Can I give a freelancer an EOY bonus without risking employment status?

mark7144 · Mar 19, 2019

I have a very talented freelancer who has worked for my company for several years. I value his loyalty and want to reward him for that and provide incentive to keep me as a priority client.

How can I pay him an annual bonus without risking him being seen as an employee?

Currently, I drafted an email referring to the payment as essentially a consultancy fee for the year in recognition of his expertise, experience, advice and ongoing interest in my company. I also mention the amount was arrived at with consideration for the expected profitability for the current year.

Does this sound ok or is the wording going to land me in trouble at some later date?

TheWebDesignCompany · Mar 19, 2019

The least detail you go in to the less likelihood of getting caught out. Just explain verbally what and why, but in writing leave it as a consultancy fee.

Safer that way.

Newchodge · Mar 19, 2019

TheWebDesignCompany said:
The least detail you go in to the less likelihood of getting caught out. Just explain verbally what and why, but in writing leave it as a consultancy fee.

Safer that way.

And ask for an invoice!

mark7144 · Mar 19, 2019

How major an issue is it that I've never asked for an official invoice?

All work has been logged and dated on Trello including when payments for that work has gone through but we haven't done invoices.

MyAccountantOnline · Mar 19, 2019

The difficulty you have, which you know, is that a bonus is usually paid to an employee.

Why do you feel this person shouldn't be paid as an employee already?

mark7144 · Mar 19, 2019

Because he has other clients and as a small business with limited work for him each month, I prefer that arrangement over full employment and the added liabilities and considerations that comes with.

I just want to make a payment EOY as an incentive for him keeping us as a client and to recognise how often he goes above and beyond.

Newchodge · Mar 19, 2019

mark7144 said:
Because he has other clients and as a very small business, I prefer that arrangement over full employment and the added liabilities and considerations that comes with.

Whether someone is an employee or not is not a choice, it is a fact. Preferring to avoid legal liabilities is not a valid reason!

If he runs a small business and you are one of several clients, and he quotes for each piece of work you need doing, you are probabaly right that he is not an employee. Have you ever considered giving other suppliers to your business a bonus?

mark7144 · Mar 19, 2019

Newchodge said:
Have you ever considered giving other suppliers to your business a bonus?

He's the only individual self-employed supplier I work with and it comes with a personal relationship I value there and he is always willing to go above and beyond. So in regards to other suppliers, such as Amazon Web Services, I wouldn't consider offering them a bonus as it's a binary offering.

My online company is very small, it's essentially just me managing everything and I use this freelancer for some web dev work each month but I don't feel there's enough work to be considering employment.

MyAccountantOnline · Mar 19, 2019

mark7144 said:
Because he has other clients and as a small business with limited work for him each month, I prefer that arrangement over full employment and the added liabilities and considerations that comes with.

I just want to make a payment EOY as an incentive for him keeping us as a client and to recognise how often he goes above and beyond.

I do appreciate what you say, but sadly the fact that he has other clients isn't enough to make the arrangement between you one of genuine self employment, and as has already been mentioned you cant decide to make anyone self employed; you have to look at the arrangement between you and base employment status on that.

I really would seek some proper paid for advise on this; getting employment status wrong can be a very costly mistake, and I think you have cause for concern.

TheWebDesignCompany · Mar 19, 2019

Newchodge said:
And ask for an invoice!

Absolutely vital...

mark7144 · Mar 19, 2019

TheWebDesignCompany said:
Absolutely vital...

Why is an invoice from a freelancer absolutely vital? Would a log of work on a tracking platform, including a note about payment for each batch, be sufficient?

This guy has worked for me for 3 years and I've never requested an official invoice.

mark7144 · Mar 19, 2019

MyAccountantOnline said:
I really would seek some proper paid for advise on this; getting employment status wrong can be a very costly mistake, and I think you have cause for concern.

Thanks for your replies. I do absolutely plan to get professional advice soon on this but wanted to first get some initial understanding here.

Is the "cause for concern" mainly the risk of tribunal situation triggered by the freelancer or a random HMRC audit?

TheWebDesignCompany · Mar 19, 2019

You need a clear paper trail.

You have to keep receipts and invoices for a certain period of time anyway, and in a situation where you want to ensure that your payment is not used as evidence of employment, getting a clear invoice stating the payment is for consultancy will serve as a protection from that ever happening.

mark7144 · Mar 19, 2019

Ok thanks so I'll get an invoice for the end of year bonus marking it as consultancy fee. But for the freelance dev work, I have no invoices but I guess you could say I have a paper trail in that all work has been logged on Trello with payments being noted for each batch.

RCW20025 · Mar 19, 2019

mark7144 said:
Ok thanks so I'll get an invoice for the end of year bonus marking it as consultancy fee. But for the freelance dev work, I have no invoices but I guess you could say I have a paper trail in that all work has been logged on Trello with payments being noted for each batch.

No this is unlikely to be sufficient to appease HMRC from both a CT deduction and employment perspective. Your consultant should be invoicing you for his services weekly/monthly/quarterly

Mr D · Mar 19, 2019

mark7144 said:
Why is an invoice from a freelancer absolutely vital? Would a log of work on a tracking platform, including a note about payment for each batch, be sufficient?

This guy has worked for me for 3 years and I've never requested an official invoice.

And what happens if in say 5 years time he sues you for annual leave, pension payments, sick pay etc as an employee? For 8 years backdated money. Oh and HMRC wanting your tax, NI and employer NI payments for that period for him.
Doing things by the book and making sure he's treated in all respects as self employed may help you.
Some previously classed as self employed people have been claiming recently from their employers. Successfully.

mark7144 · Mar 19, 2019

RCW20025 said:
No this is unlikely to be sufficient to appease HMRC from both a CT deduction and employment perspective. Your consultant should be invoicing you for his services weekly/monthly/quarterly

Is it ok to pay early before the invoice is generated? So for example, pay him each month and then have him generate a quarterly invoice of the total? Or even a retroactive annual invoice?

MyAccountantOnline · Mar 19, 2019

mark7144 said:
....

Is the "cause for concern" mainly the risk of tribunal situation triggered by the freelancer or a random HMRC audit?

HMRC could challenge employment status at anytime - they may do this after looking at your accounts, after looking at the accounts of the person you are paying, from information supplied to them or from information they have found in any other ways.

MyAccountantOnline · Mar 19, 2019

mark7144 said:
Is it ok to pay early before the invoice is generated? So for example, pay him each month and then have him generate a quarterly invoice of the total? Or even a retroactive annual invoice?

Generally when someone is genuinely self employed they will issue an invoice and you will pay the invoice based on agreed credit terms.

It can be factors such as this which HMRC will use if they challenge employment status.

MyAccountantOnline · Mar 19, 2019

TheWebDesignCompany said:
....getting a clear invoice stating the payment is for consultancy will serve as a protection from that ever happening.

If only - sadly an invoice on its own doesnt guarantee someone is self employed.

Prime81 · Mar 19, 2019

Can it not be seen as a tip like a hairdresser or beauty Therapist who comes to your house? Obviously a lot more but same principle.

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Can I give a freelancer an EOY bonus without risking employment status?