Self Employed Contractors 

The law regards a self-employed contractor as a person who works under a contract for services.  This section of the site aims to provide general guidance on contractors and their legal rights.

Contracts for service:

Commercial firms, organisations and self employed individuals who carry out work for others are contractors. If they in turn engage a business, organisation or self employed person to do some or all of the work, that individual or body is a sub-contractor.

Contractors have a contract for services, which may or may not be in writing. The relationship between an organisation and its contractors is governed by contract law, regardless of whether the contractor is a self employed individual or a large firm, and whether the contract is for a small piece of work or a major project.

Self-employed individuals:

People who are self employed are generally not entitled to the same rights as employees, and are not taxed under PAYE but:

• a person who calls himself or herself self-employed and is treated as such by the organisation could in fact legally be an employee, and thus be entitled to the full range of employment rights;
• a person who does work on a self employed basis but not in the course of his or her profession or business may be a worker and entitled to workers' rights but not employees' rights;
• people who are legally employees and workers nearly always have to be taxed under PAYE, even if they call themselves self-employed;
• different criteria are used to define self-employment for tax purposes and for the purposes of employment law, so in some situations a person could be legally self-employed for the purposes of tax but an employee or worker for the purposes of employment or workers rights, or vice versa.

Employment rights:

Individuals who meet the tests for self-employment are not entitled to the rights available only to employees, and are not entitled to most rights available to the wider group of people legally defined as workers . However if they are obliged to provide their services personally, rather than being able to sub-contract them, they are covered under the employment provisions of the race, sex and disability discrimination legislation.

Workers rights:

Certain statutory rights, such as minimum wage, working time rights and certain other rights, are not available if the person is carrying out his or her profession or business, and the organisation is his or her client or customer. However there is a wider category of workers which includes any person, employee or otherwise, who is working under a contract and has to provide their services personally, but not where there is a client relationship.

Such workers may carry out work on what may appear to be a self-employed basis, but are still entitled to these rights.

For the purposes of minimum wage, working time rights, part-time workers rights and the right to be accompanied at disciplinary and grievance hearings, there is a distinction between self-employed individuals who run their own business and are not entitled to the rights, and other workers who may undertake work on a freelance basis and are entitled to the rights.

The secretary of state for employment has power to extend other employment rights to workers

Tax status:

As well as differences in employment rights, there are significant differences in the tax treatment of employees and self-employed people. Tax law uses different criteria than are used for employment law, and distinguishes between:

• people who meet the Inland Revenue tests for self-employment, are registered with the Inland Revenue as self-employed for tax purposes and pay tax through self assessment;
• the vast majority of other workers, who are treated as employees for tax purposes and must be taxed under PAYE;
• individuals who do not meet the criteria for self-employment, but have earnings or other income which does not have to be taxed under PAYE and is therefore taxed under self-assessment.

Before treating a person as self-employed, it is essential to confirm that he or she will be self-employed in relation to the work. A number of tests are used for this. A person can be self-employed in one capacity but employed in another, so the fact that the person is registered with the Inland Revenue as self-employed does not necessarily mean that he or she can be treated as self-employed for this work.

If the individual is not generally self-employed for this work, the organisation must treat the individual for tax purposes as an employee. It is the employer s responsibility to ensure that PAYE is operated if it should be.

Business and organisations:

As well as self-employed individuals, an organisation might appoint a firm- a partnership, cooperative or company-or a voluntary or not-for-profit organisation to undertake work on its behalf. The deduction of tax and NI is not generally an issue, because the organisation rather than an individual is being hired. However the deduction of tax and NI may be an issue with some building contracts, and for an individual who sets up a personal service company and undertakes work through the company.

The test of personal service:

An employee must be personally involved in providing a service to the employer, but a self-employed person does not necessarily have to undertake the work personally. So a very strong indication of self-employment is that that person can appoint or sub-contract someone else to do it. But this test is not conclusive the other way, because in many cases genuinely self-employed individuals are required to undertake the work themselves and do not have the right to sub-contract it.

The control test:

Employment implies that the employer has the right to command the employee, while self-employed people generally have more choice about what they do, how they do it and when they do it. However, in some cases employees exercise considerable control over their own work, while others may agree to follow detailed instructions and still be considered self-employed. So the control test is not conclusive.

Integration test:

Some times called the organisation test, the integration test looks at whether the persons work is integrated into the core of what the organisation does or is it an add-on or accessory . If the work is not integral, the person may be self-employed. But this test creates all sorts of difficulties in defining what is and is not integral.

Mutuality of obligation:

In employment, the employer is obliged to provide work if it is available and if the employee has to do it. If the organisation has no obligation to provide work, and the person is free to take it or leave it when it is offered, self-employment is indicated.

In a leading case, waiters at a hotel were treated as self-employed but were given preference over other casual staff. It looked very much like a contract of employment, but the Court of Appeal agreed that they were not employed because the workers had a right to decide whether to accept the work and were free to obtain work elsewhere, and the employer was not obliged to provide work although it regularly did so.

Documentation:

Any written agreement for the work will be closely examined, to see whether it contains terms typical of employment such as references to salary (rather than fee), arrangements for pay during holidays or sickness (which self-employed workers do not generally receive), or dismissal (rather than termination of the contract).

Registration:

If an individual providing a service is registered for VAT, this generally indicates that he or she is not an employee. But the rules used by the VAT authorities are different from those used by the Inland Revenue or the employment tribunal, so VAT registration is not, in itself, conclusive proof of self-employment.

If a person sets up a limited company or partnership, that body enters into a contract and the person does the work on behalf of the body, the person is not self-employed in relation to that work. He or she will be doing the work as a director or employee of the company, or as a partner in the partnership.

The independent business test:

The independent business test looks whether the individual is genuinely in business on his or her own account, or whether he or she is in fact part of the organisation to which the service is being provided. At present this is often used as the fundamental test.

Individuals are likely to be considered independent if they:

• provide their own equipment and other resources;
• are, in effect, selling their services and expertise;
• invest their own capital in the business;
• run financial risks and stand to gain or lose financially from the business.

A person who works for many different bodies and whose income is irregular is more likely to be considered independent than one who works most of the time for one body and is paid an a regular basis.

Intentions of the parties:

If the results of the other tests are inconclusive, the intentions of the parties may be an important factor in clarifying whether the relationship between them is one of employment or of self-employment.

Inland Revenue criteria:

The criteria used by the Inland Revenue and Contributions Office for the purposes of determining tax and national insurance liability are similar to the above tests and are set out in booklet IR56 Employed or self-Employed. This looks at whether the individual:

• takes risks with his or her own money in carrying out the work;
• is able to engage others to do the work
• can decide when, where and how the work is done;
• has to put right unsatisfactory work in his or her own time at his or her own expense; and
• provides his or her own equipment.

Registration as self-employed:

The distinction between self-employed and employee is significant not only for the organisation, but also for the individual. From 31 January 2001 individuals must register with the Inland Revenue within three months from the end of the month in which they start self-employment. A person who fails to register may incur a 100 penalty.

If you require further assistance please do not hesitate to contact the Legal Team Tel:  0844 5569519  Email: legal@rya.org.uk.