Are you in false self-employment?

If you are hired to work for someone, they have certain responsibilities. One is that they must correctly work out your 'employment status' for both tax and employment law. They must do this separately as they will not necessarily be the same.

'False self-employment' (that is, being treated as self-employed by an engager incorrectly) is a serious matter. It has recently been looked at in the case of M Gorman v Terence Paul, where the Employment Tribunal (ET) decided that a hairdresser was an employee of the salon she worked in, even though the salon viewed her as self-employed.

What happened in this case?

Miss Gorman was a hairdresser at Terence Paul’s salon in Manchester. Her contract was terminated following closure of the salon. The company argued that because she was self-employed, she could not claim for entitlements arising from the closure of the salon, including notice pay, redundancy pay and unfair dismissal.

Terence Paul argued that Miss Gorman was a self-employed hairdresser, in line with a contract which clearly stated she was self-employed and responsible for her own accounting.

However, the Judge found that there was a large degree of control by the salon over Miss Gorman’s hairdressing business, so much so that she was not in business on her own account.

Miss Gorman was found to be controlled in areas such as pricing and promotions, hair products, uniform, time off, working hours and when she got paid. In all of these areas, Miss Gorman was found to have no entitlement to negotiate or vary arrangements, unlike what one would expect of a self-employed hair stylist.

In conclusion, the Judge said: “In all the circumstances, the Tribunal concluded that the relationship between the parties was that the claimant was an employee of the respondent. The tests of employee status are clearly made out. The written contract does not reflect the reality of the working arrangements in practice, save in respect of the requirement for the claimant to keep her own accounts and attend to taxation, about which the claimant had no choice.”

This means that Miss Gorman is entitled to bring her claims for unfair dismissal and other employment rights. It is unclear if Terence Paul will appeal the decision – if they do and their appeal is allowed the case will be heard by a higher court.

Why is this case important?

Individuals have different rights at work depending on their employment status. People who are ‘employees’ have significantly more protection than ‘workers’ and the ‘self-employed’ have very few employment rights at all. Some engagers would prefer to treat their staff as self-employed when they are not, because it can save them money.

This case is a useful reminder that a person's employment status is not a matter of choice by their engager; it depends on the true nature of the relationship. It is particularly important to note that the parties cannot necessarily rely on the paperwork or contract in place, if the reality of the situation is different.

Although this decision is fact specific, it suggests that people in similar circumstances could also be in false self-employment. Indeed, the issue of false employment is further in the spotlight as the Uber case, on appeal from the Court of Appeal (who agreed with the Employment Appeal Tribunal decision that we discuss on our website) has recently been heard remotely in the Supreme Court. The decision in this case is expected within the coming months.

How do I know if I am in false self-employment?

There is no single test to determine whether a person is an employee, worker or self-employed – all the relevant factors needs to be considered. It can therefore be difficult for workers to understand what their employment status is for employment law purposes.

You may be in false self-employment if you are treated as self-employed by your engager, but one or more of the following factors are present:

• if there is a requirement to provide personal service to the engager (that is, your engager wouldn’t be happy if you sent someone in your place);
• mutuality of obligation (there is an obligation on your engager to provide work, or to pay for work done, and there is an obligation on you to perform that work);
• a degree of control over you from the engager (including the right to control, even if that right is not exercised on a regular basis), for example whether a person is under a duty to obey orders, who has control over working hours, supervision, the mode of working, and who provides any equipment.

Other factors may also be taken into account, as set out on our website. Note that tribunals will usually take the same type of factors into account when deciding employment status for tax or employment law purposes.

Even if you don’t reach the 'pass mark' for employee status, you may have 'worker' status, which is broadly midway between self-employed and employed.

What about tax?

Your employment status is not just relevant to your employment law rights but is also relevant to your tax affairs.

The way that employees and the self-employed pay their taxes in the UK is very different. If you are an employee and you earn £120 or more a week, your employer is required by law to operate Pay As You Earn (PAYE) tax and Class 1 National Insurance on your wages and pay it to HM Revenue & Customs (HMRC). You must also be provided with a payslip.

If you are self-employed you pay income tax through the Self Assessment tax return system, as well as Class 2 and Class 4 National Insurance directly to HMRC.

Typically, we would expect someone who is lower paid and works for someone else, as opposed to being in business on their own account, to be treated as employed for tax purposes by their engager.

It is worth noting that a Miss Gorman's tax position will not automatically be impacted by the employment law decision that she is an employee. This is because a person’s employment status for tax law and employment law can be different (whilst the status of a person for employment law will be indicative, it is not determinative).

However, on the facts, it is open to HMRC/a tax tribunal to decide that someone in a position like Ms Gorman would be an employee for tax purposes and should have had PAYE operated by their engager.

What should I do if I think I'm I false self-employment?

It is important that individuals seek advice if they are unsure on their employment status for employment law and tax purposes and/or believe that their employment rights have been breached. 

You could try ACAS, an employment law adviser or solicitor (they may offer a free initial consultation) or a trade union, if you belong to one (or want to join one).

You can check your employment status for tax purposes using HMRC's online service. It will ask you a set of questions about your situation and at the end it will give you an indication of your employment status for tax, which you can print off and then show your engager (if necessary).

⚠️ Please note that this tool should not be used to try to work out a status for employment law purposes – not least because it doesn’t cover 'worker' status.

Hopefully any issues you have can be resolved informally by talking with your engager, but if not, any disputes can be resolved by a court. For employment rights, a dispute is first heard at the employment tribunal.

If your employer refuses to deal with your taxes properly, then you may wish to report your employer to HMRC.

If you are on a low income, you could then seek advice from the charity TaxAid as to how to report your income to HMRC yourself.