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What is the Difference Between an Employee and a Worker? And What is the Effect of the Upcoming IR35 Reforms?

Employees and workers enjoy vastly different employment rights, and so it is fundamental that employers understand the difference and the respective rights attached to each group. With the upcoming IR35 changes on the horizon, the distinction between employee and worker is now an increasingly hot topic for employers.

Employee v Worker

The Employment Rights Act 1996 (ERA 1996) defines an employee as an individual who has entered into a contract of employment (s.230(1)). Employees typically enjoy the maximum level of employment protection rights.

The ERA 1996 defines a worker as an individual who is employed under a contract where they undertake to perform personally any work or services for another party to the contract (s.230(b)). The definition of a ‘worker’ is therefore much more broad, and includes anyone else working for the employer (except the self-employed).

Workers’ Rights

Due to the greater degree of flexibility surrounding a worker, they invariably enjoy less protection when it comes to employment rights. For example, they are not entitled to make a claim for unfair dismissal, or redundancy pay. They do however have some basic employment rights, which include the right to paid holiday, national minimum wage and working hours protections.

How to distinguish an employee from a worker

When determining whether an individual is an employee or not, the courts have helpfully identified some key principles:

  1. Control – the greater the degree of control that the employer has over the individual, the more likely they are to be considered an employee.
  2. Substitution – if the work can be carried out by a substituted individual, the individual is less likely to be considered as an employee.
  3. Mutual obligations – if there is a mutual obligation on the employer to provider work and the individual to perform it, the will be classed as an employee.

IR35: what is it?

The IR35 relates to the introduction of new tax legislation, which focuses on the nature of the relationship between a worker and their intermediary, where the worker would otherwise be classed as an employee were it not for the intermediary.

The worker therefore benefits from not having to pay the income tax and national insurance contributions that an employee would, and the intermediary company benefits from not having to pay the national insurance contributions on behalf of the employee. 

If caught by the HMRC rules, the worker will be classified as a ‘deemed employee’ and will be liable to pay tax as an employee. HMRC can look beyond the employment contract at the nature of the working relationship between the two parties.

In order for HMRC to determine the true employment status of an individual, the above key principles for distinguishing between an employee and a worker will be considered.

When will it be introduced? 

The new IR35 rules will become effective from 6 April 2021, following a 12 month postponement in March 2020 due to COVID-19.

What does this mean for recruitment agencies and contractors?

  • Assessments: end user clients must carry out a status determination to consider whether the new legislation applies to the current arrangements. I.e. if the worker would be deemed an employee were it not for the intermediary company, the IR35 reforms apply and there is a ‘deemed employment.’
  • Default position: the assessment must be carried out, otherwise HMRC will assume that there is deemed employment as the default position, and the tax falls due.
  • Costs: increased costs with adding contractors / workers to pay roll
  • Not retrospective.

If you need advice or have any queries regarding IR35 or any other Employment advice, please contact Paul Chamberlain or another member of the employment team at JMW Solicitors LLP on 0345 646 0342.

This bulletin is for general guidance only and should not be used for any other purpose. It does not constitute, and should not be relied upon as legal advice.

JMW Solicitors is a Limited Liability Partnership.

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