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IR35: Lack of employment rights for deemed employees

The off-payroll working reforms have been postponed to April 2021, which gives the government a year to consider any unintended side effects, such as the lack of employment rights afforded to contractors deemed to be employees.

3rd Apr 2020
Tax Writer
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Pregnant woman working from home

An employee is entitled to various employment rights, including (but not limited to):

  • Minimum notice periods
  • Protection against unfair dismissal
  • Statutory Sick Pay
  • Statutory maternity, paternity, adoption, and shared parental leave and pay
  • Statutory Redundancy Pay

However, if a contractor is treated as a deemed employee by their client (ie their engagement is considered to be within IR35) then that contractor is not afforded the same employment rights.

This is made clear in the government’s guidance to fee payers (typically an agency or the end client).

As the guidance explains, as a contractor engaged through a PSC is not one of the fee payer’s employees, that contractor is not entitled to:

  • Statutory payments
  • Employment rights (eg holiday pay) or 
  • Pensions auto-enrolment.

A fee payer is also not responsible for deducting student loan repayments for contractors engaged through a PSC.

Instead, “The worker’s entitlement to statutory payments comes through their employment with their intermediary” (in other words, through the contractor’s PSC).

This leads to an unpalatable situation where a contractor classed as a deemed employee will pay broadly the same amount of income tax and national insurance contributions as an employee, but will not have the same statutory payment or other employment rights.

Interaction with maternity pay

One point to note is that there have been reports that self-employed women may no longer be able to claim maternity pay if they were treated as a deemed employee by a client.

Thankfully, this appears not to be the case. According to Katie Wood, Senior Legal Adviser at Maternity Action, the IR35 reforms should not prevent a woman from claiming maternity pay. Statutory Maternity Pay or the Maternity Allowance should be available, provided all eligibility conditions are met.

Employment status for rights vs employment status for tax

This mismatch between how an individual can be treated for tax and employment law purposes is not a recent issue. Some respondents to the government’s consultation on the implementation of the off-payroll working (IR35) reforms suggested that the government should consider giving employment rights to off-payroll workers.

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