A person who provides work to an individual is responsible for correctly establishing the employment status of the worker. For tax and National Insurance contribution (NIC) purposes that is whether the worker is an employee or self-employed.
Why employment status matters
An individual’s employment status affects the amount of tax and NICs they pay, how they pay them, their employment rights, and if applicable their employer’s responsibilities.
|Employmentstatus||Method of payment||Employment rights|
|Employee||The employer deducts tax and NICs at source from the employee’s pay under the Pay As You Earn (PAYE) system||An employee has a wide range of rights, including entitlement to:· statutory sick pay;· maternity/paternity pay; and· holiday pay.Where necessary, the employer’s disciplinary and grievance procedures apply to an employee, as does the employer’s redundancy policy|
|Self-employed||Self-employed individuals are normally exempt from PAYE and instead report and pay tax and NICs personally through the self-assessment tax system||A self-employed individual does not have the rights of an employee, for example they are not entitled to holiday or sick pay|
If an employer incorrectly treats an employee as self-employed, it can cost the employer (or sometimes the employee) a lot of money to put things right.
An individual can have one employment status for tax and NICs purposes and a different one for employment law purposes. For example, taxi drivers in the gig economy may be self-employed for tax and NICs purposes but a ‘worker’ for employment law purposes and as such entitled to some employment rights.
Establishing an individual’s employment status
There is no comprehensive definition in law to say whether an individual is an employee or self-employed. An individual’s employment status is established by weighing up all relevant facts and looking at the overall picture. The factors to be considered are derived from case law.
To emphasise, self employment is a matter of FACT NOT CHOICE
Summary of key factors to be considered:
|For employment||Against employment|
|There is an employment contract||There is no employment contract|
|The engager controls the way the work is done||The worker controls how they do the work|
|The worker must do the work themselves||The worker can send someone else to do the work on terms of their own choice and pay them out of their own pocket|
|The worker does not bear the losses nor keep the profits||The worker bears the losses and keeps the profits|
|The worker does not correct unsatisfactory work in their own time and at their own expense||The worker corrects unsatisfactory work in their own time and at their own expense|
|The engager decides where the worker must work||The worker decides where to work|
|The worker is paid a regular salary by the engager||The worker invoices the engager for work done|
|The worker receives benefits in kind||The worker is only paid in cash, cheque or bank transfer|
|The engager provides the tools and equipment||The worker provides their own tools and equipment|
|The engager lays down regular and defined working hours||The worker decides when they want to work|
|The engager cannot withhold payment||The engager can withhold payment until the work is done as agreed|
|The engager can dismiss the worker||The engager cannot dismiss the worker or cancel the work once the work is agreed, without compensation|
|The worker works for one engager at a time or a few regular jobs||The worker has lots of engagers at the same time|
|The engager and worker understand the relationship to be that of employer and employee||The engager and worker understand the worker to be self-employed|
|The worker does not risk their own money||The worker risks their own money in the business|
- “worker” refers to the person who does the work (not a “worker” for employment right purposes): and
- “engager” refers to the person for whom the work is done (this could be the individual’s employer)
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