In our last update we wrote about the Prevention of Illegal Working legislation and how important it was for employers to review their systems and processes in light of the surge of UKBA action against sponsors.

As a follow up to this theme, we urge employers to exercise caution where their business model involves engaging 'staff' as self-employed contractors. The fact that the contractual paperwork supports their status as self-employed contractors is not the end of the matter.

Whether or not a person is an employee (under a contract of service) or a self-employed contractor (under a contract for services) is a question of law, to be determined by reference to the facts of the relationship. This applies as a general principle of the common law, whether the relationship is being analysed for the purposes of employment law, tax law or indeed immigration law.

A recent reminder of this was delivered by the Supreme Court in the Autoclenz case handed down on 28 July 2011.

Autoclenz is a provider of car-cleaning services to motor retailers and auctioneers. It engaged car valeters as self-employed contractors and reflected this throughout the contractual documentation. What's more, in 2004 the Inland Revenue had reviewed the arrangements and accepted the self-employed status of the valeters.

A number of valeters subsequently brought proceedings against Autoclenz, claiming that, notwithstanding the express terms of their contractual arrangements, they were 'workers' and as such entitled to National Minimum Wage and statutory paid leave under the Working Time Regulations.

The Supreme Court held that they were workers and therefore entitled to NMW and statutory paid leave. It confirmed that when assessing an individual’s employment status the focus should be on the 'actual legal obligations of the parties' (including examining how the parties conducted themselves in practice and what their expectations were of each other). Where the terms in a written agreement do not reflect the genuine agreement of the parties, then these can be disregarded (Autoclenz Ltd v Belcher and others [2011] UKSC 41).

This is a timely reminder in the context of the Prevention of Illegal Working legislation. Employers could find themselves unwittingly breaching this legislation if they engage self-employed contractors whom the UKBA deems in fact to be employees, in 'disguised employment'.

As most of our readers will be aware, employers can protect themselves from liability under the Prevention of Illegal Working legislation by checking that their prospective employees have the right to work in the UK. These checks must be carried out before the employment begins and copies must be kept of the prospective employee’s passport and, where relevant, documents evidencing their right to work in the UK. If it is found that an employee is working without permission and the employer cannot produce copies of the relevant documents, the employer can be issued with a penalty of up to £10,000 per employee.

These duties extend only to workers employed directly under a contract of service. Employers do not normally need to check the documents of temporary workers hired through an agency or self-employed contractors. However, as the Autoclenz case reminds us, a self-employed contractor may be deemed under the law to be an employee.

So the employer's treatment of the relationship is not the end of the matter and can be overturned by the UKBA, which may then issue Notices of Potential Liability under the Prevention of Illegal Working legislation in respect of the alleged employees. The burden then falls on the employer to prove that the contractors are indeed self-employed and not employees.

Given that a worker’s employment status determines the charge to tax on income and National Insurance contributions, HMRC may also disagree with an employer's claim that it is engaging self-employed contractors and may assert that they are in fact employees - HMRC has set out a guide to assist employers - see link below.

So what can employers do to protect themselves under the Prevention of Illegal Working legislation and ensure that their self-employed contractors are in fact self-employed?

Three things:

  1. audit the actual legal obligations (not just the documentation) of current self-employed workers and assess whether the overall relationship fits into the definition of self-employment;
  2. keep a record of NI number and the Contract for Services with the self-employed worker on file; and
  3. as a precaution carry out a right to work check and obtain copies of ID and confirmation of right to work in the UK for the self-employed workers too.

For the HMRC guide on 'employment status', please click here.