Employment status is back in the spotlight following the recent Supreme Court’s Uber decision and the recent extension of the off-payroll working rules to the private sector.
What’s the issue?
Engaging labour on a self-employed basis may offer commercial flexibility but the financial and reputational cost of this being successfully challenged can be expensive.
The Supreme Court’s Uber decision in February 2021 set a new approach to determining employment status.
Tribunals and Courts will now place greater emphasis on the actual working relationship between the engager and individual – particularly any element of subordination or control – than on written contracts and legal structures (including where there is no direct contract between the engager and the contingent labour).
This impact of this decision goes beyond the gig and platform economies.
Other recent high-profile decisions on employment rights issues, as well as private sector off-payroll working reforms from April 2021, also place the employment law and tax risks of contingent labour firmly in the spotlight.
All organisations utilising contingent off payroll labour either directly or via third parties should reassess their engagement model and how they’ve categorised contingent labour to gauge the risk of successful claims for ‘worker’ or ‘employee’ status and, where relevant, assess the financial and reputational impact of getting it wrong.
The relevant tests to determine employment status are complex, nuanced and fact dependent: potentially producing different outcomes for employment rights, tax and social security purposes.
What’s the potential impact?
Successful claims for ‘worker’ status could result in:
- Settling historic National Minimum Wage (NMW), pension and holiday pay arrears and increased operating costs going forward;
- Scrutiny by HMRC of whether individuals classified as ‘workers’ should have been subject to PAYE and NIC. Employment rights ‘worker’ status does not necessarily equate to ‘employed’ status for tax and National Insurance purposes, but could increase the risk of HMRC opening a review;
- Increased costs (and management time in putting things right) which impact profits, affecting the group’s effective tax rate, potentially resulting in changes to the operating model which in turn will impact the transfer pricing model;
- In certain circumstances, platform businesses being required to account for additional VAT; and
- Potential reputational risk that might adversely affect perceptions of the business and impact future transactions, relationships with investors customers, employees, HMRC and other relevant stakeholders.
What should users of contingent labour do?
Immediate steps organisations can take to assess their risk include:
- Confirm how the workforce is currently categorised for employment rights, income tax, and National Insurance purposes and re-apply the employment status tests to identify potential risk areas;
- Compare contractual engagement terms to the reality of working practices and update policies and engagement procedures accordingly; and
Plan remediation and possible disclosure to HMRC for any underpayment of NMW, PAYE and National Insurance and consider the management time implications of HMRC reviews.
How KPMG can help
Employment status reviews can have legal, payroll, VAT, corporation tax, and regulatory impacts.
Our multi-disciplinary team of specialists assists a wide range of organisations, from start-ups to international groups to understand and respond to their employment status issues.
We can help you to:
- Undertake a working practices review, including conducting and recording ‘on the ground’ interviews to explore the reality of working life and review contractual documentation to assess employment status;
- Carry out an impact assessment of potential changes to employment status in relation to employment law and tax;
- Update contractual agreements to reflect the reality of working practices and create or refine engagement processes to minimise the risk of a mismatch, as well as draft guidelines for self-employed workers to ensure they understand all terms; and
- Negotiate with relevant stakeholders e.g. HMRC, Unions to settle any NMW, holiday pay, pension, PAYE or National Insurance exposures and strengthen processes to ensure future compliance.
In appropriate circumstances our advice can be provided under legal privilege and allow you to examine your workforce in a protected way.
In a landmark case for the care sector the UK Supreme Court has upheld that sleep-in shifts are not working time for NMW purposes.
The UK Supreme Court has upheld that sleep-in shifts are not working time for NMW purposes