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Employment status, court rulings and what they mean for your business

The three employments statuses are: employee, worker and self-employed
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The three employments statuses are: employee, worker and self-employed
Sandhya Iyer - HR Dept Sevenoaks Tonbridge Tunbridge Wells by Sandhya Iyer - HR Dept Sevenoaks Tonbridge Tunbridge Wells
Director - HR Dept Sevenoaks Tonbridge Tunbridge Wells

The recent headlines surrounding Pimlico Plumbers Uber and Deliveroo has made employment status the hot topic for many businesses.  Knowing how the rulings apply to your business is crucial if you don’t want to find yourself in similar hot water.  Sandhya Iyer of the HR Dept outlines the different employment statuses and employers’ obligations.

The definitions of employment status

Confusingly for business owners, employment status is recognised in different ways by the tax man and employment tribunals .  While HMRC  recognises only self-employed status and employee status, employment tribunals recognise an additional status, namely ‘worker’. So, what does this mean to your business?

It helps to look at the three statuses as a spectrum of rights to workers and costs to business:

  • The self-employed contractor sits at one end of the spectrum, attracting the least employment rights and thereby the least cost to any business.
  • At the other end of the spectrum sits the ‘employee’ , who is the most expensive for a business and thereby enjoys the maximum employee rights.
  • In between these two sits the ‘worker’ , who does not enjoy all the rights of an employee but does have specific rights, which if overlooked, could land a business in hot water, as we have seen in the Pimlico Plumbers and Uber cases.

Identifying if your staff are ‘workers’

Frustratingly for business owners there isn’t (yet) a written law on the worker status. However, the litmus test lies in five specific areas which, taken together, should give you an idea of where your workforce sits on the spectrum:

  • Mutuality of obligation – Is there an obligation on your business to offer work and is there a corresponding obligation on the part of the individual to accept that work?
  • Control – To what extent does your business control the manner in which services are provided by the individual in question? For example, do you expect them to drive your company vehicle, put them on your company roster, use your tools and wear your branded uniform?
  • Substitutions – Do the individuals in question have to provide the service themselves or does your business allow them to sub-contract the job or send a substitute to do the same job for you? And to what extent do you control any such rights they may exercise around using a substitute or sub-contractor?
  • Financial risk – Do individuals providing services endure any risks and, if so, do they have to take the hit for any such risks? For example, reduced turnover with the loss of a client or not getting paid for a job that was under estimated for?
  • Subordination – How different is the bargaining power between you and your contractor?

Many business owners find that when they apply these litmus tests, contractors they had considered to be self-employed are indeed workers. And to add a spanner to the works, you or your workforce do not get to choose their status; this is determined purely by the historical working relationship. Just having a contract in place which refers to an individual as a self-employed contractor will not cut it in a tribunal, if the litmus test indeed confirms they are a worker. This is what has come as a rude shock to the owner of Pimlico Plumbers, Charlie Smith.

The cost implications of workers over contractors

Having to recognise someone as a worker when you had intended to have a self-employed contractor means that you become obliged to consider some of the following, although this list is not exhaustive:

  • National Insurance
  • Holiday Pay
  • Rest periods
  • Statutory Sick Pay and all other statutory payments, subject to qualifying periods
  • National Minimum Wage/National Living Wage

In addition to the immediate cost implications, you also run the risk of losing your contractors if they refuse to be put onto a worker contract because of the increased tax implications for them (roughly 10%-20% of their earnings, which obviously reduces their disposable income).

Costs v benefits of identifying the correct employment status

Although there are increased costs to business owners of recognising contractors as workers (and tax implications for staff in becoming workers), there are also potential costs in failing to identify employment statuses correctly.  If you get it wrong, you put your business at the risk of legal claims and awards, including penalties and back pay.

What’s more, come April 2020  agency workers, zero hours workers and atypical workers are set to get increased rights under the Good Work Plan, which is bound to place a greater onus on Employers to recognise employment status. With less than a year to go, it makes sense to sit down now with your accountant to work out the cost implications of recognising the right employment status to build this into your cashflow, as well as consulting with your HR business partner to make sure you have the right employment contract in place to mitigate the risk of any claims. 

The high-profile legal cases surrounding employment status show the real costs of getting this wrong – and impending changes to the law means it’s more important than ever to make sure you’ve got this right.

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Sandhya Iyer is the director of the  HR Department , helping small- and medium-sized businesses in Tunbridge Wells, Tonbridge and Sevenoaks, Kent.  A graduate member of the  Chartered Institute of Personnel and Development , she works with business owners, entrepreneurs and managers to prevent people problems and help them get the best from their staff.