When taking on someone to work for your business, it is tempting to think that calling them self-employed is enough.
Unfortunately, it is not.
Employment status depends on the reality of the working relationship, not simply what is written in a contract. Getting it wrong can lead to unexpected tax bills, penalties and employment rights claims.
The three main types of employment status
Employee
Employees have the greatest level of employment protection.
They usually work under a contract of employment, must personally carry out the work and are entitled to a wide range of statutory rights, including holiday pay, Statutory Sick Pay where eligible, family leave and protection against unfair dismissal after the qualifying period.
Worker
Workers sit somewhere between employees and the self-employed.
They are entitled to important rights such as National Minimum Wage, paid annual leave and protection from unlawful discrimination, but they do not have all the employment rights that employees receive.
Self-employed
Self-employed people run their own business and work for clients rather than employers.
They generally decide how and when work is completed, may provide their own equipment, can often send someone else to do the work, and usually take on financial risk.
Being issued with an invoice or having a written agreement saying someone is self-employed does not automatically make it so.
Why does employment status matter?
Getting someone's status wrong can affect:
- PAYE and National Insurance.
- Pension auto enrolment.
- Holiday entitlement.
- Statutory Sick Pay.
- National Minimum Wage.
- Other employment rights.
Tax status and employment rights status are not always identical, so it is important to assess both.
Use HMRC's CEST tool
If you are unsure whether someone should be treated as employed or self-employed for tax purposes, HMRC provides the Check Employment Status for Tax (CEST) tool.
The tool asks a series of questions about the working relationship and provides HMRC's view of the tax status based on the information entered.
While no online tool replaces professional advice, it is a useful starting point and should be completed using accurate information.
Where can I find the official guidance?
Use these official resources:
- Employment status overview
- Worker status
- Employee status
- Self-employed and contractor status
- Check employment status for tax (CEST)
- Employment status guidance for employed or self-employed
Need advice?
Employment status is not always straightforward, particularly if you use contractors, casual staff or freelancers.
If you want help looking at the facts of a working arrangement before it turns into a payroll or rights problem, get in touch with us.