Can someone who is paid through their own limited company be a worker or employee?

EAT agrees that out of hours GP paid through her own company was a worker

Professionals and consultants may at times provide their services through an intermediary, such as their own "personal services company". Although such an arrangement might be labelled "self-employment" or a "contract for services", it is possible that it will be found to be employment for tax purposes. 

Tax rules covering such "off payroll" working, known as the IR35 rules, mean that individuals who would have been an employee for tax purposes if they were providing their services directly to the client, pay broadly the same tax and National Insurance contributions as employees. HMRC has created a useful online tool for checking employment status for tax.

As a separate issue, employment tribunals may also examine the legal status of such arrangements when individuals bring claims, such as for holiday pay, National Minimum Wage, unfair dismissal or discrimination. Readers should be aware that someone can be treated by HMRC as self-employed for tax purposes but be found by an employment tribunal to be an employee or worker. The following key issues are considered by tribunals when determining the employment status of the claimant.

Employee status

An employee has an ongoing right to expect to be provided with work and an ongoing obligation to accept work (this is known as "mutuality of obligation"). Employment is also marked by a high level of control over how and when the employee performs the work and a high level of integration into the employer organisation (for example the individual regularly represents the employer, appears to be part of the business and must comply with their rules and procedures).

Along with the rights of workers set out below, employee rights include the right not to be unfairly dismissed (subject to qualifying length of service), statutory minimum notice and statutory redundancy pay.

Worker status

A worker has a contract to perform the service personally and there is no client/contractor relationship. A worker will usually be distinguished from an employee because there are no guaranteed hours of work and the worker can turn down work when it is offered (there is no ongoing mutuality of obligation).

Workers' rights include statutory minimum paid holiday, statutory sick pay (if eligible), National Minimum Wage and protection against discrimination. A worker is treated in the same way as an employee for tax purposes.

Self-employment

A truly self-employed person is in business on their own account and markets their services "to the whole world". They are not required to provide personal service. In other words, they have the freedom to send someone else to perform the work when they are unable or unwilling to do so. A self-employed person will usually have the power to negotiate their own terms and takes a financial risk in the arrangement, for example not getting paid if the work is not satisfactory.

Case details: Community Based Care Health Ltd v Narayan

Dr Narayan worked for 11 years as an out of hours GP provided by Community Based Care Health Ltd (CBCH). She also performed services as a locum GP through an agency. Dr Narayan, following the advice of her accountant, set up a company through which she processed her pay. She did not tell CBCH about the existence of the company or submit invoices, but she passed on her company bank account details to CBCH. After some conduct concerns, CBCH wrote to Dr Narayan and told her she would no longer be offered work. Dr Narayan brought claims in the employment tribunal including unfair dismissal, wrongful dismissal, unlawful deductions from wages (for holiday pay), breach of contract and race and sex discrimination.

The employment tribunal found that Dr Narayan was not an employee because there was no "mutuality of obligation". In other words, there was no obligation on CBCH to provide work and no obligation on the doctor to accept work even though she carried out the same regular shifts over a very long period. Dr Narayan could (and did at times) turn work down when she was unwilling or unable to carry it out. For example, she was able to take holidays whenever she chose.

However, the employment tribunal found that Dr Narayan was a worker. This was on the basis that: she was required to provide personal service; CBCH was not a client of Dr Narayan or her company; and that there was a considerable degree of control by and integration into CBCH. In practice, Dr Narayan would ask one of her fellow out of hours GPs if they could cover a shift, but the replacement would be arranged and paid for by CBCH. This was not a case where a substitute could be sent to perform the work with no control by CBCH over who was chosen (which would be more likely to indicate a self-employment arrangement).

On appeal, the EAT agreed. It disagreed with the respondent's argument that Dr Narayan could not be a worker because her company was receiving her remuneration, unbeknown to CBCH. It held that the contract was between CBCH and Dr Narayan as an individual. This was because the party contracting with CBCH to perform the out of hours service had to be a qualified and approved GP and a company could not fulfil this requirement.  

The EAT determined that the tribunal was right to distinguish the case of Suhail v Herts Urgent Care UKEAT/0416/11 in which a doctor was found to be self-employed. The EAT made clear that Dr Suhail marketed his services to any provider of medical services which would provide him with work. On the other hand, Dr Narayan worked only for CBCH and the locum agency.

The risks of mislabelling an employment arrangement

Organisations entering into contracts for services with "self-employed" consultants should be aware of the risk that the relationship will be found to be mislabelled. HMRC / the tax tribunal may determine that tax arrears, penalties and interest are due if the arrangement is found to be one of employment. HMRC can investigate tax arrears going back a number of years. The number of years depends on whether HMRC consider the non-payment to have been an innocent mistake (up to 4 years), careless (up to 6 years) or a deliberate evasion (up to 20 years). Penalties of up to 100% of arrears can be charged. Penalties for a failure to notify will be higher than those where voluntary disclosure occurs.

Individuals who bring successful employment tribunal claims may be awarded underpayments, such as those due for holiday pay or NMW and may in some cases be found to have been unfairly dismissed or discriminated against. Unfair dismissal compensation is capped at the lesser of one year's gross salary or £86,444 in addition to the basic award which is equivalent to statutory redundancy pay. Discrimination claims are uncapped and assessed on the basis of financial loss and injury to feelings.  

Employers should take legal and accountancy advice when engaging with a "self-employed" individual who is paid directly or through their own limited company.