03 April 2020 - Article
Are ‘consultants' engaged to work for a business in reality its employees? If they are, this can have far reaching implications for the employer. Employees have statutory rights that consultants do not share, such as the right to paid holiday and sick pay, maternity and parental leave, the right not to be unfairly dismissed and the right to a statutory redundancy payment. Other rights, such as the right not to suffer discrimination on the grounds of sex, race, disability, sexual orientation, religion/belief or age, apply to a much broader category of workers.
HMRC commonly examine consultancy arrangements to ascertain if they are a sham or not an accurate refl ection of the relationship between the parties. Their fi ndings will first and foremost impact on the individual's status for tax and national insurance purposes – if a person is employed, it will normally be the employer's responsibility to deduct tax and national insurance from that person's pay under the PAYE system and pay it over to HMRC; a worker who is self-employed will be liable to pay his own tax and national insurance and will be directly responsible for paying it over to HMRC.
An employer may have to face a tribunal or court claim. If a consultant's contract is terminated, or the consultant feels otherwise aggrieved about the fact that he is working on different terms to the employees he works alongside, but without the same rights, there may be a real benefit to him in unraveling the contract, arguing he has employment status and enforcing his rights as an employee.
Whether an individual is or is not an employee will be decided on the facts. As a starting point, one looks at the terms of any written agreement (whether in the form of a letter, contract or other document) and the practical arrangements behind that agreement. Does the consultancy agreement genuinely and accurately refl ect the relationship between the parties? Often relationships continue for many years without the parties questioning the true nature of the relationship between them, and without revisiting any written or verbal agreements. If a company engages a ‘consultant' for a long period of time (months or years rather than a few weeks), and he works regular days and hours for which he receives a fi xed income, there is a real possibility that he will be your employee.
The following is a non-exhaustive list of points to consider when looking at how a contract is performed.
- Is there an element of personal choice in the performance of the contract? A person who can choose whether or not to do a job at all or can choose to do the job himself or hire somebody else to do it for him, or can hire someone else to provide substantial help to do a job, or has no guarantee of any work, is probably self-employed.
- The greater the degree of control which the company exercises or is entitled to exercise over the individual, the greater the likelihood of that individual being an employee.
- Employees tend to be paid a fi xed wage or salary by the week or month. Self-employed contractors on the other hand tend to be paid a fi xed sum for a particular job, on receipt of an invoice. As a general rule, consultants do not receive work for overtime and do not receive a bonus or profit share.
- Only employees are entitled to sick pay, holiday pay and pensions.
- If an individual works for a number of clients throughout the year and has a business-like approach to obtaining his engagements, this will point towards self-employment.
- Often a consultant provides his own equipment and maintains an office, perhaps at home, to deal with his business.
Whilst written terms and conditions may point towards consultancy or employment, they are irrelevant if they do not reflect the reality of the relationship between the parties. It is prudent to seek legal advice on the terms of any proposed consultancy arrangements and, on a regular basis, to assess the risk that your relationship with consultants may in fact amount to an employment relationships.