Are workers employees?

January 25th, 2020

It is important to know whether a worker is employed or self-employed as there are many differences in the way in which they will be taxed. Broadly, employees are taxed under the PAYE system with income tax and Class 1 national insurance contributions (NICs) being deducted from payments made to them. Class 1 NICs are also payable by employers. In contrast, the self-employed pay income tax and Class 4 NICs direct to HMRC, and are also currently liable to Class 2 NICs.

Some important differences are that:

Employment indicators

The term ‘employment’ is broad in scope but is not exhaustively defined. The legislation lists three types of arrangement which indicate the central meaning of the term:

For tax purposes, though, the concept of ‘employment’ is normally extended to encompass also the holding of an office. The distinction between ‘office’ and ‘employment’ is only of limited interest for tax purposes. Employees are said to operate under a ‘contract of service’.

Firstly, the terms and conditions of the engagement need to be established – normally established from the contract between the worker and client/employer, whether written, oral or implied or a mixture of all three. Then any surrounding facts that may be relevant need to be considered – for example, whether the worker has other clients and a business organisation.

Factors indicating employment include:

Workers’ rights

If a worker is classed as an employee, there will automatically be entitled to certain employment rights, including the National Minimum Wage, statutory minimum levels of rest breaks and paid holiday, and protection against unlawful discrimination

Employment status is not determined by any one single factor. In more complicated circumstances it will be necessary to build up a picture, taking into factors such as substitution, mutuality of obligation, control, pay structure and benefits, and the wording of any contracts in place.

Check employment status for tax: