It is extremely important that the nature of the relationship is clear from the outset when bringing someone into your organisation. The correct status must be applied. It is particularly important where there is a desire to appoint someone on a self-employed basis that a careful analysis of the relationship is carried out to ensure that the person is in fact self-employed. Attaching self-employed status to someone who is, in practice, an employee, can have costly implications – both in terms of HMRC and in Employment Tribunal proceedings.
While there are clear advantages to having the benefit of engaging someone’s services without them accruing employment rights, there can be draw-backs too. For instance, a self-employed person will usually have their own insurance costs and be using their own equipment in carrying out the work and so will usually require a higher rate of pay than an employee performing a similar role. Further, it is much more difficult to control the activity of a self-employed person than it is to exercise control over an employee’s activities.
As with many things relating to employment law, the issue of employment status is complicated. Even something as seemingly basic as identifying whether someone is employed or self-employed is not as straightforward as most people think. There is no one sentence definition of an employee. There are certain requirements that must be present for an employment relationship to be established. The person must perform the work personally, the employer must exercise a degree of control over the activities of the individual and there must be mutual obligations on both sides – on the employer to provide work and pay and on the employee to perform work for pay.
What the parties call the relationship is not determinative. What is important is what is going on in practice on a day to day basis. A business owner might think someone is self-employed and get a nasty surprise when the individual subsequently claims that they have employment status with all the rights that go with it and a Tribunal finds that the individual has been unfairly dismissed.
While there is no single test for defining employment status, there has been some good guidance arising out of case law where the point has been argued.
An individual is likely to be found to be self-employed if:-
- He can send a substitute to carry out the work on his behalf
- He uses his own equipment in carrying out the duties
- He has his own public liability / professional indemnity insurance
- He sets his own hours
- He carries out work for several different businesses
An individual is likely to be found to be an employee if:-
- He has to carry out the work personally
- He uses the business’ equipment and works under the business insurance
- The business sets the hours of work and rate of pay
- The business owner / manager can give him other duties and bring him in on other tasks
- He works only (or primarily) for the business
Whichever arrangement a business owner decides upon at the outset, it is important to record the terms of the engagement in writing so that, at the very least, the intentions of the parties are clear from the start.
Whether you are thinking of engaging someone on an employment contract or as a self-employed associate, please do not hesitate to get in touch for advice to ensure the correct decision is made and the contract reflects the reality
This article is intended as a guide and for general information only and is not a substitute for taking specific advice relating to your situation.
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