Employment status is not a matter of choice. If you are a contractor you are responsible for working out the employment status of your workers and have to make a statutory declaration to HMRC every month. There are important questions to ask to determine whether your workers are employed by you or are self employed.
Main indicators of employment
If you, the contractor, have the right to control what the worker has to do – where, when and how it is done – even if you do not use that control very often – that worker will be your employee and you will have to put them on a PAYE system, deduct tax and NICs and send the money regularly to HMRC. The contractor should consider not just the right and degree of control, but also the right to direct the worker if they so choose.
The employee may supply his or her own small tools, (this may simply be personal preference and is common for workers irrespective of whether they are self-employed or employed) and may operate equipment and plant at work. However, the worker does not risk his or her own money and there is no possibility that he or she will suffer a financial loss. For example, if a contractor pays an hourly, daily, weekly or monthly rate, or paid by the day, there is little risk to the worker.
The length of engagement may also be a factor, but is not decisive. Long periods of working for one contractor may point to employment, but even very short-term work could be employment. Regularly working for the same contractor, even under daily or weekly contracts, points to employment. If a worker moves from site to site with the same contractor that may be construed as employment, but some of the other indicators would need to be taken into account.
Main indicators of self-employment
The greater the degree of financial risk for a worker, the more likely it is that he or she will be self-employed. Therefore how they are paid is important. Self- employment involves risk. If a worker bids for a job and has to bear the additional cost if the job ends up costing more than the worker’s original estimate, that will also be considered self-employed status. If a worker has the right to decide how and when the work will be done, within an overall deadline, and supplies the materials, plant or heavy equipment needed for the job they will also be considered self-employed. If the worker has a right to hire other people who he or she pays, or supplies materials plant or heavy equipment needed for the job, they will also be seen as self employed.
Other relevant factors include the nature and degree of expenditure that the worker incurs on his or her account, and whether the work contract was won as a result of a competitive tendering process.
Frequently asked questions about employment status
Why can I not take on workers as self-employed if it is easier for me and the worker agrees?
Although taking on workers on a self-employment basis can seem attractive to both parties, the rules are dictated by the government and are not based on people’s preference. You cannot simply choose, but have to follow the guidelines. The tax rules for self-employed reflect the financial risks taken by people genuinely in business and can only be applied to those people.
If I have not given someone a contract does that mean they are self-employed?
No. Just because someone does not have a written contract it does not mean they are self -employed. If a person has agreed to work in return for payment a contract exists. It can be written, spoken, implied or a combination of all three. The contract determines rights and obligations and can be a contract of service (employment) or a contract for services (self employment).
My workers have contractor’s certificates (CIS6) and registration cards (CIS4), surely that means they are self-employed?
Just because they hold a certificate or a card does not mean that every job they take on is as a self-employed person. Remember it is the terms, conditions and facts that apply to each job that determine whether they will be employed or self employed in that particular case. There are no certificates and registration cards in new CIS.
What happens if terms change part way through the contract?
If the changes result in a worker becoming employed you must tell HMRC and immediately start deducting tax and NICs from his or her earnings otherwise you may be liable for the deductions you should have made. Interest and a penalty may also follow. Conversely, if the changes result in a worker becoming self-employed, he or she will be responsible for their own tax and NIC.
I took on a person on a casual basis who I thought was self-employed, but now I want to make them an employee – what should I do?
Start to operate PAYE immediately. You may be responsible for past payments of PAYE tax and NICs for the employee. It is vital to make regular reviews of the status of individual workers to avoid this happening.
Are any categories of workers exempt from the rules?
No. It is important to consider the status of the entire workforce not just the manual workers. Managers, estimators, site supervisors, professional staff and others all have to comply with the same rules. The only time special rules might apply is when an agency is involved and they operate PAYE and account for NICs. If this is the case, check status carefully and contact HMRC to ensure the burden won’t fall back on you.
For further information see separate article: Special tax rules for the construction industry.
