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When you're running a business, the lines between who is self-employed and who is actually employed can become blurred.
It’s important to know the status of the people working for you, so you understand the rights they have and your responsibilities towards them.
In law, there are various types of employment status. The key ones are:
The status, rights and responsibilities of an employed person are easier to understand, but the boundaries with self-employed contractors can be fuzzy and with workers fuzzier still! Here is what these three types of employment status look like:
Unfortunately, it isn't all straight-forward in employment law. There is no one particular test or rule that will identify whether someone is an employee, worker or self-employed. An employment tribunal would look at the contract that’s in place and critically look at how the contract works in practice.
For example, if the contract suggested that the individual was self-employed, but they were clearly treated like an employee, then the tribunal would look at the practicalities of the situation and probably rule that the individual was an employee.
It is possible, however, that the status of someone can be different for HMRC purposes and employment rights purposes, so don’t assume you are safe from the employment tribunal just because HMRC has categorised them in one way! They will be looking for different things.
The biggest risk is the enormous cost of getting it wrong. If you view staff as self-employed (when, really, they are being treated like employees or workers) then you could be liable for paying the cost of wages, holiday and benefits if the individual decided to challenge it in a tribunal and were subsequently confirmed as a worker or employee. You may also suddenly find yourself having to defend any claims employees can bring, for example, unfair dismissal.
Had you been aware of this when identifying your original business model, it might be that you would have taken a very different approach to pricing and business planning. Paying out compensation that goes back up to six years - and having to suddenly start paying for workers’ rights going forward - can be very costly if you have not accounted for that. It could even bring a business down if not sufficiently capitalised.
Make sure you are clear who is working for you, from the beginning!
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