workers and had employment rights. The Sash Window Workshop Ltd, who now face the consequences of an ECJ decision going against them, is not a big name; it is a small Berkshire-based SME company. Workers, unlike the self-employed, are protected by core employment rights such as:
national Minimum Wage;
rights under the Working Time Regulations (breaks);
maternity, paternity, and adoption pay (but not leave);
statutory Sick Pay; and
paid annual leave.
In regards to paid annual leave, the courts decided in 2017 (The Sash Window Workshop Ltd) that it does not matter if the employer is unaware of the individual's employment status. The burden is on the employer to seek all information regarding their obligations. In this case, this entitled the worker to claim back 13 years' worth of holiday pay. Employee An employee typically has a contract of service which is where the individual is under the control of a third party whom they agree to serve. There is a master/servant dynamic. An employee has more employment rights than a worker and the self-employed. They have all the rights a worker has as well as:
statutory sick pay;
statutory maternity, paternity, adoption and shared parental leave and pay (workers only get pay, not leave);
minimum notice periods if their employment will be ending, for example if an employer is dismissing them;
protection against unfair dismissal;
the right to request flexible working;
time off for emergencies; and
statutory redundancy pay.
Self-employed The self-employed run their business for themselves and are liable for its failures. To get round this, many self-employed individuals operate through a Limited Company to limit their liability if things go wrong. They also have fewer rights than an employee or a worker as they are effectively their own boss and as a result, Employment Law does not cover them. However, they have health and safety protection as well as their rights and responsibilities set out in the contract for services they sign with the end-hirer client. There are also tax benefits. If the self-employed individual purchases something for their business which is not a capital asset, they can deduct the cost of it from their taxable profits. The most noticeable feature of the self-employed is their level of control over their activities. Self-employed individuals are in business on their own account.This feature has been decisive in court decisions such as Uber and Pimlico Plumbers which will be covered more in-depth later.
The test to decide if your staff population is a 'worker', 'employee', or 'self-employed'
HMRC will start the assessment by looking at the contractual arrangements discussed above: contract of services (employee) and contract for services (worker/self-employed). 5 factors that may determine the employment status will need to be considered:
Mutuality of obligation
Where the actual nature of the working relationship is not reflected in the contractual arrangements, HMRC will ignore the contract when determining the status and look only into the 5 factors of employment.
Does the individual have the ability to control:
their own timetable? Or on the contrary does he have to request time-off?
the location of work?
whether to accept a contract/project?
who they work for?
The more control the individual has, the more likely that the individual is self-employed. Typically, an employee will not have ultimate control over the above-mentioned factors whereas a worker/self-employed is more likely to be able to. In the Pimlico case, the Supreme Court decided in 2018 that plumbers working for Pimlico Plumbers were workers rather than self-employed contractors as the agreement with their workers specified on the minimum number of working hours per week, a uniform, and required the company's logo to be on the hired vans the workers drove in for work. Therefore the level of control and integration into Pimlico Plumbers’ business was inconsistent with being self-employed.
Mutuality of obligation
If the end-hirer client does not have to offer projects or services to an individual and the individual does not have to accept such an offer for projects or services, then it is likely that the individual is a worker (as seen in zero-hour contracts) or self-employed. In 2016, the Employment Tribunal decided that Uber drivers should be classed as workers instead of being self-employed as Uber imposed restrictions on how the drivers could work: especially while the drivers had the right to refuse work, Uber reserved the right to disconnect the drivers from the app if they did so too frequently, hence an actual mutuality of obligations inconsistent with being self-employed.
Employees are typically paid a regular rate of pay and have benefits such as: holiday pay, sick pay and pension rights. Therefore, employees have no financial risk.
These are not available to the self-employed, who have a greater degree of financial risk. In addition self-employed also typically have additional risks such as:
to bear running costs or to pay for materials or overheads
to subscribe for public liability insurance
to fix defective work at their own cost
Integration If the individual performing the services is an integral part of its end-hirer client's business or is 'part and parcel' of the end-hirer client's business/organisation’s activities and structure, they are likely to be an employee. For example, when the individual is used to mentoring the end-user client's employees, he is likely to be 'part and parcel' of the end-hirer client's business and therefore an employee. Other examples of integration include:
accessing discounted canteens, gym memberships, training, or other subsidised benefits such as social events;
being part of the end client telephone list, having a personalised email address or signature; and
not being clearly identifiable as a contractor, for example by not wearing a visitor/contractor ID badge.
In the Pimlico plumbers case, the plumbers working for Pimlico Plumbers had to wear a uniform and were required to display the company's logo to be on their hired vans.
Although a less prominent factor today, substitution can still be a determining factor in the right circumstances. Many engagements are for the individual's personal experience and expertise and, because of this, substitution may not be a viable option. However, there are also many other engagements which can allow for indirect substitution where the services are the individual's responsibility and accountability but they need assistance in completing all tasks. Therefore, if an individual, at their own expense, can usually send another to fill their place or can obtain additional help from sub-contractors, it is likely that they are of self-employed status. For an employee, however, it is normally the employer who provides and determines any substitution or additional assistance. In the Pimlico Plumbers case, there was a right to substitute but at the same time, personal service was required, which means the right of substitution was never exercised. Given the recent growth in the number of self-employed in the UK, the April 2020 reforms to IR35 are likely to have an appreciable impact.
Preparing for the new rules: the 3 steps you should consider by April 2020
As the liability for incorrect assessments on employment status falls on the end-hirer client, it is important that businesses are prepared sooner than later.
1. Analysis of current working practices Does the contract between you (the end-hirer client) and the contractor reflect the true working relationship? As seen with Uber, HMRC will disregard it if this is not the case, no matter how carefully the terms of the contract are written. To help you determine the employment status of your staff population, use the 5 factors of employment mentioned earlier in this newsletter as a guide. You should also carefully review your contracts with your contractors and amend them if necessary to reflect the true working relationship. Communication with individuals will be key. 2. CEST scheme End-hirer clients can engage with the CEST scheme : https://www.tax.service.gov.uk/check-employment-status-for-tax/reason-for-using-tool. Main questions asked are:
is there a right to substitution?
is there a right of control?
is the individual taking substantial financial risk?
is the individual integrated into the organisation?
The result is then published –there is a matrix behind the results with high, medium and low tags. However, caution is advised as it does not take into account "Mutuality of Obligation" which the courts have proved to be a possible decisive factor (Uber). 3. Before you make a decision (determination)
If IR35 rules apply, the end-hirer client will have to deduct income tax and employee NICs from fees paid to the intermediary company, and will also pay employer's NICs. In these circumstances, you should be prepared for contractors to demand either that their fees are grossed up, or that they are engaged as employees or workers, which will bring extra costs. Consider whether you will be able to pay an extra contractor fee.
Consider whether additional costs can be incorporated into your budget (National Insurance Contributions, other PAYE costs).
Consider whether your HR team will be able to handle additional employees. Consider Employment Law implications, particularly: employee protections, worker's rights, and equal pay.