Employed or Self-employed
Written by Ray Coman
There is no single answer to the question of what makes a person employed or self-employed. Becoming self-employed is not merely achieved by foregoing employment status and having no written contract. A contract is the combination of anything in writing, verbal or implied. Moreover, a person's working status is determined by a variety of factors, of which employment law protection is only one. To help outline, many of the key factors are summarised here.
Control over work
Employers have more right to control their staff than others who they hire. A self-employed worker has greater opportunity to decide what to do, where, when and how to do it.
Employees are obliged to provide their services, and the employer is under obligation to pay for these services. An employer will typically provide work to be performed within set working hours. This is in contrast to working arrangements which do not form part of an employment.
Integral part of the organisation
The extent to which a person is an integral part of the business is a strong indicator of employment. Integration is indicated by, for instance, access to the work premises, a work station, invitation to staff functions and entitlement to company pension.
In business on own account
While self-employed, a person is in business on their own account, and is more likely to hire helpers, or substitutes, correct own work, provide own equipment, take greater financial risk with own capital, and profit from own management. The factors are expanded upon below
Where an individual provides a personal service, there is a requirement for them to perform the service personally. Self-employed status is more probable for a service provider who can bring in a substitute if they are unable to carry out the work themselves. A person is more likely to be considered as self-employed if they are contractually required to provide a substitute, if they can, in practice, arrange for their replacement and if they are obliged to pay the person standing in for them. An employee is more likely to have to do the work themselves.
Provision of own equipment
Self-employed people are more likely to be required to provide their own tools. As a consequence, self-employed people may have a greater requirement to work from their own premises where they can access these resources. For instance an IT contractor working from home will be relying less on their clients' computer supplies, and as such has more reason to maintain that they are self-employed.
A self-employed person risks greater financial loss than an employee. The individual uses their own money in the business which may not be recouped by the income generated through the work this investment brings about in the future. Typically, a person in business on their own account will buy equipment and other assets, cover the overheads of the business and invest in developing their own skills and those of their workforce.
Self-employed workers are often personally liable to creditors and investors of their business, as well as exposed to non-payment from debtors.
A self-employed person is likely to work on fixed term contracts. There is higher risk of financial loss caused by gaps between each job. Where a price is fixed for an assignment, the contractor is exposed to loss through the job overrunning. A self-employed person would have to correct any defective work in their own time and at cost to themselves. Greater outlay may be incurred in pitching for work, for instance, through advertising costs.
On the plus side, greater opportunity of profiting from sound management, initiative taking and working more effectively arises from self-employment.
Self-employed people tend to work for a greater number of clients.
An employee often has greater scope to terminate their contract mid-assignment, say, by giving notice. A self-employed person may be contract bound to see an assignment through to an end, unless there has been a breach. An employee can be moved between tasks, being paid for hours worked rather than per job.
Greater benefits tend to come with being employee. For instance, job perks may include private medical insurance, employment pension scheme and access to grievance procedures. In compensation, a self-employed person normally enjoys higher rates of pay.
In practice, an employee works an agreed, set number of hours. Pay is in regular intervals. Good results could be rewarded with a bonus, and longer hours with overtime, which would break a regular pattern of pay. In contrast, a self-employed person may realise better performance more immediately, through increased profits.
In summary, employment is a contract of service, whereas self-employment is a contract for services. A worker's status is decided by reference to a combination of factors. No single factor is by itself conclusive. The factors which will have more weight will vary from one situation to the next. If the factors are evenly balanced, the intention of the parties will be decisive.
The determinants of working status have been brought about through case law. The matter continues to bring HMRC into dispute with taxpayers.
Coman & Co. Ltd. are specialist Chartered Tax Advisers. Whether you are employed or self-employed, we can advise on the tax implications of your contracts. We offer practical guidance on how to avoid being deemed to be an employee by HMRC. Please contact us for an initial consultation.