Employed vs. self-employed: determining worker status

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Determining worker status is an important part of defining the relationship between worker and employer. Whether an individual is considered employed or self-employed will determine how their income tax and National Insurance is calculated and paid. In employment law there are implications for employment rights like redundancy, for example. Not only does worker status affect the rights of the individual but also the responsibilities of the employer to the individual. With this relationship very open to interpretation, it can be a confusing topic.

However, HMRC does not consider this a matter of choice and it is the responsibility of the business who engages the services of the worker to correctly determine whether an individual should be employed or self-employed. It is important to get this right to comply with HMRC’s tax legislation.

HMRC’s advice is to consider all the factors that are present in, or absent from a particular case, then weigh those pointing to employment against those pointing to self-employment. Having done that, a picture will emerge from which employment status can usually be ascertained.

The most important points to consider are as follows:

Mutuality of obligation

Where the company is under obligation to provide work and the worker is obliged to accept the work and the tasks delegated to him, this usually points towards an employment relationship. A self-employed person would have no guarantee of work nor would they be expected to accept work under all circumstances. An employee does not often have the freedom to refuse work.

Right of control

In a typical employer/employee relationship the employee will exercise very little control over what he or she does on a day-to-basis; an employer would usually tell an employee what to do and how and when to do it. Self-employed individuals would typically have a greater degree of autonomy than an employee.

Provision of own equipment

An employee would rarely be required to provide their own tools or equipment to perform their duties. A self-employed person on the other hand, would be more likely to provide their own equipment.

Right of substitution and engagement of helpers

The ability to provide a substitute and/or engage helpers is something HMRC look at closely when deciding whether a worker is employed or self-employed. An employee will have no freedom to send a substitute in his or her place if, for whatever reason, they are unable to perform their duties. Similarly an employee will rarely be allowed to engage the services of a helper or assistant. On the other hand, if a self-employed person has contracted to do a job and is either sick or double-booked, that person will usually have the freedom to provide a substitute to complete the job in his place.

Financial risk

Individuals who risk their own money, purchasing assets and paying for general overhead costs and materials are usually considered to be self-employed. Employees are generally not expected to risk their own capital. Self-employed persons often quote for work in the knowledge that the risk of additional time or costs may cause them to lose money. An employee would normally being remunerated on a time-spent basis at no financial risk to themselves.

Opportunity to profit

A person whose profit or loss depends on the capacity to reduce overheads and organise his work effectively is likely to be self-employed. Individuals who are paid by the job will often be in this position.

Degree of integration into the organisation

The degree to which a involvement or participation of an individual in the structure of the organisation can indicate either employment or self-employment. An employee may have their own desk or workspace, their own computer and a telephone number. Employees may be invited to join company pension or employee benefit schemes. In contrast with this a self-employed person will be unlikely to have a desk, a computer or access to the business premises without prior appointment.

Right to terminate contract

A right to terminate an engagement within a specific notice period is usually indicative of employment. A self-employed person will usually terminate their contract upon the completion of a particular task.

The number of paymasters

A typical employee has one paymaster – he is paid by the employer and no one else. A worker who provides services to several different business has numerous paymasters. In summary, an evaluation of the relationship between the company and the worker should consider the above factors in determining a suitable treatment of employment vs self-employment status. If after weighing up these factors, you still have any doubt about this issue, we would be happy to provide our opinion on this matter. To do this we will need a description of the relationship between the worker and the company, taking into account the factors set out above.

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Please contact us for more information:
Owen Sanders
Management Accountant
+44 (0)117 918 1440
[email protected]

HMRC provides an online tool, the Employment Status Indicator (ESI) I to give guidance on this issue. You can access this here.

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