Employee or Contractor the differences explained on BBC Radio York

Michael Millward joined Elly Fiorentini this afternoon on the BBC Radio York Drive time show to discuss the difference between an employee and a contractor.

The conversation was prompted by news that the Government is investigating the way in which people who work for the government in senior roles have set up companies that submit invoices to the Government for their services, a strategy that allows them to avoid paying what can be thousands of pounds in income tax and national insurance.

Mr Millward explained the simplest way to avoid paying the 50% higher rate of income tax is not to be an employee with a high salary.

But if you want the high income without the high tax rate you can, quite legally, provide exactly the same service to the company, but instead of receiving a pay check at the end of each month you submit an invoice in the name of another company, a company that you own and when that invoice is paid instead of you paying 50% income tax on the amount you pay corporation tax at the much lower rate of 21%.

Your National Insurance payments could also be much lower. But you have to remember that as a contractor you miss out on all the benefits and protections of being an employee including pensions. Although in some circumstances a company might have to auto enrol a contractor into a pension scheme.  

Several celebrities and senior government ‘employees’ including the head of the Student Loan Company have been revealed to be operating these arrangements.

One major BBC celebrity is reported to have been paid £22,607 in to her company. The income tax bill on this amount would be about £11,303, the corporation tax bill is just £4,380, less than half. The celebrity is also able to describe several that normal everyday expenses are business expenses and claim them against tax.

Mr Millward stressed that there is nothing illegal about this, and that as the number of self employed professionals increases it is likely that more people will manage their income through a limited company. You don’t need to be a millionaire or a celebrity to do so. You just need to be operating a business, with valid business expenses. 

So what is the difference between an employee and a valid contractor asked Ms Fiorentini.

Well, said Mr Millward, in reality not everyone who works is an employee.  Many people like me who work as business consultants or independent contractors establish companies so that we can have more control over the type of work we do, and how and when we do it.

People who are employees don’t normally have the same level of control or independence. However as an employee they do benefit from numerous legal protections that self employed contractors do not enjoy. You can not for example as a contractor claim unfair dismissal because that concept is part of employment law and a contractor relationship is governed by contract law.

There are three factors which identify someone as an employee

  1. Control – is what the person does controlled by another person, if so then the person is an employee. 
    Looked at another way if the person doing the work has been brought into an organisation because they are skilled and knowledgeable about an activity that the person who is paying for their service cannot be expected to understand it or perform it instead of them then the person doing the work is a contractor, because it is illogical to describe them as being controlled by someone from the organisation.
  2. Mutual Obligation – are both parties obliged to each other?
    If the person is obliged to do whatever he or she is told then they are an employee. If the person decides what they will do, when, and where and how they will do it and can decide whether or not to do it without penalty then they are a contractor.
  3. Personal Service – Does the worker have to do the work themselves or can they ask someone else to do the work on their behalf.

We are not talking about a senior manager telling a junior manager what needs to be done and then that junior manager delegating tasks to a team. That is an employment situation. The contractor has the freedom after a contract has been won to decide to subcontract the work to another person, who the customer or client may not be aware of.

There are other factors that help to define a person as an employee these include

  • Having set working hours
  • Being paid regularly regardless of whether they attend work or not.
  • Works at the employer’s premises or at places determined by the employer;
  • Not being allowed to work for other organisations
  • The person can be dismissed and has the right to appeal against that dismissal.

Other factors which indicate that the person is an independent contractor include if the person

  • Has risked their own money in the business – so that they will have to cover any losses as well as enjoying any profits;
  • Is the final decision maker in the business
  • Is not reliant on the customer or client for the provision of equipment necessary to do the job.
  • Recruits other people to help complete the work and is responsible for paying them
  • Is free and able to work for other organisations at the same time.

Working arrangements said Mr Millward need to be defined at the start of the relationship and described in writing to avoid the risk of future confusion.

However although two parties can agree to a contract it must be a legal contract and the final decision on whether someone is an employee or a contractor rests with the Courts.

Mr Millward explained that an increasing number of people are looking at self employment as a viable alternative to employment, and companies are welcoming them with open arms. Independent contractors offer a company much more flexibility and potentially a higher level of skills and knowledge than an employee, and it is talent that they can turn on and off as and when they need it.

As Chairman of the Chartered Institute of Personnel and Development (CIPD) North Yorkshire Branch I lead the branch with the largest number of independent consultants in the country. Every six weeks the Branch hosts an event for self employed professionals, of all kinds at St Aiden’s School in Harrogate.

The next event is on 27th February. Full details are available at the branch website.

At the end of their discussion Mr Millward reminded Ms Fiorentini that they next time the two of them would speak on 5th March 2012 he would be talking to her from the Northern HR Conference for the Voluntary Sector, which is being held at the Royal York Hotel, York and where he would be presenting a seminar on absence management.

February 20th, 2012 by