Employment status has been a hot topic in the employment sphere in recent years. The government consulted on whether to clarify the legal tests for employment status but has now announced that it will not be making any changes. Employers are therefore likely to continue to face uncertainty in how to correctly classify some contingent workers, resulting in a regular stream of case law in the courts and tribunals.
A recent employment tax case suggested that the approach to determine if someone is an employee for tax purposes could be different than the approach for employment law purposes. The starting point for tax purposes is to consider the contractual terms as agreed to by the parties, while for employment purposes, the contractual terms can be ignored if they do not reflect the reality of the relationship.
With the rise in digital platform services, we are seeing an increasing global trend in case law and legislation aimed at protecting platform workers' labor rights. For more insight on these developments, along with other employment law updates, click here.
A finding that an individual is a worker (or potentially an employee) would give them greater employment law rights. An employee has the full set of employment rights including the right not to be unfairly dismissed, right to statutory redundancy pay, etc. A worker has some employment rights including holiday, working time and minimum wage rights.
Misclassification will carry higher costs for the employer, potential reputational risk, and more restrictions on managing the relationship.
100% penalties on the amount due plus interest.
100% penalties on the amount due plus interest.
Liability for backdated pension contributions for the period of the misclassification – The amount will depend on the particular pension arrangements the engaging company has in place, but would include employer contributions (likely 3% of the slice of each workers' compensation between GBP 6,240 and GBP 50,270 ("qualifying earnings")) and, potentially, employee contributions (since April 2019, an additional 5% of qualifying earnings; less before that date) plus, potentially, interest. While backdated pension contributions can be relatively modest for individuals, if a large group has been misclassified over a long period, the amounts can be very significant.
Additional financial penalties – The Regulator could impose additional penalties (most likely if backdated contributions are not made). These could range from a fixed (flat rate) penalty of GBP 400 to an escalating penalty. The latter ranges from GBP 50 per day for engaging companies with one to four workers/employees to GBP 10,000 per day for those with 500 or more workers/employees.
Misclassification will also give rise to reputational risk. The Pensions Regulator can and does publicize on its website information about enforcement action that it takes.
Yes, if employees are seen to be facilitating the tax evasion of contingent workers, the company could be liable for a corporate criminal offense.
Potential for company to be liable for a criminal offense if employees knowingly facilitate the tax evasion of contingent workers and potential for engaging company to be liable for a criminal offense if it willfully breaches its auto-enrollment duties – This could potentially be as a result of misclassification, although willful breach is a fairly high bar and may be difficult to meet where the misclassification has been a result of genuine confusion over the correct classification of a worker.
The main employment law risk is misclassification. The trend in the UK courts is that contingent workers are likely to be workers (and potentially employees) with greater rights and with operational challenges over calculating and observing working time and minimum wage rights.
If the individual is reclassified as an employee or a worker, the engaging company would then be responsible for checking that the individual has a valid right to right to work in the UK prior to their employment commencing.
Misclassification risk by HMRC, leading to liability for lack of withholding – Penalties can be up to 100% of the amounts due, depending on the level of culpability, plus interest for late payment. HMRC is focusing on contractors providing services through personal service companies.
Misclassification risk by HMRC, leading to a liability for failure to pay employer social security contributions and failure to withhold employee social security contributions.
Misclassification risk by the Pensions Regulator – If the individual is reclassified as an employee or a worker, the engaging company is at a high risk of being found to be in breach of automatic duties which, broadly, require eligible workers to be automatically enrolled into a workplace pension scheme and for the engaging company to deduct and pay minimum pension contributions in respect of them. The relevant definitions for categorizing workers and employees for automatic enrollment purposes are similar to those that apply for employment purposes.
Misclassification risk by the Pensions Regulator leading to liability to pay backdated pension contributions plus other fixed and escalating penalties and, in extreme circumstances, criminal penalties – It can also lead to reputational damage. The Pensions Regulator is likely to take into account judicial authority in relation to employment status cases to reach a view on whether individuals have been misclassified for pensions automatic enrolment purposes. As such, the trend in the UK courts that those working in the gig economy are likely to be employees is also relevant when assessing pension risk.
Misclassification risk by HM Revenue & Customs, leading to liability for failure to pay employer's social security contributions and failure to withhold employee's social security contributions