Key issue
Assessing your workforce for auto-enrolment is a key part of the process but it might not be as straightforward as merely checking your PAYE records for age and earnings. The legislation applies to 'workers', which may cover some individuals whom you believe to be self-employed.
WHO IS A WORKER?
The legal definition of worker is wider than 'employees' and includes those who "contract to work or perform services personally". This definition is not particularly helpful when differentiating between those who are genuinely self-employed and those who might be paid as if they were self-employed - but are actually within the definition of 'workers'.
However, over the years, tax and employment cases have built up a useful list of indicators. There is no one factor that will be conclusive and the individual may need to be tested against all of them. It is important to consider these indicators, as the relationship will be determined on the basis of the facts, not just the contractual paperwork that has been put in place.
A person would be genuinely self-employed if:
- Personal service The individual is not required to carry out the services personally and has a right to appoint a substitute (the contract is for "services" and not the "service" of one person).
- Mutuality of obligation The company is not obliged to offer work on a regular or frequent basis and the individual has no obligation to accept any work that is offered.
- Control The individual has the ability to determine when and how they work and is not under the direction or supervision of the company. The individual is the expert provider of the services, for which the company is the customer.
- Exclusivity The individual is free to provide their services to whomever they choose. A self-employed person could be expected to have any number of customers for their services. An exclusive and long-term relationship would be contrary to this.
- Nature and length of the engagement The individual is engaged for a finite period, for a particular purpose, and/or to carry out a specific task or project.
- Pay and benefits The individual is paid on the basis of delivery e.g. completion of a specific task or project. They are not entitled to any benefit schemes and will not participate in bonus or commission schemes.
- Integration The individual is not integrated within the company.
- Facilities and equipment The individual provides their own equipment in order to perform the services.
- Financial risk and opportunity to profit The individual will be personally responsible for any losses arising from their work. They may be required to correct any unsatisfactory work in their own time and at their own expense. They may also stand to profit from an efficient delivery of the services required under the contract.
- Taxation The individual is responsible for payment of their own income tax and is responsible for registering for VAT if appropriate.
When determining someone's status as a worker, you must determine whether or not the individual can truly be said to be carrying on a business of which you are a customer? The answer to this question should become clearer after considering the above factors.
Example
Russell Ltd is a company employing about 1000 people. A few years ago there was a headcount freeze and it now uses a number of contractors and selfemployed people. The following are believed to be selfemployed and have been regularly working with Russell Ltd since 2008:
John
John is an IT contractor. He is paid monthly and invoices the company on the basis of the number of hours he works each month. He receives an additional rate for work done after the company's working hours of 9am-5pm. He was recruited to manage delivery of a specific project and although the project is still ongoing, he is also involved in other aspects of IT support. He sits at a desk with the rest of the IT tea. He uses the email john.charles@russell.com and his email address is included on all the internal IT group mailing lists. He has business cards from Russell Ltd. He reports to the Head of IT. He uses the company gym and has attended the office Christmas party every year for the last 4 years.
Jane
Jane is a HR and Development Trainer. She delivers on-site training for at least 12 weeks a year, but last year she worked for 30 weeks to deliver special training following a new project implemented by Russell Ltd.. Her business trades under the name 'Re:Development' and she also works with other companies (although Russell Ltd is by far her biggest client). Jane has her own website and email address. Jane provides her own training materials, but she has agreed with Russell Ltd to 'brand' her training documents with the Russell Ltd logo.
Bill
Bill is an electronics technician who specialises in broken photocopiers and printers. Bill's business trades under the name 'printers2fix' and he has his own website and office. Bill's nephew is an engineering student and often helps his uncle out during holidays. Bill is called into the Russell Limited offices on average once a week to fix their equipment. Once a month he carries out a full service on the machines. Bill brings all his own tools and equipment.
Looking at each example in turn:
John
John is a worker and not self-employed. Although he is associated with a specific project, his duties have widened and he now does general work for the department. He works the same hours as everyone else and invoices on an hourly basis. He is very integrated into the company's structure.
Jane
Jane is probably, on balance, self-employed. She has a clear business identity and has other clients. She provides her own materials (we assume that despite the re-branding of the documents she uses with Russell Ltd she still has intellectual property rights over these materials). Jane's case is more borderline, so if this were a real example you may want to make a few more enquiries about how she is paid, whether she takes the 'financial risk' in respect of her services to Russell Ltd and whether she has the 'opportunity to profit'.
Bill
Bill is clearly self-employed. He works on his own account and his contracts are for 'services' and not 'his service'. He has many different customers. He could turn down a call from Russell Ltd if he is too busy or send his nephew instead. He provides all his own equipment.
!!WARNING!!
The line between a 'worker' and the genuinely self-employed is blurred and as an employer you may have to make difficult judgement calls. However the one thing that you shouldn't do is ignore the issue as the Pensions Regulator can impose penalties on those employers who are in 'wilful default' of their key duties under auto-enrolment.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
