Defining the correct employment status of someone who works for you has become increasingly complicated, but also increasingly important. Businesses can employ individuals in a number of different ways – direct employees, contractors, or casual workers – and failure to correctly categorise the employment relationship could expose you to a challenge that could end up in an employment tribunal. 

If one of your workers claims that under employment legislation they are entitled to more rights than they are receiving (such as statutory sick pay or statutory redundancy pay), any investigation would hinge on the facts and not necessarily what you may have agreed. 

There is also an additional risk of an investigation by HMRC if you have categorised someone’s employment status incorrectly as the tax treatment of self-employed workers is different to employees and workers (see below).

Defining employment status

The breadth of employment protection rights has increased substantially over the years, but not all rights are available to all workers (confusingly, an employee can be a worker but not vice-versa). 

For the purpose of employment law there are three status categories: employee, worker, and self-employed. Employees have the highest level of employment protection, whereas the self-employed have very few. 

Given the nature of some roles, you may employ various workers either for a specific period or on a zero-hours contract, calling on them when needed. In these cases, the line can become very blurred between ‘worker’ and ‘self-employed’, with the former being able to claim employment protections not available to the latter.

Employed: An employee is someone whose hours, place of work, and workload are controlled by you. You are obliged to provide them with work and determine how it should be done and they, in return, are obliged to carry it out. They do not have the right to substitute someone else to do their work, and they do not provide their own equipment. 

In return, they enjoy comprehensive employment protection rights, such as statutory minimum notice, the right to request flexible working (currently after 26 weeks’ service) and being able to claim unfair dismissal after two years’ continuous service. 

Employees also have the right to parental leave and pay, parental bereavement leave and pay, time off for dependants and public duties, as well as protection against dismissal or suffering detriment if they are taking action over a health and safety issue.

Worker: ‘Worker’ is a rather more ambiguous term, floating as it does between defining employed and self-employed status. It is worth noting that the term could include agency workers, freelance workers, and also zero-hours contract workers. Casual workers will probably fall into this category as their hours are likely to be irregular and they are not obliged to accept work offered (likewise, you are not required to offer work). 

However, when they are working for you, you do have control over their workload, and they cannot substitute anyone else to carry out the work they have agreed to do themselves. Although they have significantly fewer employment rights than employees, they retain the right to paid holidays, the national minimum wage, and protection against unlawful discrimination. 

Unlike employees, they do not have the right to sick leave and maternity, or other types of parental leave (although they may be entitled to Statutory Sick Pay and maternity, paternity and adoption pay).

Self-employed: Self-employed workers, such as the owner of a company or a contractor, set their own work schedules and negotiate their own rates of pay with you, invoicing you for work done rather than receiving a wage. 

They have the right to substitute someone else if they are unavailable, provide their own equipment, and are free to work for other people. Individual contractors undertaking time-limited projects usually fall into this category. They are also responsible for paying their own tax and NICs and have limited employment rights (such as the right not to suffer discrimination).

Avoiding a claim

It is your responsibility as an employer to determine the employment status of your workers, and it can be expensive if you get it wrong. There have been several court cases in the last few years, primarily concerned with the rights of workers operating in the gig economy. The upshot of the majority of those cases has been a strengthening of protections for workers.

The government has issued guidance on the matter which can be found on the gov.uk website, but if you are in any doubt, good advice could be a worthwhile investment. This is definitely a case of a ‘stitch in time saves nine’.

Tax consequences

There are several consequences of getting a worker’s status wrong and not operating PAYE when you should.

Unpaid tax and National Insurance

You will be liable for any PAYE tax and National Insurance Contributions (NICs) that should have been paid in respect of the employee. 

If HMRC recovers tax from you, you may then have a right of action against the employee, however you would need to seek legal advice on this. Interest is charged if PAYE tax and NICs are paid late.

Penalties

Although getting your worker’s tax status wrong will not necessarily cause penalties if you have not been treating someone as an employee, this means that you will probably not have been doing certain things that do carry penalties, such as sending in correct employee information, sending in any employee information at all, or paying PAYE tax and NIC on time. The level of penalties will normally depend on the gravity of the discrepancy, and the degree of co-operation and disclosure from the employer.

HMRC can go back six years for unpaid tax and NIC, interest, and penalties in the case of careless behaviour.