IR35: The importance of determining employment status

Is your business working with someone who is self-employed – or considering doing so in future? Then it’s vitally important to understand if they are truly self-employed or in fact should be considered an employee of the organisation, particularly in relation to upcoming IR35 law changes for April 2021

Employers need to know the differences between employees/workers and self-employed people who are doing work for the company, as this affects a range of working rights and responsibilities on behalf of the individual and the business.

IR35 law changes from April 2021 will have an impact on private businesses with more than 50 employees (or smaller businesses that fall within other criteria) using falsely self-employed contractors.

Here we’ll focus on the processes employers can use to determine whether someone who is working for them is self-employed or an employee of the business. However, this is only a general guide, and businesses should consult an employment law/HR professional for specific advice before making decisions.

What is false self-employment?

False self-employment describes scenarios where a company is working with a self-employed person in such a way that they should actually be an employee. It’s a common occurrence across several industries, such as construction, driving/haulage, and catering.

A falsely self-employed person may also be described as a ‘deemed employee’ or ‘disguised employee’, as they’re effectively an employee in all but name. In some cases, false self-employment is used knowingly for businesses and self-employed contractors to avoid paying the amount of tax they should.

Employers need to check if someone is truly self-employed in terms of tax law (to determine whether they’re exempt from PAYE) and employment law (to determine whether they have an employee’s rights). If someone is falsely self-employed, their categorisation within both types of law will be very different to that of a truly self-employed person.

What are the potential penalties for false self-employment?

If someone is self-employed but working for an employer in a capacity that means they are in fact an employee of that company, the company will be liable to pay back tax, National Insurance contributions (NIC), and interest on the time the person was falsely self-employed, as well as associated penalties.

Determining employment status

The UK government advises that someone is likely an employee of a company if most of a given list of criteria apply, including that:

They are needed to work regularly
They expect to be paid for number of hours worked, not upon the completion of a specific project or task
A minimum number of working hours are required from them
They only work for the business or if they do undertake other work it is very different from the role in question
They have a manager/supervisor responsible for their workload, advising on how the work is done and giving deadlines
They work on company premises or a specified location
The business provides tools and materials for the person to do their job
They can’t send someone else to do their work

The more criteria that the self-employed person fills, the more likely it is that they should be classed as an employee by the business. This will affect the rights they are entitled to (such as paid annual leave, maternity leave, statutory sick pay) and how they and the business pay tax.

Not sure if someone is self-employed or should be classified as an employee? The government advises calling ACAS.

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Written by Camille Brouard

Camille is a Senior Marketing Executive for myhrtoolkit who writes on topics including HR technology, workplace culture, leave management, diversity, and mental health at work.