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, off-payroll 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.
Under the Employment Rights Act (1996), someone carrying out work or services for you will fall into one of three categories:
The current employment law framework means that a person’s entitlements and rights are determined by which category they fall under.
Many employers have assumed that, provided someone is self-employed in the eyes of HMRC, they fall outside the traditional employment relationship and come under category (3) above.
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:
Drivers for Uber were found to be workers and not self-employed, even though they had signed Uber’s driver agreement which said they were. Update: this went all the way to the Supreme Court, who found in favour of the workers.
People working for a car cleaning and valeting firm were found to be workers, despite signing agreements that declared them to be self-employed.
A bicycle courier was found to be a worker rather than a self-employed “independent contractor”.
Just as in the Dewhurst case, a bicycle courier was found to be a worker rather than self employed.
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.
As you can see, there's a clear trend in how the law is being applied to self-employed workers, especially within the so-called ‘gig’ economy.
Why are people engaged as "self-employed" being interpreted as workers?
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.
Let's look more closely at the legal interpretation...
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.
The key here is in deciphering what paragraph (b) means. Let’s break it down...
This means an agreement exists between you and the person doing the work, but that agreement is not a contract of employment.
You have agreed that you provide work and the individual will do that work personally. The are not sending someone else in their place.
The work they do is for you (or on your behalf 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 of yours. For example, working under your business name, under your business branding, you have significant control of how, when and where they do the work, the end customer pays a bill or invoice under your business name, and so on.
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.
"Workers" have arrangements that 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..
Let's explore an example to help illustrate the difference.
Bob 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!”
Hence, Bob is self-employed whereas Frank is a worker.
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.
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.
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:
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.
A business is normally only responsible for Statutory Sick Pay (SSP) or Statutory Maternity Pay (SMP) etc. 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.
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.
At the time of writing, contributions to a workplace pension break down as follows:
A worker might opt out of the pension arrangements if they don’t want to sacrifice a percentage 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.
The effective hourly rate for workers must not 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.
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.
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 a fixed amount of time per week, 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.
However, for flexible workers who work varying hours (e.g. 'zero hour' contract workers), you need to work out the average number of hours they work per week over a 52 week period and multiply that by 5.6
Read our article on calculating holiday for flexible workers for more details.
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.
Workers are protected 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 by the worker, this would be unlawful unless either:
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 include:
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 for future engagements.
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.
