In recent years, there has been a significant increase in the number of self-employed workers. The Office of National Statistics reported this month that there were 4.76 million working in the UK. Even before Covid-19 hit, the nature of work and how people did it had been changing and it’s become part of that landscape for employers to make greater use of self-employed workers as consultants.
However, while employers might have thought they were engaging a self-employed consultant, there are many occasions when in fact they have actually taken on an employee and there are potential obligations arising from that. A 2015 report by the Citizens Advice Bureau estimated that 460,000 self-employed consultants were wrongly classified and were collectively owed £6 million in holiday pay. The complex task of correctly classifying workers and interpreting traditional employment laws to fit the new working arrangements has been highlighted through some high-profile Employment Tribunal cases, including those brought by Uber divers against the taxi app service.
Employed v Self-Employed
A worker can fall within one of three categories:
– employed (with the full spectrum of employment rights)
– self-employed (very few employment protections)
– an intermediate class of ‘worker’ (entitled to some elements of the employment protection, for example paid holidays, rest breaks and the national minimum wage)
Various factors are taken into account by the Employment Tribunals and HMRC when determining which category a worker falls within.
Personal Service & Mutuality of Obligation
At its most simple, the test involves the idea that an employee or worker personally serves their employer. The employer has an obligation to provide work to the employee and the employee is obliged to personally carry that work out, something called ‘mutuality of obligation’. In contrast, someone who is self-employed and running their own business provides services to a client or customer and that self-employed consultant is normally free to accept or decline work and to send a substitute to carry out those services.
This covers the notion of who has the power of deciding the task to be completed, how it shall be done, the time taken and place the work is undertaken. A high level of control tends to point towards the relationship being one of employment. As most highly-skilled employees will have considerable autonomy over how and when they carry out their duties, cases have tended to focus on the extent to which the individual is actually controlled during their engagement. The extent to which the worker is subject to company processes such as appraisals, time recording, quality control and disciplinary processes is important.
Integration and Exclusivity
The less interdependent the parties are, the less likely an Employment Tribunal will find there to be an employer-employee relationship. The longer (and more exclusive) the contract and more integrated into the company the individual is, the greater the likelihood of a tribunal finding the individual to be an employee. It will, for instance, be easier for a freelancer to argue there was a mutuality of obligation when a contract (particularly an exclusive one) spans several years and where they have worked for only one company.
The consequences of getting this wrong can be substantial, including facing claims from self-employed consultants that they are due accrued holiday pay, national minimum wage payments or, if the engagement has lasted more than two years, claims for unfair dismissal or redundancy.
The distinction is also important from a tax perspective as payment of PAYE income tax and national insurance is required in respect to all employment income. If a self-employed consultant is in fact an employee, HMRC will look to the hiring organisation rather than self-employed consultant for back tax and payment of penalties.
When engaging self-employed consultants it is important to weigh up these factors. Is the engagement genuinely one of a self-employed nature? It’s important to document the arrangement in a properly drafted Consultancy Agreement. Bear in mind that the contract, by itself, will not determine the status and, if a dispute arises, an Employment Tribunal will look at the actual circumstances of the relationship to determine the individual’s employment status.
Barry Nichol is an Employment Partner at Anderson Strathern