Can a company safely hire someone on a self-employed basis rather than taking the person on as an employee?
In the current economic climate some companies might be tempted to hire independent contractors on a self-employed basis rather than hiring staff as employees. The advantages and flexibility seem extremely attractive as this individual will not be entitled to any employment rights (apart from non-discriminatory rights), will only be paid when he or she produces satisfactory results, and the administration and managing costs will be overall much lower.
This looks too good to be true so why aren’t other companies doing just that? The simple answer to this question is that the employment status needs to be properly justified because at some point it can be challenged. At that stage, if the company fails to justify the legality of their self-employment arrangements they can face hefty financial penalties from HRMC.
The employment status could be challenged by the person who was hired on a self-employed basis, particularly if a dispute arises regarding pay or working conditions for example. It will be the employer who has to prove the validity of the self-employment status and not the individual. At this point, the onus is on the employer to prove that the individual is not an employee.
Another possible scenario is when an Inland Revenue “status inspector” performs an employment status audit on the company. The Inland Revenue loses a great deal of revenue with self-employment arrangements (e.g. lack of employer national insurance contributions, etc) so it is on their best interest to prove that there is an employment relationship where the relationship is blurry.
How can we decide?
The Inland Revenue status inspector and Tribunals apply various tests to check the validity of the self-employment arrangement.
The main four indicative tests are:
(1) the Degree of Control Test (e.g. the amount of supervision and how much does the company control the how, when and where the individual works);
(2) Mutuality of Obligation Test (e.g. can the individual reject work without any future detriment?);
(3) the Economic Reality Test (e.g. Is the person in business on their own account? Is there a degree of financial risk? Can the person make a profit or a loss?)
(4) the Integration Test (e.g. is the self-employed individual’s work integrated with the core business or is this work only an accessory to it?).
There are other aspects that might be looked at as well, such us: is the person working on an exclusivity basis for the company or does it have several clients? Is this a short term project or is the person hired to work indefinitely? Does the contractor have the right to appoint a helper or a substitute to do the job?
Often, taking someone on as an ‘employee’ is a safer option. Additionally, making the person feeling part of the company and having more control over what the employee is doing will also bring great benefits to each party in the employment relationship.
A more flexible approach could be using “casual workers” where the casual employment relationship can widen the gap, for example, by using temporary or zero hours staff. You may wish to use this where you require flexibility or markets are unclear. It is important to note that all workers are still entitled to be paid the national minimum wage for each hour they work and that the premium that you will pay per hour to an agency might not make this option cost effective.
April 20th, 2009 at 6:07 pm
It is no doubt becoming a trend in this economy as I am seeing it more and more. It is very beneficial to the employer and can also be an incentive for an employee who is looking to set their own hours. One option for many small to mid-sized companies that are currently hiring independent contractors and are looking for a cost effective way to make them an actual employee is to consider using a PEO for handling all the issues that are associated with having a regular employee.