To Employ Or Not To Employ – Will A Freelancer Do?
Working out whether to employ or whether your business would benefit from hiring the services of a self-employed contractor instead can be tricky. On the one hand, you have certain business needs, but this decision needs to factor in the legal and tax consequences of either option.
Technological change has introduced new ways of working, most notably in the ‘gig’ or ‘sharing economy’. The new terminology that comes with this has added to the confusion in defining employment status. The most important distinction is between workers, freelancers, contractors or self-employed. However, added to this terminology are terms such as casuals, zero contract workers and consultants. No wonder there is confusion.
Here are some important definitions and distinctions:
- In the Working Time Regulations 1998, a “worker” is defined to include employees and those employed under a contract under which they undertake personally to provide services, but excludes those who are in business on their own account and whose “employer” is in reality their customer or client.
- Mutuality of obligation is critical for an individual to be categorised as a worker. Examples of people who have been held to be “workers” are builders who work under CIS.
- Workers do not have protection from unfair dismissal but they are protected from discrimination under the Equality Act 2010. The National Minimum wage, Working Time Regulations, Part Time Workers Regulations and Whistleblowing legislation (PIDA) are the principal legislative provisions which protect workers.
- The main difference between an employee who is working under a contract of employment, known as a contract of service, as opposed to a self-employed contractor working under a contract for services, is that an employee agrees to serve another, whereas a contractor only agrees to provide certain services to another.
- A self-employed individual works more independently from the person requiring their services and determines their own working days and hours.
- There are three elements that must be present in every contract of employment. The contract must impose an obligation on a person to provide work personally. This means that a self -employed consultant or independent contractor ought to be able to provide a substitute or to sub- contract the service obligations.
- There must be a mutuality of obligation between the employer and the employee on the employer to provide work and the employee to perform it. The court will look at the overall arrangement including the time in between periods of work.
- An employee must expressly or impliedly agree to be subject to the control of the person for whom he or she works to a sufficient degree to make that person master. Examples of this are where the individual is told where they work and their working days and hours.
In deciding whether someone is an employee or self-employed the courts will look at a number of issues known as the ‘multiple test’ which includes:
• Whether they work under the orders of another who controls not only what they must do, but also how and when they must do it;
• Whether they are employed as part of the business of the employer and their work is done as an integral part of that business, rather than ancillary to the main business;
• Whether they work exclusively for a company and whether they can work for other companies without their permission;
• The nature and the length of the engagement, longer periods working for one organisation may be more likely to signal an employment relationship;
• Whether they provide their own equipment, wear a company uniform or drive a company car;
• Whether they hire their own helpers;
• Whether they take a degree of financial risk;
• Whether they have responsibility for investment and management;
• Whether they are included in benefit schemes operated by employer such as share option schemes, health insurance and bonus schemes;
• How far they have the opportunity of profiting from sound management in performing their task; and
• Who is responsible for paying Tax and National Insurance?
The usual consequence of failing to appreciate that your freelancer is actually a worker is the failure to pay holiday pay, thus flouting the Working Time Regulations.
Also, where a freelancer is invoicing in their name rather than a limited company, any tax or National Insurance deficit found by the Inland Revenue will be payable by your company.
More seriously, failure to comply with worker and employee rights, in the mistaken belief that someone is working on their own account, could lead to an Employment Tribunal claim against your company.
Employment Tribunals will always look behind the contract to assess the real relationship based on the tests above. They often find that the written contract is a ‘‘sham’’ so that claims can be made against a company by a worker or employee. Status can change during the relationship so it’s important to regularly carry out an audit of your staffs’ status. This ensures peace of mind in terms of any potential tax liability and claims against the company.
If you need any further information on auditing your workforce or deciding whether to employ or hire a freelancer, contact our specialist Employment Law team at Martin Searle Solicitors on 01273 609911, or email firstname.lastname@example.org.