BWB’s Louise Rea summarises everything an employer needs to know about working with self-employed individuals.
There are three main categories of employment status; “employees”, “workers” and the genuinely “self-employed”. This article provides some general HR guidance on self-employed individuals and consultants.
Self-employed individuals are on the opposite end of the spectrum from employees; they enjoy the highest level of independence and the lowest level of protection. In this scenario, the organisation contracts with an individual to provide services, which do not need to be carried out personally. The individual is therefore free to sub-contract or engage other people to assist with carrying out the services. The individual assumes financial risk and reward for his or her activities and should be in business on their own account with other customers and clients. This status is best characterised as a business – customer relationship, where the customer in this scenario is the organisation paying for the services of the self-employed individual.
It is important that you put in place a consultancy agreement with any self-employed individual to set out clearly the rights and obligations of each party. This will also help to evidence the intentions of the parties regarding the status of the relationship. However, it is essential that the substance of the relationship matches the label you attach to it. A tribunal or HMRC will examine the circumstances fully when determining whether the individual is genuinely providing services to your organisation on a self-employed basis.
Even if the parties understand the arrangement to be a self-employment situation, it might turn out that, in reality, the relationship has all the features required for a worker or even an employee. It is also possible for an individual to be self-employed for tax purposes but a tribunal to hold that they are a worker or an employee and vice versa.
Individuals in ‘employment’
Protection under discrimination law extends to employees, workers and a wider category of individuals who are self-employed but are obliged to perform the work personally. If a self-employed consultant is allowed to sub-contract the work or employ other people to perform it they are unlikely to qualify for this protection.
Commercial Agents Regulations
A potential issue to be aware of is whether the consultant will fall within the definition of a “commercial agent” under the Commercial Agents (Council Directive) Regulations 1993. These regulations apply to all self-employed “intermediaries” with continuing authority to negotiate or conclude the sale or purchase of goods on behalf of the organisation. If you think this may be the case you should seek advice from one of the Employment team.
A consultant may provide services to your organisation as an individual or, through a service company, in which case the consultant will be a corporate entity. There are two tax regimes that are potentially relevant when receiving an individual’s services via an intermediary company; the “IR35” regime and the managed service company regime. Although the primary liability will be on the consultant company to ensure that it applies the correct tax regime, HMRC could in certain circumstances seek to recover the consultant company’s unpaid PAYE and NICs from your organisation. It is therefore recommended that you seek specific tax advice on the arrangements you put in place and seek appropriate indemnities in the consultancy agreement.
Factors indicating self-employed status
• No mutuality of obligations
• Individual has control over when and how they work and is not under the direct supervision of the organisation
• The individual is not required to carry out the services personally
• The individual is generally free to provide their services to other organisations
• The individual is engaged for a limited period of time to carry out a specific task or project
• The individual is not paid in the same way as your employees e.g. a fixed fee on completion of a specific project or a daily rate for services provided
• Lack of integration in the organisation so he or she has to sign in as a visitor, isn’t entitled to go to training or required to go to team meetings
• The individual provides their own equipment and materials
• The individual bears some responsibility for the organisation’s losses arising from the provision of the services and has the opportunity to make a profit or a loss from the venture
Establishing which category applies to the various individuals who will be working for your organisation is an important first step. You may wish to refer to our article on Employees and Workers which you can find here. If you have any queries about self-employment status or, require a consultancy agreement, you should get in touch with one of BWB's Employment team.