< Go Back Are workers employees? Posted: Jan 14, 2020 Are workers employees?
It
is important to know whether a worker is employed or self-employed as there are
many differences in the way in which they will be taxed. Broadly, employees are
taxed under the PAYE system with income tax and Class 1 national insurance
contributions (NICs) being deducted from payments made to them. Class 1 NICs
are also payable by employers. In contrast, the self-employed pay income tax
and Class 4 NICs direct to HMRC, and are also currently liable to Class 2 NICs.
Some
important differences are that:
currently,
self-employed people have a lower liability to NICs than employees (especially
when taking into account the employers liability) self-employed
people benefit from a cash-flow advantage in the timing of tax payments under
self-assessment, compared with employees taxed under the PAYE system the
rules allowing tax relief for expenses are generally more relaxed for the
self-employed in
some circumstances, an employer who incorrectly treats an employee as
self-employed is liable for the income tax and NICs that they should have
deducted under PAYE. HMRC may treat as a net amount the figure that was
intended to be paid gross. Employment indicators
The
term 'employment' is broad in scope but is not exhaustively defined. The
legislation lists three types of arrangement which indicate the central meaning
of the term:
Any
employment under a contract of service Any
employment under a contract of apprenticeship Any
employment in the service of the Crown For
tax purposes, though, the concept of 'employment' is normally extended to
encompass also the holding of an office. The distinction between 'office' and 'employment' is only of limited interest for tax purposes. Employees are said
to operate under a 'contract of service'.
Firstly,
the terms and conditions of the engagement need to be established - normally
established from the contract between the worker and client/employer, whether
written, oral or implied or a mixture of all three. Then any surrounding facts
that may be relevant need to be considered - for example, whether the worker
has other clients and a business organisation.
Factors
indicating employment include:
Substitution - does the individual have to carry out the work personally, or can they send a
substitute to do the work for them? Control - is the individual told what to do, when and how to do the work? Pay
structure - is the individual paid by the hour, week or month, and are they
eligible for overtime pay? Hours - is the individual required to work set hours, or a given number of hours per
week or month? Location - does the individual work at the other party's premises, or at a location of
the other party's choice? Integration - is the individual part and parcel of the organisation? Dismissal - what provisions are there for terminating the engagement? Mutuality
of obligations - does the nature of the contract mean that there is an
obligation for the engager to provide work on the one hand, and for the
individual to carry out that work on the other? Benefits - is the individual in receipt of benefits such as holiday pay, sick pay,
medical insurance or a company car? Continuous
work - are there long periods where the individual works only for one party? Workers' rights
If
a worker is classed as an employee, there will automatically be entitled to
certain employment rights, including the National Minimum Wage, statutory
minimum levels of rest breaks and paid holiday, and protection against unlawful
discrimination
Employment
status is not determined by any one single factor. In more complicated
circumstances it will be necessary to build up a picture, taking into factors
such as substitution, mutuality of obligation, control, pay structure and
benefits, and the wording of any contracts in place.
Partner note: ITEPA 2003, s
4; Check employment status for tax:https://www.gov.uk/guidance/check-employment-status-for-tax