False self-employment

Risks of 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.

The distinction between the different statuses is not always clear; some engagers try to exploit this and people looking for work, for example, by treating them as self-employed when they are employees (for tax purposes) or employees or workers (for employment law purposes). This is what we mean by ‘false self-employment’.

This means they avoid operating pay as you earn (PAYE) and so do not make any payments of tax and National Insurance (NIC) in respect of your wages to HM Revenue & Customs (HMRC). In certain circumstances, HMRC could demand the PAYE payments that should have been made by the engager from you if they believe you should have been treated as an employee and were not, although in accordance with their own guidance, they should approach the engager first.

PAYE is supposed to alleviate the burden of individual workers having to declare their earnings to HMRC via the self assessment system. We know that people can easily fall into non-compliance when trying to navigate the complex self assessment system and this can have longstanding ramifications. This is another consideration for people in false self-employment.

If you are being treated as self-employed incorrectly for tax purposes, then you may be being treated incorrectly for employment law purposes too and may be missing out on some rights. You may also be in more of a vulnerable position in terms of working for a business that may not hold employer liability insurance etc.

So be wary if:

• you are offered work and given a choice of being an employee or self-employed;
• someone you are going to work for tells you that you are self-employed.

Instead, make sure you understand your employment status for yourself before you start work. If you think that something is wrong, you might want to challenge the engager that is offering you the work or contact HMRC – more on this below.

Recognising false self-employment

There is no single test to determine a person’s employment status – all the relevant factors need to be considered. In particular, you will not automatically be self-employed just because you have an existing unique taxpayer reference (UTR) and submit tax returns each year, or your position lacks permanency, or you provide your own small tools.

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.

An important legal case

An important legal case (Autoclenz Ltd v Belcher [2011]) confirmed certain workers who had been classified as self-employed were in fact employees with a contract of employment.

The company involved was a large one offering car valeting and related services. The individuals concerned in the case all had written contracts, the terms of which were quite explicit in saying that they were being engaged as self-employed contractors rather than as employees. The worker was termed a ‘sub-contractor’. Under the terms of that agreement, the worker confirmed that he was ‘a self-employed independent contractor’.

In general, when interpreting a contract, the law only considers what is in the actual signed contract and not the parties’ intentions. So given the clear written terms of the contract, how did it all go so wrong for the company?

It went wrong because the employment tribunal was entitled to ignore the terms of the written documentation and to look, instead, at the reality behind the workers’ contracts. This was because, in the view of the courts, the workers had only one choice: to sign up on the terms dictated by the company or seek work elsewhere.

Once this principle – looking at the reality behind the contracts – was applied, all sorts of findings of fact by the employment tribunal justified its conclusion that these individuals were working under a contract of employment.

The following factors had been influential in that conclusion:

• the individuals in question could not be described as being in business on their own account,
• they had no control over the way they did their own work, being subject to the direction and control of other employees, and being obliged to clean the cars in accordance with a detailed specification,
• they could control the hours they worked only in the sense that they could leave when their share was done,
• they had no real economic interest in the way the work was organised, though they could earn more by doing more work,
• they had no say in the contractual terms, which were devised by the company,
• their invoices were prepared by the company, which also decided the amount of deductions to be made for insurance and materials, without any evidence of the correlation between those deductions and the actual costs,
• the company determined the rates of pay, increasing or reducing those rates unilaterally,
• the individual workers were fully integrated into the company’s business and, with only a few exceptions, did no other similar work, and
• despite a substitution clause in the written agreement, the individuals were in fact required to do the work themselves; and despite another clause that implied that there was no obligation on the workers to turn up, or on the company to provide work, this was wholly inconsistent with what happened in practice.

It was also noted that the company provided, at the time under consideration, all the equipment and materials, including jet washers, vacuum cleaners, sponges, and chemicals.

If the terms of the contract had represented the true nature of the contract, the individuals would be considered to be self-employed. However, in summary, the Supreme Court agreed with the earlier Court of Appeal ruling, which in turn concluded that the employment tribunal was entitled to find that the individuals were working under contracts of employment.

The Autoclenz approach (that is that parties cannot necessarily rely on the paperwork or contract in place, if the reality of the situation is different) is appropriate when analysing contractual terms in the context of applying employment law legislation aimed at protecting vulnerable workers. It was recently used in another case (Uber BV v Aslam 2021) to help decide that the drivers were ‘workers’ for employment law purposes. We discuss this further on our Employment rights page.

As has been shown in a recent tax law case (HMRC v Atholl House [2022]), it does not automatically follow that a tax law judge will take the same ‘purposive’ approach, where for instance, they are trying to analyse contractual terms around employment status in contexts such as IR35/off payroll. The contract wording will still be the first port of call. So for example, if a contractual right to send a substitute exists, but as a matter of fact is not used, under Autoclenz, it may have been disregarded. Atholl House seems to be saying that it does not matter that it is not used – if it is in the contract and is realistic, then it must be considered.

However in cases involving vulnerable taxpayers with little bargaining power and false self-employment (where for instance, terms are foisted onto workers by engagers with a ‘take-it-or-leave-it’ approach in an attempt to avoid operating PAYE), it is foreseeable that the ‘Autoclenz approach’ could still carry weight, although it is unclear how a court would apply all of its principles.

If you think you are in 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 contacting ACAS, an employment law adviser or a 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 CEST 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.