Employment status and false self-employment

25 August 2015

Research published by Citizens Advice highlights just how important it is for employers to have a good understanding of the employment status of workers, however it is a challenging and multi-faceted area.

As the labour market and the economy evolve, it is vital that the system for self-employed people adapts and modernises. The government has made positive progress with proposals to scrap Class 2 National Insurance and to move tax returns online. Alongside this, the government should address the lack of clarity around self-employment status as a priority.

Bogus self-employment occurs when workers are told they are self-employed when the legal tests would likely define them as employees. This phenomenon is made more common by the lack of consistency and clarity around the definition of self-employment: employment and tax law take different approaches.

Tackling bogus self-employment will help the government by ensuring it receives the tax and National insurance it is due; it will help responsible businesses who are undercut by rivals; and it will ensure that workers get the basic protections they are legally entitled to, such as the National Minimum Wage and holiday pay.

The Citizens Advice report addresses two key research gaps. First, it provides an estimate of how many people may be in bogus self-employment across the whole economy. Second, it shows the human impacts - in addition to effects on government and business - of bogus self-employment.

Citizens Advice surveyed nearly 500 of their clients to understand how they work and how they perceive their employment status. They then compared this to the law and to existing evidence that their network has gathered about incidences of bogus self-employment.

The key findings are:

  • Citizens Advice suspect that one in ten of the people that were surveyed are bogusly self-employed, with at least three markers suggesting that their self-employment is not genuine. If scaled up, this could translate into as many as 460,000 people nationwide.
  • Each of these people may be losing on average £1,288 a year in holiday pay and are paying an extra £61 per year in National Insurance that they would not pay were they classified as employed.
  • The Exchequer is losing, on average, over £300 per person who is wrongly categorised as self-employed, because the national insurance system currently incentives employers to categorise workers as self-employed, even when they are not. If scaled up, this means the government could be losing as much as £314 million annually.
  • Responsible businesses, which do the right thing and want to employ their staff legitimately, face a competitive disadvantage to other employers which hire bogusly self-employed staff. The current lack of clarity around the definition of self-employment also means that many responsible employers struggle to be certain that they are categorising their staff properly.

Citizens Advice has made recommendations that can help to redress the balance. These include extending to self-employed people some of the rights have been previously reserved for employment, reviewing the tax and national insurance system with a view to ensuring that self-employed people are treated fairly and strongly enforcing the rights of those who suspect that they are in bogus self-employment.


CIPP comment

Employment status is certainly not a new issue and the Office for Tax Simplification (OTS) is continuing its work to ‘simplify’ this area. They published an Employment Status report in March 2015 with a large number of recommendations for simplification and improved guidance but this is such a mammoth task and many of the recommendations are big projects within themselves, such as the alignment of tax and NICs. IR35 and employment intermediaries was out with the scope of this particular report but again these are projects in their own right and are currently under consultation - CIPP and BDO joint survey on both consultations is open until15 September so there is still time to provide comment.

A quote from the OTS in their March report sums up the issue rather effectively:

“…employment status is a complex and wide-ranging subject that many have said has no real solution – and that if we did manage to ‘solve it’, we should immediately move on to world peace as we’d clearly be on a roll.”

Suffice it to say employment status, and all its associated complexities, is going to be on our agendas for quite some time to come.