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.

What is false self-employment?

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

Misclassification as an independent contractor: Who regulates this?

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!

Effects pertaining to employment law

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.

What happens to my taxes when I am misclassified as an independent contractor?

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.

Who could be affected by misclassification as an independent contractor?

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 points to misclassification as an independent contractor?

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

Examples of misclassification as an independent contractor

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.

What are the consequences of being misclassified as an independent contractor?

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

Income Tax and National Insurance

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.

Employment law consequences

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

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