The False Economy of Part-Time Employees and Contractors

If you own or manage a business, getting the right people and building the right team is vital to your success, especially when the Coronavirus pandemic has had a huge impact on ways of working. Thousands of workers have transitioned from onsite employees to full-time remote workers and it’s clear that this shift in expectations about working patterns is here to stay.

In this era of hybrid working as the norm, hiring the best talent is not now simply a question of remote versus in-office workers, but also part-time versus full-time employees or independent contractors. Choosing between employees (full or part-time) and contractors, or a mixture of all three has pros and cons and in some cases the seemingly obvious choice could well prove to be a false economy.

Hiring Part-Time Employees

Part-time employees do offer cost savings over full-time employees for an employer in terms of proportionately lower rates of benefits, sick leave and pension contributions that have to be paid. Part-time employees allow you to staff exactly according to your company’s needs and market conditions and they can also fill in for full-time employees taking sick or maternity leave or work in after-hours technical support or night and weekend hours.

You can bring on staff with the expertise you need, when you need it and part company when that need is no longer there. You can recruit part-timers from a much broader, usually more reliable and mature, talent pool such as women re-entering the workforce, or those who are newly retired but not quite ready to stop work altogether.

However, you will still have to go through the same lengthy recruitment process for part-time positions as you would for full-time roles and there’s always the risk that part-time workers won’t be as committed or loyal to your company as their full-time co-workers. Part-time employees will have less time to invest in learning the ethos of your company and because they aren’t around as much as full-time employees, it could be difficult to integrate them into a coherent and effective team. Because they work less hours, part-timers are less likely to be intimately familiar with the task at hand and the quality of their work, as well as their productivity, can suffer.

If you are thinking of adding part-time employees to your workforce, you can manage the downsides by giving part-timers work that’s engaging and clearly communicating your expectations for full-time and part-time employees working as a team, scheduling meetings or social events at times convenient for both. You could develop strategies for handing off incomplete tasks to other employees and invest in additional training to shore up part-timers’ company knowledge.

But if all that sounds like too great an investment of your time, effort and resources on what could well be a limited duration project or need, it could make sense to hire a contractor instead.

Hiring Independent Contractors

Contractors aren’t your employees. They are one-person businesses who work for organisations usually for a defined period of time. If your business needs someone with specific skills which your firm lacks for a short-term project, hiring a contractor (often also referred to as freelancers) could be a cost saving solution. There’s no need to provide company benefits, holiday pay, sick pay or pension or superannuation payments to contractors and the employer’s legal liability is also reduced.

For many employers, the cost of a contractor is secondary to the quick access to what could be business critical skills which your current workforce lacks or would prove more costly to train up in house. Unlike employees of whatever status, when you hire an independent contractor, you can end the contract without any apparent reason with just a few weeks’ notice.

Some business owners see full-time employees as consistently more costly than independent contractors. It is true that having employees on your books means that you will need to do all the HR work or hire an HR specialist. Contractors will not require that kind of support, but they will charge more per hour as they have to self-fund their own benefits, tax, legal liability and overheads.

Contractors might therefore actually cost more and inevitably will have less loyalty to the firm than employees. They are not solely dedicated to you and might book other future work just when you need them most. It’s true that contractors can help your business through periods of growth or difficulty, but investing in employees, having people on board you can trust to develop the business with you because your interests coincide, is often a better long-term strategy than spending a lot of money on contractors.

Legal Issues Around Employment Status

Anyone hiring contractors, freelancers or consultants rather than employees needs to understand the legal view on their respective employment status as incorrectly classifying a worker can lead to penalties or fines. Employees and independent contractors are treated differently for tax purposes. In fact, even if a worker is not an ‘employee’ for employment law purposes, they may still be an ‘employee’ for tax purposes. So how can you decide if someone is an employee? UK law considers there to be three essential requirements for a contract of employment to exist:

  • Control – if the employer has ultimate control because, for example, they can discipline the worker, then it is likely that the person is considered an employee.
  • Mutuality of obligation – if the worker is obliged to do any work they are given and the party giving them the work is obliged to pay for it they are considered an employee.
  • Personal obligation – if there is a requirement to do the work personally then the worker may be considered to be an employee.

For there to be a contract of employment all of the above requirements need to apply.

Definition of an Independent Contractor

A worker would be considered an independent contractor in law if, for example, they had the final say in how their business is run, provided their own equipment and were free to work for others while working for you. HMRC has developed guidance on when it considers an employment relationship exists. It has also developed an online tool called the ‘check employment status for tax’ tool.

For employers and company owners, determining whether a contractor they take on board is an employee or is providing services through a Personal Service Company (PSC) became even more important on 6 April 2021, when new IR35 tax rules were introduced.

The term Personal Service Company was coined by HMRC alongside the introduction of IR35 legislation and is usually taken to mean a limited company that has a sole director who owns most, if not all, of the shares. Changes to IR35 now make the end-client liable for determining the tax status of contractors who work through a Personal Service Company and the rules require that employment taxes and National Insurance contributions are paid by the end-client business with which the contractor engaged directly.

Contractors Aren’t Suitable for Every Role

Making the right choice between full time employees, part time employees and contractors will depend upon your business circumstances and plans for the future. Understanding the different business needs and the suitability of an independent contractor versus a full-time employee can be complex. It is often tempting to turn to a contractor because the thought of going through the advertising, interviewing and on-boarding process is daunting. But there are situations where hiring a contractor could be the wrong decision, especially if you are trying to build a team for the future.

The most important thing to remember is that a contractor is not an employee. Contractors are independent businesses working for you, sometimes on your premises. If you treat them as employees you run the risk of losing money through having to pay unnecessary IR35 taxes. Getting sound business and legal advice before you consider who you should hire and in what capacity will not only take some of the burden of finding the right people with the right skills off your shoulders but will also safeguard your business from potential penalties and ensure you are getting the best possible value for money out of every hire.

Hybrid and Remote Working in a Post-Covid World

Most commentators seem to agree that remote working in some form or other introduced as a result of the pandemic is here to stay. A wide range of research confirms that most workers want to continue to work from home, some all the time but most it seems would prefer a balance where they are in the office for some of the week and at home for the rest. This is so called “hybrid working” or “blended working”.

The hybrid working model does have benefits for both employer and employee but can also bring frustrations and disadvantages. Hybrid working demands that employers trust their employees and that goes hand in hand with a change in managerial attitude and a redefinition of the measurement of performance. Indeed, contrary to many employers’ initial fears, remote or home working has in many cases resulted in increased productivity. Employees are judged on results and trusted to achieve their objectives.

However, it’s equally true that hybrid working arrangements may not be for everyone. Some people thrive in an office. Some need structure or a more social environment. Some industries just aren’t suited to hybrid working. There’s also a risk that hybrid teams will lose the cohesion and camaraderie that comes with face-to-face working.

Despite these potential downsides, surveys consistently show up to 77% of those asked were in favour of making some form of remote working a greater part of normal business life. However, hybrid working means different things for different organisations and careful thought and planning needs to be in place for these new ways of working to be accepted by the employees and to be effective.

Hybrid Working Arrangements Are Here to Stay

It’s now generally accepted that some form of flexible working that permits employees to split their working week between the office and another venue, usually their home, will have advantages for both the employee and the employer. For the employee, better work–life balance, greater ability to focus with fewer distractions, more time for family and friends, saved commuting time and costs are some of the more obvious advantages of a hybrid work regime.

Equally hybrid working means organisations and firms can reduce estate and facilities costs (although investment in IT may need to be increased) whilst retaining or even increasing productivity and retaining talent (if you don’t offer the hybrid working arrangements your employees seek, your competitors will).

The Importance of Having a Policy

A clear policy setting out when attendance in the office is required avoids the presumption that the homeworking arrangements adopted during the pandemic will be continued indefinitely. If you do simply allow permanent homeworking to continue this could give rise to an implied contractual right to permanent homeworking through custom and practice.

Key Elements of the Policy

Some of the key issues to include in a hybrid working policy include the question of eligibility – is the policy going to be applicable to all staff or is it is only suited to certain roles. If it will apply only to some roles, it should clearly set out the reasons why some are not eligible. The policy should also specify what the business’ expectations are in terms of the split between office and other locations.
For example, are employees expected to split their time 50/50 or attend on a set number of days between the office and other location? The policy should also consider if there are any specific circumstances, such as team or client meetings, where employees will be expected to attend the office and whether these will be on set days.

Clarifying what counts as a remote location is also important. Is it just the employee’s home or are other venues permitted? Will your employee need to inform a manager if they are working from a location which is not their home and how should they ensure that location is secure to work from bearing in mind data protection obligations? No matter what the location, the business’ data protection and computer security policy for remote working should be an integral part of the policy.

Working Abroad

There are significant legal and logistical issues with allowing employees to work from abroad for weeks at a time (e.g. immigration, tax, intellectual property, and data protection) which need to be carefully considered. A blanket approach of declining requests for extended working from abroad is certainly the easiest solution, however, this approach could unfairly impact vulnerable individuals and even give rise to indirect discrimination claims. Any limits on where the employee can work should clearly be set out in the policy whilst retaining the flexibility to consider any request on its merits.

Don’t Forget the Office

Your policy should also include what the business expects when employees are working from the office. For example, do they need to work set hours, or can hours be flexible? Are there any ongoing safe-working measures such as a desk booking system that need to be followed? Clarify what happens about expenses for travel to the office and specify what technology or equipment will be provided and whether you will require access to carry out maintenance checks on that equipment.

Other HR Issues to Cover

Ideally, your policy should detail health safety procedures and policies for employees whilst working from home, including risk assessments. It should also set out how sickness absence should be reported. The hybrid working policy should clarify what other types of flexible working options are available to employees, who will still retain the right to make a formal flexible working request. And whilst many employers are choosing not to update place of work clauses in contracts of employment on the basis that the approach to hybrid working is a flexible, informal one, some may decide to set clear contractual expectations, which will require change and agreement. Reviewing any benefit packages that may be inappropriate in a hybrid working environment is also a good idea – for example, would gym membership close to the office still be worthwhile?

Implementing the Policy

Once you’ve drafted your policy it will have to be implemented. There is no set procedure for this, but you would be well advised to consider the following steps:
Consult: seek feedback from employees, employee representatives or trade unions and address any concerns they may have before implementing the policy.

Support: offer training and guidance to help managers, who will face many new challenges, develop the skills needed to manage teams that are working both remotely and in the office.

Communicate: any business that adopts hybrid working will have to change how it communicates with staff, perhaps making team meetings by Zoom or MS Teams the norm and only conducting face-to-face meetings when appropriate.

Hybrid working, established long term, could very well make even greater demands of managers and organisations than the urgent shift to total remote or home working required at the height of the Covid pandemic. Flexible work policies will also give rise to a growing need for co-working or shared workspaces and hot desking office models.

Long term hybrid working is an option that has a proven positive impact on employee productivity, reduced real estate costs and the environment, however, setting out expectations in advance through a carefully drafted policy will help to ensure that those benefits are realised.

Getting Down to Business After Covid

The lifting of Covid restrictions from 19 July removes more or less every domestic legal restriction in England in one fell swoop. All businesses will be able to open, without Covid-related capacity limits, and measures such as mask-wearing and social distancing will be left to people’s personal responsibility. Most Covid rules in Wales will be relaxed from 7 August if coronavirus rates allow. Welsh social distancing laws will be replaced with a requirement for risk assessments and legal limits on the number of people who can meet others will be scrapped. Face masks will still be required in most indoor public places in Wales (and on public transport in London) except in hospitality businesses, such as pubs.

Care will still need to be taken of course, but we can be positive about the fact that we are now able to do more activities than before and return to work. But now that ‘statute’ is replaced by ‘guidance’, transferring responsibility for COVID-related risk management from the government to individual organisations, what will this mean for employers in England and Wales?

Government Guidance

The government has published guidance on working safely during coronavirus and is no longer instructing people to work from home if they can, so employers can start to plan a return to workplaces. However, the government expects and recommends a ‘gradual return to offices’, with many of those who are able to work from home still doing so over the summer. Employees who are clinically vulnerable or have a compromised immune system will have no implicit legal right to demand home working, even if their workplace is not socially distanced and colleagues do not wear masks.

What Should Employers be Doing to Keep Their Employees Safe in The Office?

The so-called ‘Freedom Day’ on July 19 makes no difference to the duty imposed on employers under the Health and Safety at Work Act. You will still have a legal responsibility to protect your employees and anyone else coming into the premises from risks to health and safety. Employers should carry out a risk assessment, which may inevitably mean going above and beyond strict legal requirements – by how much will depend on each individual employer’s circumstances.

Protective measures such as hand sanitising gel stations and regular deep cleaning can easily stay in place. However, as part of a risk assessment, employers should also consider if social distancing should remain in the office. It is likely that retaining a requirement for mask wearing, particularly in communal areas, may be desirable, if only to reassure more vulnerable members of the workforce. If testing is already required, it’s sensible to retain this too.

Possible Discrimination Claims by Employees Returning to Work and How to Avoid Them

Whilst the Public Health (Control of Disease) Act 1984 and the Coronavirus Act 2020 grants considerable power to the government, the legislation stops short of forcing citizens to undergo medical treatments and vaccinations – at least in certain occupations. The House of Commons recently approved new regulations meaning that, from October this year, anyone working in a Care Quality Commission-registered care home in England must have two vaccine doses unless they have a medical exemption.

So, should you too require your staff to be double-jabbed as part of their job? It could be argued that it’s a reasonable step to take to reduce the risk of infection. Some may say it’s doing your staff a favour if they fancy going clubbing after September this year! Beware of going down this route though as requiring evidence of double vaccination could well give rise to discrimination claims on the grounds of age (younger staff members may not get their first jab until September at the earliest) or disability, where someone is advised not to have the vaccine because of underlying health conditions.

Instead, you should discuss the options with employees and any recognised trade unions or employee consultative bodies in advance. You should also consult with employees and representative bodies about the outcome of risk assessments and the proposed safety measures to reduce that risk to ensure ‘buy in’ from everyone.

Homeworking/Part Time Working Requests and How to Deal With Them

The employment contracts of most employees will likely state that their office or workplace is their contractual place of work. The most notable impact of the pandemic on that employment relationship has been the shift from the workplace to homeworking – what was once the exception has rapidly become the ‘new normal’. The initial stages of the pandemic meant that speed was essential when it came to mandating homeworking, but this has not created a contractual right to work from home given the instruction to do so came from the government, meaning employers and employees had no choice in the matter.

Employees with at least 26 weeks’ continuous service will still have a statutory right to make a flexible working request to permanently change the terms and conditions of their employment. These changes can relate to their hours, times they are required to work or the location from which the employee is required to work.

But now, given that the government will no longer be insisting that people ‘work from home’ from 19 July in England, employers face a decision as to where people are expected to work from. There has been a lot of talk about the adoption of hybrid working patterns and recent surveys suggest that people’s expectations around work, how they fulfil their role, and how they reconcile work and domestic responsibilities, have changed dramatically.

The key points for any employer here are clarity and communication. If you simply continue to allow homeworking after 19 July without comment, it is possible that, in due course, employees could argue that their contractual place of work has changed to their home. Forcing them back to the office at some future date would constitute a fundamental breach of contract, giving rise to a constructive unfair dismissal claim.

To avoid uncertainty and possible discrimination claims, it would be prudent to set out a government-style ‘roadmap’ describing the employer’s expectations of employees on returning to work and to communicate those expectations effectively to all staff, stating any general approach in some form of written communication, as well as regular virtual or face to face briefings.

However, it’s also worth bearing in mind that, if employers have learnt anything since the start of the pandemic, it is that their workforces are more flexible and resilient than they perhaps realised. With recent surveys suggesting that over half of workers would like to retain a mix of working at home and their workplace, and three quarters expecting employers to offer it, perhaps now is also the time to be thinking about policy on hybrid working?

Refusing to Return to Work

Some employees may refuse to come back to the office because they feel unsafe doing their required daily commute, especially if they use public transport, or they may have a clinically vulnerable person living with them. Can you insist they work from the office? After all, while employers have a statutory duty to provide a safe place of work, this legally binding obligation does not extend to the employee’s commute to and from work.

Instead, the employer should listen to the employee’s concerns and find out more about their circumstances: could they walk or cycle instead of using public transport or can an arrangement be made to avoid peak travel times and minimise social contact?

Flexibility and Communication is Key

Whatever the circumstances, flexibility and communication with your staff is key. It’s important to foster an inclusive working environment, ensuring that decisions don’t discriminate against certain groups of employees. Keeping people informed of what the business is doing will give them some degree of security and retain business productivity and make life easier for all concerned.

What is Corporate Law?

Corporate Law is the body of law pertaining to the practices, structure, rules, and regulations, conduct of persons within corporations. Working in corporate law is highly sought after due to its dynamic, fast paced, and exciting nature.

What do Corporate Lawyers do?

Working in corporate law, no two days are ever the same. The general undertakings of a corporate lawyer include advising businesses on their legal obligations, rights, and responsibilities.

Corporate lawyers must be well versed in contract laws, tax law, intellectual property protection etc. The lawyers represent the corporation entity, not the shareholders, employees, or board members.

In the world of business, corporations are constantly faced by challenges and need to make important decisions which, for anyone without extensive knowledge, can become stressful. With the help of a lawyer, time can be saved negotiating and come to a conclusion faster. Typically, a corporation will work alongside a mid to large sized well-known law firm as they have a bigger capacity to help and more in-depth knowledge.  Some corporations hire lawyers from law firms they’ve previously worked alongside, to form their own exclusive in-house legal team to assist them with their legal matters.

Many assume that corporate lawyers spend their time preparing to argue in court, but they do quite the opposite. Their constant aim remains the same and that is helping corporations to avoid litigation – the process of taking legal action.

What is a Corporation?

A corporation is a legal entity that exists to conduct business whilst being entirely separate from its owners. Corporations are controlled and maintained by numerous owners through shares they have within the company.

Corporations are created and regulated under the corporate law found within their authority. To become a corporation, they must undergo a legal process called incorporation. Incorporation involves writing up a document known as ‘the articles of incorporation’, bringing the corporation into existence and separating the business’ assets and income from the investors and owners – known as limited liability.

Corporations can enter contracts, borrow money from financial institutions, own assets and both sue and be sued, known as corporate personhood. Corporate personhood voids shareholders, of all accountabilities for debts, lawsuits, and legal claims.

Like a government body, during the annual meeting the shareholders vote and elect a board of directors to act as their representative. The board must respect their new duty of care, act within the best interests of the corporation and make executive decisions that impact the shareholders.

How Corporate Law Can Protect Your Business

We know that ‘corporate law’ may not sound all that thrilling, but it is vital to ensure that you are protected.

Corporate law firms commonly advise corporations on mitigations and acquisitions, contracts, corporate governance, venture capital, security and protection from insider trading, fraud etc.

Corporate Governance

At Motion Paradox, we offer corporate governance services, helping you to ensure that your business complies with the rules and regulations set out by Companies House and HMRC. Combined with other services that we offer, you can rest assured that you’re saving time spent on paperwork, and you are operating within the law, efficiently and safely. Find out more about what we can do for you and your business.

Is it Necessary to Use a Corporate Lawyer?

In essence, yes, but only if you can afford one. A corporate lawyer can help you draft documents and develop a business structure. They will be able to assist you in any stage of your development and aren’t limited to only helping large multi-million-pound corporations, in fact many startups and SMEs seek help from them. However, they can be quite expensive to hire, so we advise you take assess your finances and business goals first.

What is a Start-Up Business?

The true definition of start-up is disputed by many with some claiming it’s a state of mind, and others believe to qualify as a start-up, you must offer something unique and meet the needs of the people.

In layman’s terms, the Merriam-Webster dictionary defines a start-up as ‘the act or an instance of setting in operation or motion’. It is the process of turning your business idea into a reality.

Tips For Success

Whether or not your start-up comes to fruition is dependent upon two things.
The first is you. You must have a strong work ethic and resilience; you’re battling against thousands of other start-ups for funding and market-leading expert backing. Have belief and confidence that your business will succeed, and this will resonate with those you’re pitching to. Remember, they’re buying into you as a person as well as your business idea.

The second is the idea. When thinking of a new business idea, undertake extensive research, analyse to see if there are any gaps in the market where a consumer’s needs aren’t being met. Also look to see if there any prospective competitors already offering a solution. If you find a gap with no competition, it can make the process a lot smoother overall. But, if there is, it doesn’t mean that you must leave your business idea dead in the water, but rather find the USP – unique selling point – and lead with that. Tell others why yours is superior and how it’s different to what’s already available.

Forbes compiled a list of 25 top tips for a start-up success. Some of the most notable being:

  • Solve a real problem and meet real needs with your product
  • Choose your team wisely
  • Have a roadmap
  • Form relationships and network
  • Be patient and enjoy the process

Is There Any Difference Between a Start-Up Business and SMEs?

Without expertise, a start-up and SME – small and medium sized enterprises – can look very similar, both are built from the ground by an entrepreneur to fill a gap in the market. But they are in fact very different. The main discrepancy is that a small business is not a new idea and often works within a local region e.g., a florist or bakery. They work on a slow and sustainable growth pattern and rely more on predictability and building a trusted, loyal consumer base i.e., locals to the area. An SME is likely to continue for years and will be passed down through family generations as a legacy.

A start-up is much more explosive in its approach and aim to have huge impact in the market. They’re founded upon creating something new, exciting and promise to become the solution to your lifelong problem. In start-ups, the race is on to scale quickly to outpace potential competitors.

Who and what you surround yourself with when creating your startup is very important. The reason being your idea is unique, and should there be a team conflict, one party may attempt to steal the idea and market it before you do. It is therefore very important to ensure you take all the legal action required.

Don’t Forget

Always, always, protect your intellectual property. Intellectual property protection encompasses the subjects of trademark, copyright, patents, and trade secrets. Formulating a plan from the outset, before intellectual property is utilised, is critical.

As an entrepreneurial start-up ourselves we, Motion Paradox, understand first-hand the importance of a clear and structured operational and legal strategy. Our intellectual property protection will stop you from falling prey to your own success. We offer a range of bespoke solutions at any stage in your growth and development to negate the effects of a motion paradox – a certain critical juncture is reached where growth becomes static, scaling untenable and capital fundraising difficult, because, without structure and governance, an already successful company cannot easily and effectively continue to move forward and transform.

When is a Start-Up no Longer a Start-Up?

There is no expiry date on the title start-up, but it is not a title entrepreneurs want to retain for too long; remaining a start-up is a sign of an unsuccessful business. Once the start-up has found a proven successful business model, and has sourced the correct products, it is no longer considered a start-up, but rather a company.

Examples of Once Start-Ups, Now World Renowned, Successful Companies

  • Lyft – founded in 2012 as an alternative to Uber, it is worth £1.8 billion ($2.5 billion US dollars)
  • Snapchat – founded in 2011 as a picture messaging app, it is worth £11.5 billion ($16 billion US dollars)
  • Honest Beauty – founded in 2011 offering eco-friendly baby products, it is worth £1.2 billion ($1.7 billion US dollars)

IR35 – Will it Affect You?

Keep hearing the term “IR35”, but still puzzled as to what it is and, most importantly, how it affects your business? In a nutshell, IR35 is tax legislation designed to combat tax avoidance by workers, and the firms hiring them, by ensuring contractors pay broadly the same tax and NICs as employees if they are “inside IR35”. It’s essentially an employment status test for tax which determines whether a contractor’s engagement points towards employment or self-employment; and it is about to change.

Previously, in the private sector, the responsibility lay with the contractor to determine whether they fell within IR35 (or not), and for accounting their employment taxes and any NICs due to HMRC. From 6th April 2021, the organisation engaging the contractor (or the staffing agency who supplied the contractor to the organisation) will be responsible for determining this, and for deducting tax and NICs from any fee as required. If you hire contractors, this could mean you.

Will These Changes Affect Your Business?

If you engage any contractors to provide services personally via intermediaries (i.e. the worker’s own limited company, a staffing agency, or another person etc.) then these changes will affect you unless you fall into one of the following exemptions.

The changes will not apply to:

  • outsourced services where you are engaging business to business (e.g., cleaning, catering etc.);
  • small companies that satisfy two or more of the following: if you are a business that has an annual turnover that is less than £10.2 million, a balance sheet total of less than £5.1 million or less than 50 employees; or
  • companies based wholly overseas (i.e., with no UK connection).

If an organisation in question satisfies any of these exemptions, then the old rules apply. Small businesses that fall within the exceptions may still be caught, however, if their parent company is deemed a “medium” or “large” private sector company.

What Are Your Obligations?

You must first determine whether the rules apply by asking the following questions:

  • Does the contractor have an intermediary?
  • Is the contractor providing me with personal services?
  • Do the above exemptions apply to my business?

Depending on the answers to the above, you’ll then have to determine the contractor’s employment status (see Determining Employment Status) and notify the contractor of your decision by sending them a “Status Determination Statement”. If you are using an agency you should notify the agency of your decision.

If you’re not working with an agency and you determine that the contractor’s employment status is that of an employee, you will have to deduct PAYE from the fee. You will also have to account to HMRC for employer NICs and possibly the apprenticeship levy (all employers paying a wage bill of more than £3 million per year are required to pay 0.5% of their payroll each month as a levy tax). If you determine that the contractor is self-employed, they will remain responsible for accounting for and paying their taxes to HMRC.

Where an agency is involved, it will be up to them to make the relevant deductions. Make sure you inform the agency of your decision, otherwise the liability to account for the PAYE stays with you. You should also be careful to ensure that the agency is accounting to HMRC properly. If they are not, the liability can bounce back to you even if you have done everything correctly. 

Determining Employment Status

As mentioned above, the responsibility for determining the employment status of a contractor (and therefore their tax status) now lies with the hiring organisation. In short, it is your responsibility to work out whether the contractor would be classed as an employee of your business or self-employed for tax purposes. This test usually relates, among other elements, to supervision, direction and control. The legislation in this area can be complicated, so we would urge you in the first instance to seek professional legal and financial advice. HMRC also provides a tool to help find out if a worker should be classed as employed or self-employed: https://www.gov.uk/guidance/check-employment-status-for-tax.

If a contractor is found to be “inside IR35”, they could also be entitled to additional rights as an employee or worker (e.g. minimum wage, maternity pay, protection from discrimination, etc.). It is therefore incredibly important that your assessment is correct.

Get Your Business Ready

To prepare for these changes you should:

  • Determine whether the exceptions apply to your business;
  • Review the employment status of your current contractors;
  • Put in place an assessment process;
  • Ask the intermediary to confirm how they are treating payments to the contractor;
  • Communicate the status determination to contractors, and to any agencies who supplied the contractor to you, before the first payment date that falls on or after 6th April 2021;
  • Keep a record of your decision-making process and any communications with the agencies;
  • Implement a process to deal with disagreements over your determination of a contractor’s employment status;
  • Review your Contractor Agreements to ensure the contractual provisions are legally compliant; and
  • Verify that any agency has applied the new rules when making payments to the contractors.

Failure to comply with your responsibilities may result in a penalty from HRMC ranging between 0-100% of the initial outstanding liability. They may also require you pay any unpaid PAYE tax and NICs, including late payment fines and interest.

Need help or have any queries with respect to IR35? Don’t hesitate to contact the Motion Paradox team now