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False self employment
A recent judgment from the Employment Appeals Tribunal (EAT), together with the Government’s proposal to review false self employment, reminds employers of the risks of engaging people on a self employed basis.
False self employment takes place across all business types but according to HMRC’s statistical evidence, 200,000 to 400,000 workers are falsely self employed in the construction industry. In 2009 a consultation was launched on false self employment in this sector but the depressed state of the industry at the time meant that it failed to get off the ground.
So what is false self employment? For ‘employed’ workers, employers deduct tax and National Insurance contributions (NIC) under PAYE and account for those deductions, together with employer's NIC (currently 13.8%), to HMRC using ‘real time information’. Employed workers are eligible for statutory payments in the event of sickness, maternity leave or redundancy, and may become eligible to be enrolled in the employer's pension scheme.
Self-employed people must pay their own tax and NI contributions but benefit from more generous tax deductible expenses. They are not employed and therefore no employer NICs are due.
If an employer engages someone under a self employed contract but HMRC decides that the nature of the relationship was (regardless of the legal documentation) one of employment, the employer will find itself liable for tax, NIC, interest and penalties.
In light of the number of individuals who are engaged on a false self employment basis, the Government proposes to review the legislation so that it can recover a shortfall of around £350,000,000. In December 2013 HMRC launched a new consultation entitled ‘Onshore Employment Intermediaries: False Self Employment’. This consultation relates to the impact of the proposed measures on UK based workers and intermediaries, particularly in the construction industry, where it acknowledges there has been a plethora of marketed false self employment arrangements. The main proposals are that:
A worker will be treated as employed if he personally provides, or is personally involved in the provision of services to the end user and receives remuneration in any form.
An agency supplying the worker to the end client must account for tax and NIC and report to HMRC using real time information if the worker is not on the payroll of any other person.
The agency must submit a quarterly electronic return giving details of any workers from whom tax has not been deducted and the reason for the non-deduction.
Employers that wrongly state a worker as being self employed when in fact they were in an employment relationship, could face claims for unfair dismissal and/or backdated holiday pay.
In a recent case (Boss Projects v Bragg) Mr Bragg’s contract described him as a “sub-contractor” and stated that he was “in business on his own account”. However, his contract gave him absolute discretion to substitute or delegate his workload and gave him sole financial responsibility.
The judge said that despite the contract being “watertight” Mr Bragg was entitled to holiday pay and that the contractual terms did not provide a complete or reliable definition of the nature of the relationship between the parties. So despite the clear contractual provisions Mr Bragg was deemed to be employed.
This case shows employers that no matter how watertight the documentation, the court or tribunal will look at the actual terms of the arrangement and will be quite happy to listen to the evidence of a claimant when considering whether he or she is genuinely self employed.
Where a person is deemed to be an employee (rather than self employed) they will be entitled to claim statutory holiday pay (currently 5.6 weeks per year) backdated to the commencement date of the contract. For some employers, that could mean substantial holiday pay claims!
The lesson here is to always consider the risks and, if you are unsure, take advice before engaging people on a self employed basis.