Mis­clas­si­fied as an in­de­pend­ent con­tract­or: When can you be con­sidered to be self-employed?

Many employees would love to be their own bosses. After all, it is a tempting prospect to manage one’s own working hours and no longer be dependent on the boss’s in­struc­tions. The feeling of working directly for yourself also makes it at­tract­ive to switch to self-em­ploy­ment. Some, on the other hand, do not opt for self-em­ploy­ment entirely vol­un­tar­ily, but see it as the only way to get work.

In any case, both groups run the risk of being classed as falsely self-employed. Employers save on national insurance and are not bound by em­ploy­ment laws if they employ freel­an­cers. If they make use of these ad­vant­age­ous aspects of a working re­la­tion­ship, but otherwise have the essential char­ac­ter­ist­ics of dependent em­ploy­ment, the le­gis­lat­or clas­si­fies these employees as falsely self-employed. But what is false self-em­ploy­ment? How can it be re­cog­nised? We answer these questions in the following sections.

False self-em­ploy­ment is not a legal term, but rather comes from col­lo­qui­al language. In short, it is when a con­tract­or is treated as self-employed but works under con­di­tions similar to those of a permanent employee. This is also known as mis­clas­si­fic­a­tion of an employee as an in­de­pend­ent con­tract­or. This can happen ac­ci­dent­ally, but it can also be due to ignorance or unfair intent on the part of the employer.

If it turns out that a free con­trac­tu­al re­la­tion­ship between the client and the con­tract­or is actually in a dependent em­ploy­ment re­la­tion­ship (i.e. essential criteria of false self-em­ploy­ment), then this has legal con­sequences for both sides – namely …

• For national insurance
• For em­ploy­ment law
• For taxation

What con­sti­tutes dependent em­ploy­ment under em­ploy­ment and social law, i.e. whether there has been a mis­clas­si­fic­a­tion of a worker, is generally dealt with through various acts, laws and reg­u­la­tions and is the purview of  HMRC, who determine whether an em­ploy­ment re­la­tion­ship is con­trac­tu­al or based on “economic reality”. The key question in the Economic Realities Test is whether the worker is eco­nom­ic­ally dependent on the company or is in business for them­selves. If the worker is eco­nom­ic­ally dependent upon the company, the worker is likely an employee. If the worker has their own business and is eco­nom­ic­ally in­de­pend­ent of the company, the in­di­vidu­al is likely an in­de­pend­ent con­tract­or. Ul­ti­mately, the factors listed above are just tools for helping to make that de­term­in­a­tion. If most of these are true the in­di­vidu­al is an employee: Instead, it’s the situation or total activity that dictates the clas­si­fic­a­tion. Sig­ni­fic­ant factors include:

1. they’re required to work regularly unless they’re on leave, for example holiday, sick leave or maternity leave
2. they’re required to do a minimum number of hours and expect to be paid for time worked
3. a manager or su­per­visor is re­spons­ible for their workload, saying when a piece of work should be finished and how it should be done
4. they can’t send someone else to do their work
5. the business deducts tax and National Insurance con­tri­bu­tions from their wages
6. they get paid holiday
7. they’re entitled to con­trac­tu­al or Statutory Sick Pay, and maternity or paternity pay
8. they can join the business’s pension scheme
9. the business’s dis­cip­lin­ary and grievance pro­ced­ures apply to them
10. they work at the business’s premises or at an address specified by the business
11. their contract sets out re­dund­ancy pro­ced­ures
12. the business provides the materials, tools and equipment for their work
13. they only work for the business or if they do have another job, it’s com­pletely different from their work for the business
14. their contract, statement of terms and con­di­tions or offer letter (which can be described as an ‘em­ploy­ment contract’) uses terms like ‘employer’ and ‘employee’ If the above mentioned framework con­di­tions apply to an in­di­vidu­al, they are not con­sidered to be self-employed or a con­tract­or, but bound by an em­ploy­ment contract and sub­sequently, an employee. However, the tolerated degree of this in­de­pend­ence depends on the activity concerned – and only an overall view of all cir­cum­stances should clarify whether an em­ploy­ment contract exists. It is par­tic­u­larly important in this context that the nature and per­form­ance of the work and the de­pend­ence on the client are essential criteria by which the em­ploy­ment re­la­tion­ship is assessed. The existence of a contract for­mu­lated in writing is therefore less important than the actual working con­di­tions for es­tab­lish­ing the mis­clas­si­fic­a­tion of an employee!

The re­la­tion­ship between an employer and its employees is governed by em­ploy­ment law. These laws set out the employee’s de­pend­ence on the employer in clear rules. In com­par­is­on, in­de­pend­ent con­tract­ors and freel­an­cers can organise their working re­la­tion­ships much more freely. However, if the in­de­pend­ent con­tract­or is largely dependent on the client to the same extent as a regular employee, then a mis­clas­si­fic­a­tion as an in­de­pend­ent con­tract­or has occurred. According to em­ploy­ment law, if they fulfil the criteria listed in the previous section, then an em­ploy­ment contract actually exists, along with all legal con­sequences. This could mean concrete holiday re­quire­ments, dismissal pro­tec­tions, wage con­tinu­ation guar­an­tees in case of illness, and many other ad­vant­ages for the con­tract­or.

Whether you are being mis­clas­si­fied as an in­de­pend­ent con­tract­or un­der­em­ploy­ment law and are entitled to an em­ploy­ment contract may be clarified by bringing a suit to an em­ploy­ment tribunal.

In the UK, employees are subject to income taxes and National Insurance payments through the PAYE scheme, which employers are required to pay on behalf of their employees, and which must be paid by in­de­pend­ent con­tract­ors them­selves in annual filings. If you are being led to believe that you are a full employee when you are being mis­clas­si­fied as an in­de­pend­ent con­tract­or, your employer is not with­hold­ing these taxes from your wages and paying them on your behalf, which means you are not con­trib­ut­ing to these taxes and may be accused of tax avoidance un­wit­tingly.

The­or­et­ic­ally, any self-em­ploy­ment field could have in­di­vidu­als finding them­selves mis­clas­si­fied as self-employed. However, in certain oc­cu­pa­tion­al groups this ex­ploit­a­tion occurs more fre­quently. These include:

• Lecturers, pro­fess­ors, and teachers
• Drivers for for­ward­ing agencies and courier services
• Honorary doctors and nursing staff
• Computer pro­gram­mers
• Graphic designers, copy­writers, and other creative pro­fes­sions

What criteria should you pay par­tic­u­lar attention to if you are unsure whether you are a full employee or an in­de­pend­ent con­tract­or? In principle, there are some typical char­ac­ter­ist­ics, even if much depends on the in­di­vidu­al case. You can use the following checklist to see whether you are self-employed and how likely it is that an em­ploy­ment re­la­tion­ship will be clas­si­fied as such. The following char­ac­ter­ist­ics highlight that you may be falsely self-employed:

• Activity is carried out on a permanent basis and es­sen­tially for just one customer: more than five sixths of the turnover is from a single customer
• Work is carried out according to in­struc­tions and in­teg­rated into the client’s or­gan­isa­tion
• Pre­scribed place of work with work equipment provided
• No personal en­tre­pren­eur­i­al action – you do not have the ap­pear­ance of your own company with letter paper or business cards
• None of your own employees
• Permanent employees are also employed by the client for the same task
• In­de­pend­ent con­tract­ors with the same tasks have been made permanent employees by the client

The following two examples il­lus­trate to what extent the mis­clas­si­fic­a­tion as self-employed can differ:

• A self-employed graphic designer receives a new customer. The customer pays better than previous clients do, which is why the designer now handles repeated orders for them. As the client has many orders to place now, the designer works ex­clus­ively for them after a few months. In order to fa­cil­it­ate co­ordin­a­tion with other de­part­ments, the client offers to provide a work­sta­tion in their office, including a computer and software. The graphic designer agrees to be available in the office during regular working hours and follow general in­struc­tions.
• A cleaner wishes to return to their post after taking parental leave, but with more flexible working hours. They are offered a job on a freelance basis, which they accept. The company provides them with all the necessary cleaning materials and in­creas­ingly in­teg­rates them into the company’s work planning. In order to simplify the process, the employer de­term­ines in detail when the cleaning work is to be carried out.

Being mis­clas­si­fied as an in­de­pend­ent con­tract­or has rami­fic­a­tions for your em­ploy­ment status, as well as your tax payments and National Insurance con­tri­bu­tions.

Employers are re­spons­ible for paying National Insurance con­tri­bu­tions and income taxes on behalf of their employees. If an employer mis­clas­si­fies an employee, they are violating wage, tax, and em­ploy­ment eli­gib­il­ity laws. Doing so can incur fines and/or legal action from HMRC. Employers are also required to file payroll taxes and may be fined for failing to do so if they are mis­clas­si­fy­ing employees.

Ad­di­tion­ally, employers must have p45 forms on record for each in­di­vidu­al employee to provide their em­ploy­ment eli­gib­il­ity. If you have mis­clas­si­fied an employee as an in­de­pend­ent con­tract­or, you may be fined for not retaining their p45forms on record.

Failure to pay for any fines or employee taxes, as well as being found to be de­lib­er­ately mis­clas­si­fy­ing employees, may result in criminal or civil pro­ceed­ings.

Aside from financial losses for mis­clas­si­fy­ing employees, employers also open them­selves up to the pos­sib­il­ity of class-action lawsuits being brought against them by their employees. These can be lengthy and extremely expensive, as well as con­trib­ute to repu­ta­tion damage and the loss of potential talent.

Please note the legal dis­claim­er relating to this article