Skip to main content

Defining employment status: a stitch in time saves nine

Written by: Tina Chander
Published on: 6 Feb 2024

Stitch

Image © Yü Lan / Adobe Stock

Defining the correct employment status of someone who works for you, as an employer, has become increasingly complicated – but also increasingly important.

Businesses can employ people in a number of different ways – including direct employees, contractors and casual workers – and failure to correctly categorise the nature of the employment relationship could expose you to a challenge that could end up in an employment tribunal.

If one of your workers claims that under employment legislation they are entitled to more rights than they are receiving (such as statutory sick pay or statutory redundancy pay), any investigation would hinge on the facts and not necessarily what you may have agreed. An additional risk exists of an investigation by HMRC if you have categorised someone’s employment status incorrectly, as the tax treatment of self-employed workers is different to employees and workers (Panel 1).

Panel 1. Tax consequences

Several consequences exist of getting status wrong and not operating PAYE when you, the employer, should.

Unpaid tax and National Insurance

You will be liable for any PAYE tax and National Insurance contributions (NICs) that should have been paid in respect of the employee.

If HMRC recovers tax from you, it is possible you may then have a right of action against the employee; however, you would need to seek legal advice on this. You should also know that interest is charged if PAYE tax and NICs are paid late.

Penalties

Although getting your worker’s tax status wrong will not, of itself, cause penalties if you have not been treating someone as an employee, this means you will probably not have been doing certain things that do carry penalties, such as sending in correct employee information or sending in any employee information at all, or paying PAYE tax and NICs on time.

The level of penalties will normally depend on the gravity of the discrepancy and the degree of cooperation and disclosure from the employer.

The consequences of getting a status wrong can be expensive – especially when you consider HMRC can go back six years for unpaid tax and NIC, interest and penalties in the case of careless behaviour (ordinarily, the time limit is four years; however, HMRC will probably seek to treat an incorrect status classification as “careless”).

Getting tax and employment status right the first time is highly advised.

Defining employment status

The breadth of employment protection rights has increased substantially over the years, but not all rights are available to all workers (confusingly, an employee can be a worker, but not vice versa). For the purpose of employment law, three status categories exist: employee, worker and self-employed. Employees have the highest level of employment protection, whereas the self-employed have very few.

Given the nature of some roles, you may employ various casual workers either for a specific period or on a zero-hours contract, calling on them as and when needed. In these cases, the line can become very blurred between “worker” and “self-employed”, with the former being able to claim employment protections not available to the latter.

Employed

An employee is someone whose hours, place of work and workload are controlled by you. You are obliged to provide them with work and determine how it should be done, and they, in return, are obliged to carry it out. They do not have the right to substitute someone else to do their work, and they do not provide their own equipment.

In return, they enjoy comprehensive employment protection rights, such as statutory minimum notice, the right to request flexible working (currently, after 26 weeks’ service) and being able to claim unfair dismissal after two years’ continuous service. Employees also have the right to parental leave and pay, parental bereavement leave and pay, time off for dependants and public duties, as well as protection against dismissal or suffering detriment if they are taking action over a health and safety issue.

Worker

A worker is a rather more ambiguous term, floating as it does between employed and self-employed status. It is worth noting that the term “worker” could include agency workers, freelance workers and also zero-hours contract workers.

Casual workers will probably fall into this category, as their hours are likely to be irregular and they are not obliged to accept work offered (likewise, you are not required to offer work). However, when they are working for you, you do have control over their workload, and they cannot substitute anyone else to carry out the work they have agreed to do themselves.

Although they have significantly fewer employment rights than employees, they retain the right to paid holidays, the national minimum wage, and protection against unlawful discrimination. However, unlike employees, they do not have the right to sick leave and maternity or other types of parental leave (however, they may be entitled to statutory sick pay and maternity, paternity and adoption pay).

Self-employed

Self-employed workers, such as the owner of a company or a freelancer, set their own work schedules and negotiate their own rates of pay with you, invoicing you for work done rather than receiving a wage. They have the right to substitute someone else if they are unavailable, provide their own equipment, and are free to work for other people.

Individual contractors undertaking time-limited projects, such as developing computer systems, usually fall into this category.

They are also responsible for paying their own tax and National Insurance contributions, and have limited employment rights (such as the right not to suffer discrimination).

Avoiding a claim

It is your responsibility as an employer to determine the employment status of your workers, and it can be expensive if you get it wrong. Several court cases have been held in the past few years, primarily concerned with the rights of workers operating in the gig economy, and the majority have led to a strengthening of protections for workers.

The Government has issued guidance, which can be found on gov.uk, but if you are in any doubt, good advice would be a worthwhile investment. This is definitely a case of “a stitch in time saves nine”.