There are three types of laborers in the United Kingdom. First are employees, who have full protection under current legislation. The next are workers, who have some (but not all) protections. The final is an independent contractor, who has access to very few protections under the law, as is true in many other countries.
While it is sometimes easy to tell if someone happens to be a true employee, it is also common to experience difficulties when it comes to their precise classification. There’s a considerable lack of clarity surrounding the precise differences between the three categories and, as a result, an independent contractor can often be considered a misclassified worker or even an employee if you’re not careful.
Independent Contractors in UK
Overall, the difference between an independent contractor and an employee is a significant one as far as tax purposes are concerned. The tax authority (in this case, Her Majesty’s Revenue and Customs, or HMRC) does not recognize “workers” at all. The only separation is between an independent contractor and an employee.
There are also certain tax and national insurance benefits associated with independent contractors, so the HMRC may often dispute how someone is categorized.
The HMRC’s test to figure out whether someone is self-employed is similar to the one the Employment Tribunal uses, although neither impacts the other’s determination. Therefore, someone can be classified as a “worker” for employment purposes” and an “employee” or “independent contractor” for tax purposes at the same time.
“Worker” and “employee” benefits include but are not limited to:
- A guarantee of the national minimum wage
- Protection against all unlawful wage deductions
- Minimum paid holidays, along with rest breaks
- The ability to not work for more than 48 hours on average per week, or to opt out of this right if they so choose
- Protections against unlawful discrimination
- Protections for “whistle blowing”
- The ability to not be treated less favorably if they work part-time
Additionally, workers may also be entitled to things like maternity, paternity, sick, and other types of leave and/or pay structures.
The Penalties of Independent Contractor Misclassification in the UK
If an independent contractor is found to be misclassified, and it is later determined that they do have an employee or worker relationship with their employer, they are therefore entitled to each benefit mentioned previously. Not only that, but they can also seek them retroactively in addition to permanent employment status.
One court case from 2017 even ruled that an employer had misclassified an independent contractor for 14 years, entitling them to the minimum leave of 5.6 weeks per year for the entire 14-year period. Considering the circumstances, the person was also said to have accrued all paid time off (PTO) that they would have received during that time, all of which had rolled over each year. In the end, the plaintiff was awarded 78.4 weeks of PTO—which could be paid out in lieu of the time off if the plaintiff wanted to.
This is an extreme case, but that doesn’t mean the consequences aren’t severe. The maximum amount that an individual can be awarded as compensation for Unfair Dismissal currently sits at £86,444 or 52 weeks of gross salary, whichever happens to be lower. This is in addition to the basic award that cannot exceed £15,750. It is very common for courts to award the maximum amount possible to the individual. In this case, employers are also liable for pension and National Insurance Contribution back payments—in addition to interest—for each person misclassified as an independent contractor.
Build Your Global Team with the Right Global Expansion Partner
The risk of misclassification is one of several reasons many organizations instead choose to work with an International Professional Employer Organization (PEO) when expanding into the UK. An International PEO compliantly hires employees in compliance with local employment law, removing any risk of misclassification—and severe penalties.
If you’d like more information about independent contractor risk in the UK, or how Velocity Global’s International PEO solution can help you establish a presence in more than 185 countries, reach out to us today.