Grappling with Employment Status gets no easier
22 May 2018
When did you last consider whether the individual you are about to pay is a worker?
If this 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, it would appear that when it comes to making payments to an individual an engager will consider are they an employee or are they self employed?
For today I am overlooking the increasingly complex area ‘off payroll’ owner manager companies whose contracts are captured by Intermediaries legislation.
In response to the Matthew Taylor Review HM Treasury, together with HMRC and the Department for Business, Energy & Industrial Strategy (BEIS) are currently considering in Employment Status Consultation how the employment status framework can be improved upon to provide greater certainty to the modern workforce.
This is not the first time this 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 against 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 and examples include the right to maternity and adoption leave and the right to receive a payslip.
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
- 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 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 business and the induvial tax payer as well as being easier to enforce by the state.
The Taylor Review concluded that the three tier approach of employment status, which includes worker status, remains relevant to the modern labour market however he favoured use of a different title to the less than descriptive term of Limb (b) and instead recommended 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.
On a final note I conclude with the reminder that as from April 2019 the Employment Rights Act will extend the right to receive a payslip to all workers and so I end this piece as I began, when did you last consider whether the individual you are about to pay is a worker?
This article was originally written for Accounting Web (published 22 May 2018).