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When is a contractor not a contractor?  (It’s not as simple as you think!)

By Níamh Kelly

2020-08-04

You might recall earlier in the year, I wrote an article called “The Good Work Plan”.  I was exploring the commitment from the Government to review and align employment status rules for tax and employment.  We need a common, simple platform, so that all business owners and personnel understand employment status. For those medium and large businesses, who will also have IR35 changes to contend with from April 2021, the need for employment status to be reviewed makes is even more imperative.

During July, a 26-year-old self-employed hairdresser in Lancashire, Meghan Gorman, won a tribunal case in which the judge ruled she deserved the rights of an employee, despite being officially ‘self-employed’.

Ms Gorman’s lawyers successfully argued that the amount of control her employer – a Terence Paul salon in the centre of Manchester – had over her working practices meant she was, effectively, an employee.

She has now won the right to claim for six years of backdated holiday pay, notice and redundancy pay after losing her job when the salon closed in 2019.

So what does this mean for businesses who have ‘self-employed’ people?  Well – in my view - this could open the floodgates to a deluge of claims for notice, holiday and redundancy pay, across multiple industry sectors.

It’s become standard practice for many salon owners to use self-employed in this way and the implications of this case are likely to be huge and costly for many business owners in this sector.

But of course, that’s not the only sector affected. Many self-employed sports coaches, tutors, golf pros, physios, dental hygienists, designers, architects, arborists… (the list goes on)  are often engaged on a self-employed basis for their personal skill and wouldn’t have a right to substitute.

Part of the problem is that smaller businesses are often encouraged to use such ‘false self-employment’ arrangements by professional advisors, bank managers and accountants who usually lack the ability to offer qualified HR or employment law advice.

One of the problems is owing to the complexity and different rules relating to tax law and employment law about employment status. In tax law, it is binary – somebody is either ‘employed’ or ‘self-employed’ – whilst in employment law, there is an additional category of ‘worker’ status.

This is not the same as an employee. Many sole trader self-employed individuals, if put to a test about their true status, would likely be a worker if not an employee.

That is not to say that all self-employed are not truly self-employed people running their own business, but for many the practices are a sham.

So what should you be looking at to determine status?  There are three main tests to check whether people are truly self- employed:

• there should be no ‘mutuality of obligation’ – as in an ongoing expectation that work is offered or has to be undertaken.  In other words – as an employer – I expect you to turn up when I offer you work

 

• the individual should not be working under the control of the employer.  Being self-employed is running your own business and providing a service; so other than quality checking as would be a normal commercial interaction; how the work is done, when and by whom is the right of the provider.

 

• The individual should have an unfettered right to send a substitute, with no right of refusal by the employer as a self-employed person is providing a business service, not a personal one. 

 

This last ‘test’ was demonstrated in a case against “Weight Watchers” in the last couple of years.  The company has contracts stating their meeting Leaders were independent contractors; the Leaders believed they were self-employed and paid their own National Insurance and tax.

The Leaders could offer a substitute Leader but “Weight Watchers” could veto the choice of person. The Leaders could arrange for the class times and dates but “Weight Watchers” outlined how the classes should be run. The Leaders could profit by selling more products, however they can only sell WW products. The Leaders could stop working for “Weight Watchers” without notice.

When the case came to Tribunal – the Court came down in favour of the Leaders being employees as although they could send a substitute; it wasn’t an ‘unfettered right’; “Weight Watchers” could veto the individual.

That cost “Weight Watchers” £23 million in backdated tax!

The view in the HR industry is that the Government should abolish worker status and also reduce the burden on a self-employed person of providing a substitute, especially where they are actually being engaged for their personal skill.

The wider issue of employment status will be put further in the spotlight with the Uber appeal case being heard remotely in the Supreme Court in late July/early August. (The private transport firm will claim drivers who had previously been found to be ‘workers’ are actually self-employed on the terms they have been engaged on).

If Uber loses, the company will have no further recourse and then the flood gates for worker status claims will well and truly open – especially with so much uncertainty in the economy and with no costs associated with bringing a claim at an employment tribunal.

About the author:

© Níamh Kelly – Director of The HR Dept Shropshire – is an award-winning HR professional with over 25 years HR experience at a Senior level in the corporate, public and voluntary sector.  Working with SMEs across the County; The HR Dept – Shropshire has rapidly developed a very strong client base of local companies.   So, if you have a question about Recruitment & Right to Work; to Resolving Problems; to Redundancy… she’s here to help you!