Temporary Contracts – Considerations for employers

As a business owner or manager, there will be times when you need to engage temporary help to enable you to cover absence or a vacancy, manage peaks and troughs in activity or to engage highly specialist skills/experience (usually referred to as Contractors or Freelancers).

You can hire a temporary worker in a number of ways:

  • A zero-hours/casual contract, where you pay for the hours worked – often used where the need is variable and ad-hoc.
  • A Fixed Term Contact – similar to a permanent contract except the contract remains in force only for a specific period of time to complete a specific objective i.e., to cover Maternity leave, to fill a vacancy or to complete a project. These contracts are often best used for periods of 18 months or less.
  • Via an Agency – You transact with the agency, and they directly pay the worker. An agency assignment will become subject to Agency Worker Regulations after a period of 12 weeks.
  • Hiring an expert via a “contract for services”. The contractor or freelancer may be self-employed or work via their own limited company. When you hire a contractor/freelancer, you should be mindful of IR35 and HMRC rules for determining whether you are responsible for payment of the contractor/freelancer’s Tax and National Insurance Contributions.

Reasonable care
HMRC require the Hirer to demonstrate reasonable care when reviewing the status of contractors and freelancers. In order to demonstrate reasonable care has been taken when assessing the status of employment for tax it is important to be able to evidence:

  • The nature of the role being undertaken.
  • How the role is being undertaken
  • The contract under which the work is being undertaken, “contract for services”, to include:
    • employment status for the assignment
    • who is responsible for making payment of tax and NICs to HMRC
  • that this evidence is retained for at least 6 years.

It is permitted to apply “blanket application” of an IR35/Employment Status check by role as long as the status determination check (SDS) is provided to the contractor and their intermediary before the contractor commences work and you have provided the right of appeal. It is important each role is understood in its own right though – the Hirer cannot apply the same status determination to different roles.

IR35 applies to all incorporated organisations that meet the criteria below (and unincorporated bodies who satisfy one of the criteria for 2 accounting periods).

  • Turnover > £10.2m
  • Balance sheet total > £5.1m
  • Number of employees: 50 or more

HMRC introduced IR35 (also often referred to as ‘off-payroll working rules’/intermediaries’ legislation) to tackle what it calls ‘disguised’ employment. IR35 assesses whether contractors are (for all intents and purposes) employees when they take on work for clients. HMRC is particularly concerned with contractors operating via limited companies acting as a Personal Service Company (PSC) i.e., where the company is small in nature and provides services rather than goods, such as “consultant” roles. If an assignment is deemed ‘inside IR35,’ HMRC may deem the individual an employee and believe that the individual should be taxed accordingly via the hiring company. The Hirer is then responsible for deducting tax and national insurance at source for these contractors and paying this over to HMRC.

With effect from 6 April 2021, the legislation was extended to medium and large organisations within the private sector and requires the Hirer to produce a Status Determination Statement, before the contractor/freelancer starts work. The Contractor also has the right to appeal a determination and receive a response from the Hirer within 45 days.

In terms of risk to an organisation, if HMRC believe you have failed to pay the tax due in relation to a contractor subject to IR35, liability for any outstanding amount of tax will shift back to the Hirer and a penalty may be applied.

IR35 status depends on some key tests which are utilised to work out whether a contractor is deemed an employee for the purpose of taxation. HMRC has a tool Hirers can use to check whether IR35 applies to a contract (CEST, or the ‘check employment status for tax’ tool), and a helpline.

IR35 status ultimately falls to case law and employment legislation and is reliant on employment test cases heard in the UK courts. HMRC do commit to standing by the determination its CEST tool provides, as long as the tool has been completed honestly and in the spirit of the legislation. The HMRC test can be accessed via this link – Check employment status for tax – GOV.UK (www.gov.uk).

Hirers must review the IR35 status of each individual operating via a limited company in the event the role they are being asked to undertake changes or their assignment is extended – this may be once annually in the case of ongoing arrangements such as guest lecturers.

Self-Employment status for the purposes of tax

Where an individual indicates they are self-employed but are not paid via an intermediary (i.e. operates as an individual but not via a limited company, partnership or unincorporated association), it is important to establish that the individual is considered self-employed for the purposes of employment as this will determine whether the individual has an employee’s rights such as entitlement to national minimum wage, sick pay, holiday pay, pension etc. the risk of getting this determination wrong can mean would be required to back-pay any benefits which should have been available to the individual for the duration of their assignment and potentially going back as far as 6 years.

The employment status check can be undertaken by completing an HMRC CEST Check – What do you want to find out? – About you and the work – Check employment status for tax – GOV.UK

There are three recognised status when considering employment status:
1. Employee
2. Worker – The status of ‘worker’ does not exist for tax purposes, only employment law purposes.
i. worker – can be employed via a casual contract.
ii. dependant worker – may be self-employed (but not via an intermediary)
3. Self-employed
i. self-employed in own right
ii. or via an intermediary – limited company, partnership, or unincorporated association

The Hirer needs to establish whether self-employed individuals have some rights under employment law such as entitlement to the national minimum wage, other benefits, and some employment protection which those who are genuinely self-employed for both tax and employment law purposes do not have. Is the individual self-employed or a worker?

It may not always be clear whether the worker is an employee of the Organisation or self-employed. The Organisation and the worker cannot simply agree that the worker is self-employed because this is advantageous to both of them — the underlying relationship and contractual arrangements must support this.

An individual is probably self-employed and doesn’t have the rights of an employee if they’re exempt from PAYE and most of the following are also true:

  • they put in bids or give quotes to get work.
  • they’re not under direct supervision when working.
  • they submit invoices for the work they’ve done.
  • they’re responsible for paying their own National Insurance and tax
  • they don’t get holiday or sick pay when they’re not working.
  • they operate under a contract (sometimes known as a ‘contract for services’ or ‘consultancy agreement’) that uses terms like ‘self-employed’, ‘consultant’ or an ‘independent contractor’.

If a contractor lives and/or works abroad

The IR35 regulations may apply where a contractor lives and or works abroad. This will depend upon whether the contractor lives outside of the UK, whether their company is registered in the UK and where the work is physically undertaken. In addition to this, there may be implications for the worker if they are working remotely from another country in terms of taxation within the country they are working from. It is recommended that you seek advice in these circumstances.

HR Wise provides an employee handbook and employment contracts (incorporating a statement of particulars). They are regularly updated by an industry expert, so you don’t have to worry about keeping on top of things. If you use our handbook and employment contracts, we help you navigate potential TUPE situations.

Please get in touch if you would like to enjoy affordable peace of mind.

Contains public sector information licensed under the Open Government Licence v3.0.

The TUPE effect

The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) protects employees if the business in which they are employed changes ownership.

It applies to employees of any size of business in the UK regardless of where the head office is located. In addition, employees of a UK business who are based outside the UK can still be protected in certain circumstances.

The effect of TUPE (except when the business is insolvent) is that the employee’s job transfers to the new company along with their existing employment terms and conditions.

If the employer is insolvent and the business is being transferred to or taken over by another company, the protection employees get is different from a normal transfer. The employees are unlikely to be protected under TUPE if the business is closing down, there are however specific provisions available depending upon the circumstances and the requirement to consult will still apply, even if a company becomes insolvent at very short notice.

TUPE can be complex in nature and we strongly advise that employers seek professional advice before they proceed.

There are two types of TUPE transfer under the regulations:

  • Business transfers – where a business or part of a business moves from one employer to another. This can include mergers where two companies close and form a new one.
  • Service provision changes – where an in-house service (e.g. cleaning or workplace catering) is outsourced to a contractor or a current contract ends and is given to a new contractor or the work is transferred in-house by the former customer. Employees are not protected under TUPE if the contract is for the supply of goods for the company’s use (e.g. a restaurant changing food suppliers) or for a single event/short-term task (e.g. a catering company being used for a corporate event). Only the employees who can be clearly identified as providing the services being transferred are protected.

A good example of a sector that is subject to frequent service provision change is cleaning and facilities and TUPE becomes a factor when a client retenders and appoints a new cleaning or facilities provider. TUPE will usually apply, even if only one employee undertakes work for that particular client.

If there’s a trade union in the workplace, the employer must inform and consult with the representatives from the union. Employers with less than ten employees can inform and consult directly with employees. Otherwise, employee representatives must be informed and consulted. If there are no representatives they must be specially elected in accordance with TUPE for the purpose of the transfer.

Employee’s representatives must be consulted about anything that will affect employees and new Employers should try to gain agreement about any proposed changes, often referred to as “measure items”.

Four weeks before the transfer the existing employer must provide the new employer with information about employees. This normally includes:

  • name
  • age
  • main details of employment
  • disciplinary action taken against employees in the last two years
  • grievances raised by employees in the last two years
  • legal action taken by employees against the employer in the last two years
  • potential legal action the employer thinks employees might raise

TUPE regulations mean employees shouldn’t lose their existing employment rights. The new employer takes over employees’ employment contracts, including all the previous terms and conditions of employment, holiday entitlement, period of continuous employment and any collective agreements previously made. It’s a breach of contract if the new employer doesn’t meet the terms of the previous employment contract. Any failures of the previous employer to observe employees’ rights may enable employees to make a retrospective claim for discrimination against the new employer, even if the failure took place before the transfer, it is therefore usually the case that an indemnity is sought by the new employer from the existing employer prior to the transfer taking place.

Employees can refuse to work for the new employer. This is the same as resigning – they won’t normally be able to claim unfair dismissal or redundancy pay. Notice isn’t required. The employee simply tells the employer, or the new employer, that they do not wish to transfer before the transfer happens. Employment then ends at the time of transfer. But be aware that if an employee’s proposed working conditions are significantly worse because of the transfer, they can object to the transfer, or resign and claim unfair dismissal.

If an employer knows that an employee is transferring to another company, they can’t normally change the employee’s terms and conditions to make them the same as those of the new company – even if the employee agrees to the change. Also, the new employer can’t change the terms and conditions if the reason is the transfer itself.

The new employer can change an employee’s terms and conditions by agreement if it is for an ‘economic reason’ (to do with how the company is performing), a ‘technical reason’ (to do with the equipment or processes the company uses) or an ‘organisational reason’ (to do with the structure of the company) involving changes in the workforce or workplace, such as a result of redundancies or a move from a managerial to a non-managerial position.
After the transfer employers can improve employees’ terms and conditions only with agreement. For example, an increase in the amount of holiday to achieve equity.

Employees can be dismissed for an economic, technical, or organisational reason involving changes in the workforce (redundancies) and the normal rules around fair dismissal apply.

Collective agreements in place before the date of the transfer must be honoured, but the terms and conditions in the agreement can be renegotiated after one year if the change isn’t less favourable to the employee.

Employees’ company pension rights earned up to the time of a transfer are protected, but the new employer doesn’t have to continue an identical pension.

When the transfer is complete, employees should get an up-to-date written statement of employment, giving the name of the new employer and a statement that their terms and conditions haven’t changed. If their tax records are being updated, they will get a P45.

The new employer can’t make employees redundant just because they were transferred from another employer. However, the new employer can consult about redundancies before the transfer if the old employer agrees. If an employee is made redundant for an ‘economic, organisational or technical’ reason involving changes to the workforce, they may be entitled to a redundancy payment.

HR Wise provides an employee handbook and employment contracts (incorporating a statement of particulars). They are regularly updated by an industry expert, so you don’t have to worry about keeping on top of things. If you use our handbook and employment contracts, we help you navigate potential TUPE situations.

Please get in touch if you would like to enjoy affordable peace of mind.

Contains public sector information licensed under the Open Government Licence v3.0.

The Uber Case

The Supreme Court’s two-day hearing of the Uber BV and others v Aslam and others case took place week commencing 20 July 2020. It will be a landmark judgement in the field of employment law in relation to the definition of an employee, worker or self-employed contract. We can expect to hear the outcome in the next couple of months.

Why does it matter?

Employment status disputes are when an individual feels they are entitled to the same rights as if they were employed (or potentially vice versa). There are different categories of employment:

  • employees, who are entitled to a wide range of employment rights and benefits;
  • dependant workers, who are entitled to some, but not all, of those rights; and
  • third party contractors (self employed), who receive very little protection under employment legislation.

This is important for the Uber drivers, as if they are considered to be workers, they are entitled to many more rights (including paid leave, etc.) than if they are considered self employed.

The merits or otherwise of the gig-economy and zero-hours contracts have been debated widely over the last few years. There are benefits to some people of having flexible working but for some this is the only work they can obtain. More and more people are looking to work for companies like Uber, in a job market which could see a rise in unemployment of up to 13%, in a worst case scenario (Office for Budget Responsibility Fiscal sustainability report July 2020) .

The Supreme Court decision will be of vital importance to those who drive for Uber or work for other such similar companies, and for their employers…..