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Employment status
The way you work - and the way people work for you - have very important legal implications.
In simple terms, there are five categories of employment recognised by the law and the tax system:
self-employed individual
worker
employee
director
contractor
The same person could be classed in one way for one area of legislation and another for a different area of legislation. A person could also be classed differently depending on the job they are doing.
There are also essential tax and National Insurance contribution differences that come with different ways of working. As an employer, you must recognise the category to which the people who work for you belong, to ensure you fulfil your legal and tax obligations to them.
This guide provides a general overview of the different employment status categories and what they mean.
Workers and employees
Every employee is also a worker, but not every worker is an employee. All employees are entitled to employment protection rights - though some rights require a minimum period of continuous service.
A number of other rights, such as the National Minimum Wage and regulations on working time, are also available to the wider category who qualify as workers.
Contracts
A person's employment status will depend on whether their contract is a contract of employment or a contract for services. An employee is someone who works for you under the terms of an employment contract. A contract of employment could be written, oral or implied. See our guide on the employment contract or use our interactive tool to create a written statement of employment.
A worker is any individual person who works for you, whether under a contract of employment with you or not, who provides a personal service, eg a casual worker, agency worker or some freelance workers.
The Law
Case law, particularly regarding casual and agency workers, is still evolving. For income tax and National Insurance contribution purposes, workers provided by an agency are treated as employees of the agency.
There is no precise formula clarifying who is an employee, who is a worker and who is self-employed. However, there are four key tests the courts will consider:
control - whether you as an employer can instruct them how and which tasks to perform
integration - whether they are part and parcel of your organisation
mutuality of obligations - whether you are required to offer work and they are expected to do it
economic reality - whether they are in business on their own, eg where they bear the financial risks of failure to deliver the service
Recent trends have been towards the application of a "composite test" which takes account of all relevant factors. However, the law is complex and you should take advice if you are unsure of the employment status of someone who works for you.
Am I legally classed as self-employed?
Whether you can be classed as self-employed - as opposed to an employee or a worker - often depends on the level of your independence.
Although there is no individual test that is decisive, you're likely to be classed as self-employed if you:
have the final say in how your business is run
risk your own money in the business
are responsible for the losses as well as profits of your business
provide the main items of equipment you need to do your job
are free to hire other people on your own terms to do the work you have taken on and pay them at your own expense
are responsible for correcting unsatisfactory work in your own time and at your own expense
You can be employed and self-employed at the same time. For example, you may work for an employer during the day but run your own part-time business in the evening.
You must tell HMRC you are self-employed within three months of the end of the calendar month in which you became self-employed. If you don't, you could face a penalty.
The law is complex and there are no hard-and-fast definitions of self-employment.
Special rules apply for contractors and subcontractors in the construction industry. If you sell your own services through a third party, such as a limited company or partnership, IR35 rules may apply. See the page in this guide on IR35 and other special rules.
You should take advice if you are unsure of your employment status or that of someone who works for you.
Employment status of company directors
Executive directors of limited companies, as office holders, are classed as employees of the company. Class 1 employee and employer National Insurance contributions (NICs) must be paid, the directors are taxed through PAYE (Pay As You Earn) in the same way as other employees and they have the same rights under employment law as employees.
For information on NICs for directors, see our guide on Class 1 National Insurance contributions.
Non-executive directors may be regarded as employed by the company or self-employed under a contract for services, depending on the terms and conditions of engagement.
However, regardless of their executive or non-executive status, company directors have a number of additional responsibilities under company law and in relation to the completion of self-assessment tax returns. See our guide on company directors' responsibilities.
Self-employed people who convert their business to a limited company usually become directors of the company as well as employees of the company.
The law is complex and you should take advice if you are unsure of your employment status or that of someone who works for you.
IR35 and other special rules
There are special rules that apply to contracts where individuals provide their services to a client through a third party, such as their own limited company or partnership. Special rules also apply to contractors and self-employed subcontractors in the construction industry.
IR35
Legislation commonly known as IR35 brings the tax paid on certain contracts in line with the tax paid by employees. As an employer, you do not make deductions for Pay As You Earn or National Insurance contributions from payments made under such a contract to an "intermediary". See our guide on individuals, companies and IR35.
Contractors and subcontractors in the construction industry
There is also a special tax scheme for self-employed contractors and subcontractors working in the construction industry. It does not apply to employees, who should be dealt with under the PAYE system.
Find out about the Construction Industry Scheme on the HM Revenue & Customs (HMRC) website.
| This content on this page has been taken from the website http://www.businesslink.gov.uk. It is published on our website with the permission of Business Link. It is subject to Crown Copyright. |
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