As an employer or engager, you should think about whether the individual you are about to pay is a worker. Unfortunately, that decision gets no easier.
If this conundrum isn’t something that has crossed your mind, then does it provide some measure of comfort to know that you are probably not alone?
Simply put, when it comes to making payments to an individual an engager should consider whether the recipient is an employee or if they are genuinely self employed.
In this article I am not addressing the increasingly complex area ‘off payroll’ working, where owner-manager companies have contracts which may be captured by intermediaries legislation (IR35).
In response to the Matthew Taylor Review, HM Treasury, together with HMRC and the Department for Business, Energy & Industrial Strategy (BEIS) are currently consulting on how the employment status framework can be improved upon, in order to provide greater certainty to the modern workforce.
This is not the first time this sort of reform has been attempted, and the cynic in me ventures to suggest it won’t be the last.
There is no intention at this time to adapt the tax system to provide a neater fit with the increasing number of employment status options, and for that we are all grateful. The consultation paper focuses on three main areas employee, worker, self employed.
But what, or who, is a worker?
Status for employment rights
Section 230 of the Employment Rights Act 1996 defines a worker as an individual who works under a contract of employment, where they agree to perform personally any work or services for the engager. But they are not in business in their own right and providing the service to the engager as a client.
In essence, all employees are workers, but not all workers are employees. Limb (b) workers, as they are referred to under the act, have a limited number of statutory rights and protections, when compared to the rights that an employee has entitlement to.
From day one a worker has a right to or protection against:
- unlawful deduction from wages
- National Minimum Wage
- paid holidays
- to be accompanied at a grievance or disciplinary hearing
- equal treatment for part-time workers
- detriment for trade union membership
Employees have further rights or protections either from day one or when they have worked for various eligibility periods. Examples include the right to maternity and adoption leave, and the right to receive a payslip.
Status for tax purposes
When we consider employment status for tax purposes, we have two main systems of tax collection. For employees, this responsibility falls to the employer under the PAYE system, and for the self-employed, we look to self assessment. Again a huge simplification, but we know from research undertaken by the Institute of Fiscal Studies that the tax system can be a key driver in affecting behaviour, and as a system it has long ‘encouraged people to work for their own business rather than be an employee’. Furthermore ‘much time and effort goes into policing the boundaries between legal forms.’
As far back as in 1968 in the case of Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance, a starting point was provided for factors that the court felt were important to establish whether a contract of service (contract of employment) existed. The core tests established in this case, now referred to as the irreducible minimum, include:
- Mutuality of obligation (MOO)
- Personal service
The consultation asks whether these are still relevant to the modern workforce and if so, should they be codified within legislation?
Alternatively, and because they are by no means the only factors that are considered when establishing employment status, the consultation paper also acknowledges commentators, who have instead suggested making use of a more ‘simpler, clearer, more coherent test’ using objective and precise criteria or by having a precise structure.
In this way, a well-designed statutory employment status test could provide simplicity and certainty for businesses, and the individual taxpayer, as well as being easier to enforce by the state.
The Taylor Review concluded that the three-tier approach to employment status, which includes worker status, remains relevant to the modern labour market. However, Taylor favours the use of a different title to the less descriptive term of “worker”, and instead recommends that a worker should be referred to as a “dependent contractor”.
Views differ widely as to whether this is a sensible and sufficiently clear alternative, and the consultation remains open to receive your views until 1 June. You can submit your views by email, online, via a response form, or add your comments below and AccountingWEB will submit a response on behalf of the community.
About Samantha Mann
CIPP senior policy and research officer