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Are your freelancers employees in disguise?

22/09/2012 | ACUMEN BUSINESS LAW

Further to the "Weight Watchers Case", the use of freelancers to service business needs that are traditionally fulfilled by employed staff is coming under increasing pressure from both HMRC and Employment Tribunals. The central question is 'do the circumstances under which the freelancers are engaged, make them employees or self-employed?' 

The Weight Watchers case 

That was the multi-million pound question asked of Weight Watchers by tribunal judges in their recent unsuccessful appeal against an HMRC finding. 

Weight Watchers ("WW") group leaders were given a self-employed status by WW therefore neither employment rights nor PAYE/National Insurance obligations were considered to be relevant to those people within the organisation. HM Revenue & Customs held in the alternative on the basis of the nature of their contractual obligations and the day to day arrangements between the parties. 

WW and a number of their group leaders appealed but were subsequently held to be employees, rather than self-employed service providers. As a result, the company will now be expected to settle a rather large National Insurance employer's contributions bill, subject to any further appeal. 

What should business leaders consider? 

Tribunals and the Courts may take a wide view on the actual characteristics of an individual case and their findings may be in the face of any agreement or contract between the parties if such an agreement does not accurately reflect the actual day to day arrangements. 

Control of operations is a major contributory factor in considering the status of service providers however in the WW case, while the contracts between WW and the group leaders purported to give the latter sufficient control to conclude that they were self-employed contractors, the reality of engagement was quite different. 

The Court placed reliance upon the ever quotable Lord Denning MR in Massey v Crown Life Insurance Ltd [1978] 1 WLR 676 at 679, namely that: 

"if the true relationship of the parties is that of master and servant under a contract of service, the parties cannot alter the truth of that relationship by putting a different label on it." 

Control should not be considered in isolation, other factors clearly have a bearing on the relationship between the parties; however it has previous been considered impossible to draw up a complete list of criteria to be considered when deciding whether a contract is one for employment or services. Other questions the Tribunal considered, from Harvey on Industrial Relations and Employment Law at division A. At paragraphs [81] and [82], were: 

  • What was the amount of the remuneration and how was it paid? - A regular wage or salary tends towards a contract of service; profit sharing or the submission of invoices for set amounts of work done, towards independence; 
  • How far, if at all, did the worker invest in his own future: who provided the capital and who risked the loss? 
  • Who provided the tools and equipment? 
  • Was the worker tied to one employer, or was he free to work for others (especially rival enterprises)? Conversely, how strong or otherwise is the obligation on the worker to work for that particular employer, if and when called on to do so? 
  • Was there a 'traditional structure' of employment in the trade? 
  • How did the parties themselves see the relationship? 
  • What were the arrangements for the payment of income tax and national insurance? 
  • How was the arrangement terminable? - A power of dismissal smacks of employment. 

Businesses should be sure of their position in relation to any self-employed consultants, freelancers or regular suppliers of services fulfilling roles akin to their employees. National Insurance is only one of many potential pitfalls they face; other issues may include freelancers, who are often paid a premium for their services due to the shift in risk burden onto them, gaining unexpected employment rights. 

For further information on the issues raised in this legal tip and for all Commercial law requirements we would be happy to meet with you. Our free Legal MOT offers you the opportunity to meet with one of our specialists for no charge.

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