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If you are paying another person to assist you in
your business it is vital to determine whether that person
is an employee or independent contractor.
Their status affects:
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Your obligations regarding PAYE and NI contributions
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Their employment rights and protection |
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Your responsibility for their safety |
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Your legal liability if they do something wrong whilst
carrying out their job. |
Tests Used
The courts and the Inland Revenue use a number of different
tests to determine whether a person is an employee or independent
contractor. No one test is conclusive - instead the
overall situation will be examined to see what category best
describes the worker's true situation.
A starting point will be to look at the contract between
the parties, and to see how they describe and treat the relationship.
However, this is not conclusive - the advantages to both sides
of inaccurate labelling are well known! Does the contract
talk of independent contractor or employee? Is the worker
left to make his own tax and NI provision, or is this done
by the employer? Where the case involves health and safety
issues the courts are more reluctant to hold that a worker
was an independent contractor, as they lose a great deal of
protection for their physical welfare.
The degree of control exercised by the employer is also
important. The greater the amount of control, the more
likely someone is an employee. Independent contractors have
greater freedom to decide how and when to do the task, whereas
employees are likely to be restricted to working certain hours,
and are subject to greater regulation on other matters, such
as holidays, reporting sick etc. Employees tend to form part
and parcel of their employer's organisation, whereas independent
contractors can be regarded as being in business on their
own account.
Mutuality of obligations is a key concept. In ordinary
language this means that an employer is obligated to continue
to provide work and pay, and the worker is obligated to continue
to provide labour, unless the contract can be lawfully terminated.
If there is mutuality of obligation, then the relationship
is that of employer/ employee. If there is no mutuality of
obligation it means that once the contractual task is completed
the employer does not have to continue to use the worker,
and is free to use others if he wishes. Similarly the worker
can work elsewhere, and does not have to continue to work
for the employer.
Finally the economic reality of the situation will be
looked at. If the worker is using his own equipment, and
is taking a financial risk then they are more likely to be
an independent contractor. If they are able to work harder
and benefit from their efficiency this will point to an independent
contractor, whereas an employee tends to use the employer's
equipment, and takes no financial risk. If an employee is
efficient and gets the job done more quickly than expected,
the employer benefits, and the employee just gets given more
to do!
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