Using self-employed workers correctly

Image of various workers
Are you using self-employed workers in your business?

Many businesses are using self-employed people to provide work or services, instead of having them on the payroll. By ‘self-employed‘, we mean self-employed in the eyes of HMRC. You pay them a gross amount for their work. They’re responsible for their own Income Tax, National Insurance, pension arrangements and so on.

These workers don’t get treated like employees or get the same entitlements that employees do. You may hear them referred to as freelancers, flexible workers, contractors and so on.

However, there have been a number of employment law decisions upholding claims raised by self-employed workers over their rights. We’ve assisted a few clients that have faced similar issues, so we thought we’d write a detailed article to explain.

If you use self-employed workers, this article explains the potential implications for your business.

The background story

If you have someone carrying out work or services, they fall into one of three categories:

  1. an employee, or
  2. a worker personally providing work or services, or
  3. an independent third party business for whom you are a customer

The current employment law framework means that a person’s entitlements and rights are determined by which category they fall under.

There has been a long-held presumption that any person that is self-employed in the eyes of HMRC is, in effect, running a business. Therefore, they fall outside the traditional employment relationship and come under category (3) above.

Employment law begs to differ

However, a string of employment law decisions have challenged this view. In these cases, the worker was self-employed (as far as HMRC were concerned) and the companies involved claimed the worker was running their own business. For example:

Uber BV v Aslam

Drivers for Uber were found to be workers ant not self-employed, even though they had signed Uber’s driver agreement which said they were.

AutoClenz v Belcher

People working for a car cleaning and valeting firm were found to be workers, despite signing agreements that declared them to be self-employed.

Dewhurst v CitySprint

A bicycle courier was found to be a worker rather than a self-employed “independent contractor”.

Addison Lee v Gascoine

Just as in the Dewhurst case, a bicycle courier was found to be a worker rather than self employed.

Pimlico Plumbers v Smith

A plumber described as an “independent contractor” was found to be a worker, rather than self-employed.

The Hospital Medical Group v Westwood

The Court of Appeal ruled that a self-employed GP who provided hair restoration services for a private clinic was really a worker.

We can see a clear trend in how the law is being applied to self-employed workers, especially within the so-called ‘gig’ economy.

Interpreting the law

If you use self-employed workers, you need to understand whether these decisions affect you. A worker has less rights than a full employee but still more than someone operating as a genuinely independent, self-employed business.

How can you tell the difference?

The Employment Rights Act 1996 s230(3) defines a worker as:

[…] an individual who has entered into or works under (or, where the employment has ceased, worked under) —

(a) a contract of employment, or

(b) any other contract, whether express or implied and (if it is express) whether oral or in writing, whereby the individual undertakes to do or perform personally any work or services for another party to the contract whose status is not by virtue of the contract that of a client or customer of any profession or business undertaking carried on by the individual;

Paragraph (a) means that an employee with an employment contract counts as a ‘worker’. Paragraph (b) says that someone who provides work or services in person (as opposed to sending someone else) is also a ‘worker’. This covers two of the three categories we listed previously.

Note that these small alphabetically listed paragraphs are also referred to as ‘limbs’. You may hear references to a limb (b) worker which is referring to the second of the above definitions.

The key here is in deciphering what paragraph (b) means. Let’s break it down.

“any other contract, whether express or implied and (if it is express) whether oral or in writing…”

An agreement exists between you and them, but that agreement is not a contract of employment.

“…whereby the individual undertakes to do or perform personally any work or services for another party to the contract…”

You have mutually agreed that you provide work and they will do that work personally. They can’t normally send someone else in their place.

“…whose status is not by virtue of the contract that of a client or customer of any profession or business undertaking carried on by the individual”

The work they do is for you, or for your customers. The individual is not doing work for a customer of their own.

That last point is important. For the duration of each engagement with you, the worker appears to outward observers just like a regular employee. For example, working under your business name, using your business’ branding, you have significant control of how, when and where they do the work, and so on.

This means their work arrangements fall midway between true self-employment and regular employment. They do not have the more traditional ‘master/servant’ relationship that an employee has with their employer, but nor are they 100% their own bosses. These workers don’t invoice the end customer in their own name, they don’t decide how much to charge, how much holiday to give themselves, etc..

A self-employed vs worker example

Taxi driverBob has his own taxi business, Bob Cabs. He has a few cars and pays drivers to drive these cars, taking passengers in return for either an hourly rate or share of the taxi fare.

Frank works for RideShare Inc. He drives cars under the RideShare Inc. system and brand, collecting a percentage of the fare paid to RideShare Inc.

Frank and Bob both registered as self-employed with HMRC and they both account for their own taxes and NIC.

Bob is clearly running his own business. He’s the boss, in full control. His business has its own identity, branding, marketing and customers. If Frank claims to be running his own business, would Bob agree? Or would Bob say: “no you’re not, you’re really just a driver for RideShare, like my drivers are for Bob Cabs!”

Recent employment law decisions align with Bob. Just because Frank handles his own tax and NI with ‘self-employed’ status for HMRC, that doesn’t make Frank a self-employed ‘business’, he’s still in practice a worker in a work relationship with RideShare Inc. Frank is a ‘worker’ and so are Bob’s drivers.

Rights and entitlements

Okay, so what rights and entitlements do workers have? Workers have some, but not all, of the rights of regular employees. The table below gives you an overview and then we’ll look at what this could mean for you.

Statutory right Employee Worker Self-employed
Statutory notice
Unfair dismissal
Discrimination
Sick pay/maternity pay sometimes
Maternity leave
National Minimum/Living Wage
Holiday pay
Pension auto-enrolment sometimes
Protected disclosure
Unlawful deduction from pay
Redundancy pay
Staff transfers (TUPE)

Unfair dismissal

Employees are protected from unfair dismissal once they’ve completed two years’ service. Workers have no protection at all. Some employers think this means they can fire anyone in those categories who ‘isn’t working out’ with impunity.

Beware, however. An Employment Tribunal will take a dim view of someone who’s clearly exploiting a lack of protection. If there are other claims that could go against you, being seen as the villain is not helpful!

Also, note that wrongful dismissal is a day-one right. If a dismissal breaches the terms of an employment contract, you could be on the wrong side of the law.

Common examples of wrongful dismissal are:

  • Insufficient notice is given outside of a gross misconduct scenario
  • Terminating a fixed term contract before it is due to expire
  • Dismissal in breach of contractual disciplinary or redundancy procedures

Workers cannot claim unfair dismissal. However, most workers have some agreement covering the terms and conditions of the relationship. Legally, this is really just another form of contract. Therefore, if you terminate the relationship in breach of any agreement, you could theoretically be in ‘breach of contract’. However, as this would be outside an employment contract, a worker might struggle to make that claim through an Employment Tribunal.

Sick pay & maternity pay

A business is normally only responsible for Statutory Sick Pay (SSP) or Statutory Maternity Pay (SMP) if it has been paying Class 1 National Insurance contributions for the worker (e.g. via PAYE) and that worker’s pay crosses the lower earnings limit.

The lower earnings limits are currently £116 per week for SSP and £145.18 per week for SMP. The thresholds for adoption pay or shared parental leave are the same as for maternity pay.

If a worker has registered as self-employed with HMRC and making their own Class 2 and Class 4 National Insurance contributions, the business is not responsible for SSP or SMP. Instead, the worker can claim Employment Support Allowance instead of SSP or Maternity Allowance instead of SMP.

We note that there’s a increasing pressure to reform and re-align employment and tax regulations. This might affect who is responsible for sick pay and maternity pay in future.

Workplace pension & auto-enrolment

The Pensions Regulator says workers are covered by the workplace pension regulations and that self-employment status from an HMRC perspective does not exempt them.

This means that any worker earning over £10,000 per year (or £192 per week) would be eligible for auto-enrolment unless they have opted-out.

Workers earning between £6,032 and £10,000 do not have to be auto-enrolled, but they can ask to be enrolled.

Currently, contributions to a workplace pension break down as follows:

  • 3% of earnings contributed by the worker (deducted from the earnings payable)
  • 2% of earnings contributed by the business (paid by the business, not deducted)

These rates will increase from April 2019 to 5% by the worker and 3% by the business respectively.

A worker might opt out of the pension arrangements if they don’t want to sacrifice 3% (and later, 5%) of their earnings. It’s usually more tax efficient to take advantage of these contributions, especially as the business also contributes.

Therefore, your business must be prepared for workers that are eligible for voluntary or auto-enrolment.

National Minimum & Living Wage

The effective hourly rate for workers must be less than the National Minimum Wage or, if over 25, the National Living Wage. Their effective hourly rate is their average earnings divided by their average working hours.

If you use workers, you must ensure that their earnings don’t fall below these minimums.

Also, the European Court of Justice ruled that travel time could count as working time in certain circumstances. For example, if you’re asking the worker to attend a variety of different places. This could include the initial journey from home to the first appointment, as in Thera East v Valentine.

In theory, this means you need to include travel time in the ‘working hours’ calculation above. We haven’t seen this rigorously tested in case law yet, but it’s something to consider!

Paid holiday

Employees and workers are both entitled to a minimum amount of paid holiday. This is defined as four weeks by reg. 13 of the Working Time Regulations 1998.

Note that a ‘week’ means your working week. So, for a regular full time employee doing a 5-day week (Monday to Friday) that means 4 x 5 = 20 days. Add 8 days for the public holidays and you get a total of 28 days.

Therefore, standard practice is to define overall holiday entitlement as 5.6 weeks, because 28 ÷ 5 = 5.6

Part-time and flexible workers may work less than 5 days a week, or work varying hours. For these workers, you need to figure out their entitlement on a ‘pro rata’ basis.

For part time workers who work whole days, it’s simple. Just multiply the number of days they work per week by 5.6. For example, a part-time worker doing 2 days a week would be entitled to 5.6 x 2 = 11.2 days’ of paid holiday.

But what about workers who do varying hours? For these workers, you can calculate their holiday entitlement as 12.07% of the hours worked. For example, if a worker does 20 hours in a week, they will have 20 x 12.07% = 2.4 hours’ of paid holiday.

Why do we use 12.07% for this? Because a full time year would be 52 – 5.6 = 46.4 working weeks, and 5.6 is 12.07% of 46.4

Protected disclosures

A ‘protected disclosure’ is when someone reports serious wrongdoing in the workplace (also known as ‘whistle-blowing’). The Public Interest Disclosures Act 1998 protects whistle-blowers from being unfavourably treated and covers both workers and employees.

Unlawful deductions from pay

This protects a worker from having any of their earnings withheld without authorisation. For example, if you deduct some amount from a worker’s pay to recover an amount owed from the worker, this would be unlawful unless either:

  • you have the prior (written) consent of the worker, or
  • the agreement or contract of employment with the worker allows it

If there’s any chance you might want to recover money from a worker, make sure the agreement or contract covers this.

Some common examples of unlawful deductions are:

  • unpaid bonuses or commission
  • withholding tips the worker is entitled to
  • unpaid holiday pay
  • late or missing payment of wages

If you have agreed a fixed rate of pay with your workers (e.g. in a contract or agreement), beware of unilaterally reducing what you’re paying. Some businesses offer work on a per-job or per-engagement basis. Instead of there being a standing agreement, each offer of work comes with its own rate of pay. The worker can then choose whether to accept the engagement or not. In this case, it’s okay for the business to increase or decrease the rate of pay, as the worker is free to choose whether they accept the work.

However, if the worker has ‘no choice’ but to accept the reduced pay, then you could be on a sticky wicket. For example, you can’t agree to pay a worker £20 per hour for the term of their engagement and then reduce that to £15 per hour during that engagement.

Conclusion – change is coming

It’s essential that you understand the implications of using self-employed workers. In particular, you must consider the cost implications. There are the potential costs of accounting for the entitlements of ‘limb (b) workers’ but, if you don’t, there are also also the risks and costs of dealing with any claims. The cost of defending an Employment Tribunal claim can be over £20,000 and it’s unlikely you can recover these, even if you win!

Also, social and political attitudes to non-employee workers are changing. The UK Government commissioned the Taylor review into Modern Working Practices, which published in 2017. This review included a look at the issue of flexible working and made several recommendations. The Government published its response in February 2018. In that response, they accept that workers need more security and predictability in their working hours and work relationships.

This Government Briefing Paper on Employment Status explores these areas and makes interesting reading!

If you use self-employed workers in your business, make sure you understand what status they have. If you need help reviewing this, contact us and we’ll be happy to assist.