Employment Status for tax purposes and employment law purposes

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In the latest UK200Group blog post, Lisa Wignall from Price Bailey Legal Services discusses the distinction between the employment status of an individual for tax purposes and employment law purposes.

The topic of ‘employment status’ is complex as it is possible to be both employed and self-employed at the same time. This is because there is a distinction between the employment status of an individual for tax purposes and employment law purposes.

This distinction is very important as an individual may be considered self-employed for tax purposes but a worker or employee under employment legislation. Therefore it is an incredibly complex area for employers but what it boils down to is:

• Tax law – whether an individual is exempt from PAYE
• Employment Law – whether an individual has protection under employment law

Therefore, when a business engages an individual to carry out work, it is worth considering their employment status at the outset. This will ensure the intention of the engagement is clear between both parties and to record it in writing is key. Learning lessons from the recent ‘Uber case’, we are well aware that what is written in a contract is not always conclusive but it does go some way to establish the intention of the parties in the event that contention arises. As employment status is fluid a regular review of the relationship is key throughout the life of an engagement.

Two recent cases have emerged dealing with the two distinctions between tax and employment law. The first case we discuss below, arose in the First-Tier Tax Tribunal (FTT) and considered whether the drivers of a haulage company were employees or independent contractors. Had the Company invested in good contracts, it is likely that their risk would have been mitigated so the HMRC enquiry may never have been instigated resulting in costs of going to the FTT and a large tax bill.

The second case we discuss below, was appealed to the Court of Appeal and considered whether plumbers employed by Pimlico Plumbers were ‘workers’ or self-employed contractors.

The tax case:
In Dhillon and Dhillon v HMRC, the Appellant provided haulage services to drivers who were paid a fixed amount per shift, could refuse jobs and who were not guaranteed work. The drivers were required to meet health and safety standards and provide all of their own equipment. Although there was induction training provided for the role, there was no subsequent supervision.

You wouldn’t be blamed for thinking that, from a first glance of the facts above, the drivers would be considered independent contractors. But, in this case the court held that the drivers were in fact employees.

The FTT established that there was a considerable degree of control exercised by the haulage company and it was not satisfied that the drivers were not in business on their own account.

The judgment in the case is not a binding decision at this level and could be disputed but the key here is that the application of tax law is changing and all of the facts of a case are being taken into consideration.

The employment case:
In Pimlico Plumbers & Charlie Mullins v Gary Smith, the Employment Tribunal (ET) initially heard the facts of this case. The claimant worked as an operative at a plumbing and maintenance company. He was described as an independent contractor, accounted for his own tax and NI, provided his own equipment, accepted personal responsibility for work undertaken by him and provided his own insurance. However, there was no unfettered right for him to engage a third party to carry out the work for him (right of substitution) and therefore there was a requirement for him to personally carry out the work himself. The ET found that he was not an employee but he was a worker (a hybrid status that exists in employment legislation but is not recognised in tax law).

The case was appealed through the Employment Appeal Tribunal (EAT) to the Court of Appeal and the appeal was dismissed so Mr Smith was given worker status. This means that he was protected with regard to national minimum wage, holiday pay, rest breaks, protection from unlawful deductions from wages, right to a pension under the Pensions Act 2008 and more.

The decision in this case turned on the concept of the ‘right of substitution’ and the ‘personal service’ aspect of employment status. When making its decision, the Court of Appeal gave a useful summary of these principles:

• an unfettered right to substitute another person to do the work or perform the services is inconsistent with an undertaking to do so personally
• a conditional right to substitute another person may or may not be inconsistent with personal performance depending upon the conditionality
• by way of example, a right of substitution only when the contractor is unable to carry out the work will, subject to any exceptional facts, be consistent with personal performance.
• a right of substitution limited only by the need to show that the substitute is as qualified as the contractor to do the work, whether or not that entails a particular procedure, will, subject to any exceptional facts, be inconsistent with personal performance

a right to substitute only with the consent of another person who has an absolute and unqualified discretion to withhold consent will be consistent with personal performance. As a result, the EAT concluded that, although in practice operatives would swap jobs around, they did so as a means of work distribution among the respondent’s operative and shift-swapping which did not amount to application of the right of substitution.

It may have been that had the Company gone through a regular risk assessment of employment status of their workforce they could have taken steps to ensure that their workforce was structured in the way they intended and relationships had not evolved to give individuals worker status.

These two cases highlight how tricky the subject of employment status is. Although the Tax Tribunal and Employment Tribunal look at the same employment status indicators, they can and do apply the tests differently.

In particular, in the tax case at the FTT, the category of ‘worker’ was not considered as this is a concept only found in employment legislation. Therefore, had the same case also gone to the ET, the drivers might not pass the ‘employment’ test.

It can be very easy for a business to make incorrect assumptions about the status of their workforce and it can be very costly for businesses where mistakes have been made. As they say, prevention is better than cure, so it’s worth proactively assessing the status of your workforce and ensuring that you have the right processes and documentation in place to support your position.

This post was written by Lisa Wignall from Price Bailey Legal Services. Price Bailey Legal Services are specialist Employment Lawyers based in the South East and if you would like further help or information on employment status and employment law matters please contact Lisa at lawyers@pricebaileylegalservices.co.uk

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