Is your latest team member employed or an independent contractor who qualifies as being self-employed? At times, it’s not possible to say. Studying the relationship helps you determine how to classify each person who works at the company in any capacity. Both employed and self-employed often look similar.
It is important for a company when recruiting members to classify each worker as either self-employed or an employee. Accurately classifying workers helps with payroll and ensures compliance with all applicable employment laws and regulations.
Recruiting new members to work in your workplace indicates a great time of growth. It also comes with extra responsibilities, such as completing paperwork and paying taxes related to employment. It is therefore vital to know whether your teammate is employed or self-employed. This understanding affects a range of working rights and responsibilities on behalf of the individual and the business.
Importance of determining employment status
Many “self-employed” people are employees in specific scenarios, creating unexpected problems for both parties engaged in the contract. This problem is known as false self-employment.
In some cases, businesses may use false self-employment and self-employed contractors to avoid paying the tax they owe. This issue may result in facing penalties where the company will be liable to pay back tax, National Insurance Contributions (NIC), interest on the time the person was falsely self-employed, and associated penalties.
Although the documents about the relationship can often assist, these will not be helpful to determine the employment status directly. Here we talk you through the importance of determining the employment states in aspects of employment rights, benefits, and law.
In most cases, employment regulation does not cover self-employed individuals. The importance of identifying the status allows you to recognise your legal rights and obligations (such as NI responsibility, tax and, liability for injury in the workplace).
An employee is provided with much greater rights than someone who is self-employed. An employee has the right to maternity and paternity pay, statutory sick pay, the right to a statutory redundancy payment, and, notably, the right not to face unfair dismissal. Determining your employment status is crucial as it may prevent you from losing out on employee benefits that you are legally entitled to.
Determination of employment status
Below are three critical types of employment status.
For the benefit of this blog we will be focusing on employees and self-employees.
The general rule on determining the status is,
- If your team member is an employee – they work for someone and do not have to worry about the risks of running a business.
- If your team member is self-employed – the team member runs their own business by themselves and is responsible for the failure or success of that business.
Critical factors of determining the employment status
- Personal service – the individual carries out the work themselves. If a person can replace or subcontract the obligation, they are more likely to be self-employed.
- Obligation – both the employer and employee, are under obligations to one another, where the employee carries out the work which the employer assigns.
- Control –The extent to which the individual will be controlled in how they undertake their tasks, including whether they can work for other people, whether they have been paid for holidays, whether they receive a fixed pay, whether they have been given sick pay etc.
An employee will work to the terms within a contract of employment. A contract exists when it agrees on terms such as pay, annual leave, and working hours.
- The team member is advised what work to do, as well as how, where, and when to do it.
- Your teammate does the work.
- Working under a contract for a set number of hours and get a regular wage or salary.
- Availability of an employment contract and work for a business that is not owned and in which your teammate is not a partner.
- Your team member receives time off for sickness and holidays, which is paid according to the terms of the employment or to statutory rules.
- Entitled for employment rights (written statement of employment, itemised pay slip, the national minimum wage, holiday pay, maternity, and paternity pay, etc.; the right to request flexible working hours, the right not to be victimised, and the right not to be unfairly dismissed.
Self-employees are contracted to provide a service for a client – they will not be paid PAYE and will not have the same employment rights and responsibilities as employees.
- Self-employed individuals will run their business by themselves where they work under contract for clients and bear the responsibility of success or otherwise.
- They will not have the right to holiday pay.
Key differences of employment and self-employment
|Method of payment||Paid a regular wage by the day, week, or month||Invoice the client for work done|
|Who has control over how work is done?||The employer is supervised on how the work needs to be done||Done by self-employed|
|When do you do the work?||You are required to turn up at a certain time and work for the agreed number of hours||Possibility to decide when to do the work|
|Benefits||Rewards are given other than in cash for the work, such as vouchers, free or cheap meals, a company car, or shares||Can only be paid in monetary form – cash, cheque, or bank transfer|
|The work you do||Can be moved from one task to another||Only the job which is agreed to do is done unless changes arise subsequently|
|Business ownership||Employee of the business||Owner of the business|
|Who does the work?||The individual does the work||Able to substitute someone else to do the work on behalf of your team member, or arrange for a job to be done and supervise others|
For more information about employment status for tax and NIC purposes, contact our team of dedicated accountants at WIS Accountancy Ltd. for professional advice or assistance.