Employee classification is complex in the United Kingdom. Foreign employers are often unaware of these complexities—which can get them into trouble.
Hiring in the UK: Avoiding Independent Contractor Risks
In addition to typical employees and independent contractors, there is a third type of laborer called a “worker.” Each has a different degree of rights. Employees, are fully protected under the law while independent contractors have almost no labor protections. Workers sit in an odd middle ground; they benefit from some but not all labor protections.
It is often difficult to fit an individual in any one of the three categories as there is a considerable lack of clarity surrounding their defining characteristics. Few differences are in code and most standards that differentiate characteristics come from tests promulgated by the courts, which are not used universally. This makes it difficult for an employer to mitigate misclassification risks when using an independent contractor.
All tests look to the actual relationship between an independent contractor and a client company rather than a contract. The most common tests evaluate the distinctions between independent contractors and employees, leaving a gray area for the worker classification.
The most common test looks at the following:
- Whether an individual has the ability to refuse work
- Whether either party has the ability to substitute the work to another person or subcontractor
- How much control a company has over an individual, specifically looking at the level of subordination, the level of integration between an individual and the daily business operation, along with other assessments
- Various other factors including the level of financial risk the independent contractor takes on, if they receive company benefits, and takes on management duties, along with many other factors
Meanwhile, worker characteristics include not working for their own limited company, not having a client-contractor relationship, and not controlling their working hours. The fundamental difference between a worker and an employee is that workers are free to accept or reject an offer of work made to them. The wording of the contract is also critical to workers.
Workers also benefit from labor protections such as discrimination, unlawful deduction of wages, and minimum wage laws, whereas independent contractors do not.
Employer and Worker Misclassification Penalties
Employees or workers found to be misclassified as independent contractors are reclassified as the proper status and entitled to their respective benefits retroactively.
A court case from 2017 ruled that an independent contractor had in fact been a misclassified employee for 14 years, entitling the plaintiff to the minimum leave of 5.6 weeks per year for the entire 14-year period.
Independent contractors who are terminated will often claim employment status and file an unfair dismissal claim. 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 a base award not exceeding £15,750. It is fairly common for courts to award the maximum amount possible to the individual.
Furthermore, employers are typically liable for pension, social contribution, and tax back payments, in addition to interest when independent contractors are reclassified.
Making things somewhat more complicated is how the UK’s revenue agency classifies laborer status. There are no “workers” in their view, and they use a slightly different test to distinguish independent contractors from employees.
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. Ensuring compliance with local employment law, businesses remove any risk of misclassification—and severe penalties.
How do I set myself up as an independent contractor in the UK?
You must tell the HM Revenue and Customs (HMRC) if you have become self-employed. Naming your business, deciding on your business structure, and creating a tax plan are all integral steps to setting yourself up as an independent contractor.
How do I pay an independent contractor in the UK?
Payment procedures can vary depending on what’s agreed upon. Wire transfers, digital transfer, or mailing a check are all common and acceptable payment methods.
What rights do contractors have in the UK?
While employment laws do not cover self-employed people, a self-employed contractor has health and safety protection, rights against discriminiation, and the rights dictated within the terms of their client contract.
If you'd like more information about 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.