The traditional concept of an employee working for an employer on a full-time permanent basis doesn’t always apply in the construction industry. For example, fluctuating demands for work on specific projects, along with seasonal downtime, mean that construction companies often use alternative types of engagement to remain commercially viable.
This Q&A begins with an overview of employment status before turning to consider it in the context of some common working arrangements within the construction industry, as well as the Construction Industry Scheme (CIS).
There are three types of employment status: employee, worker, and self-employed.
Employees and workers are entitled to certain statutory employment rights. Broadly speaking, the key employment rights for workers are the right to receive the National Minimum/Living Wage and paid annual leave. For employees, in addition to the above, the key right is the right not be unfairly dismissed (after two years’ service in most circumstances).
If an individual has been incorrectly categorised, this could give rise to claims for back payment of, for example, holiday pay and wages, or a successful claim for unfair dismissal. There may also be tax and National Insurance implications, including fines and penalties (while ’employee status’ for tax purposes is not the same as employee status for employment law purposes, determining that an individual is a worker or employee for employment purposes is a strong indicator of ’employee status’ for tax purposes).
As such, the implications of misclassifying someone as a self-employed contractor can prove to be very expensive for a company.
How is an individual’s employment status determined for employment purposes?
Case law has established three main principles to consider when determining the employment status of an individual, namely:
1. Personal service
Employees and workers are required to perform work personally and cannot appoint a substitute. A self-employed individual will often (but not always) have the ability to send a substitute in their place.
2. Mutuality of obligation
Employers have an obligation to provide a minimum level of work to employees and employees have an obligation to carry out such work. In contrast, clients do not have to provide work to self-employed individuals who, in turn, may turn down such work if they wish.
In the middle, there are workers – and a considerable body of case law! On current authorities, even if an individual is not obliged to accept work, this does not necessarily mean the individual cannot be a worker during the periods they are working.
3. The company’s degree of control over the individual
An employee/worker has less control over how, when and where work is carried out. For example, they may be told how to plaster the walls and in which order (and often under supervision). In contrast, self-employed individuals agree to provide services to a client; a client builder needs the walls to be plastered, so procures the services of a plasterer to do it – provided the walls are plastered satisfactorily and on time, the client builder is likely not too bothered about how and when the plasterer goes about the work.
Importantly, status is determined by considering a number of factors which often do not point in the same direction. Ultimately, what the courts and tribunals are looking to determine is the overall ‘feel’ of the working relationship. This imports wider considerations into the assessment, such as, who bears the cost of rectifying any mistakes made when work is carried out? If, using the example above, it is the plasterer, then that would point towards self-employed status. Does the plasterer come in their own uniform and provide their own plaster, plastering trowels and other equipment? If the ‘client’ builder provides the uniform and equipment, that points towards employee or worker status.
What are the common types of atypical worker in the construction industry?
The construction industry uses many atypical workers, including:
- Agency workers;
- Casual workers; and
- Self-employed contractors / consultants.
What are agency workers and what are their rights?
Agency workers are individuals who are engaged by an employment business and work for one of the employment business’ clients on a temporary assignment. The agency worker does not enter into a contract with the construction company (typically referred to as the “end-user”) directly, but is usually an employee (or worker) of the employment business.
However, agency workers have various rights that the construction company should be aware of, comparative to the construction company’s own employees:
- “Day one” rights – the end-user client must ensure that the agency worker has access to: (i) the same collective facilities and amenities as those directly engaged by the end-user client (canteen, child-care facilities, transport services etc.); and (ii) relevant job vacancies with the end-user client.
- “Week 12” rights – if an agency worker is carrying out the same role with the same hirer for twelve continuous weeks, they will then become entitled to at least the same basic working and employment conditions which they would have been entitled to had they been recruited directly by the end-user client. This includes the right to at least the same pay, duration of working time, paid annual leave and rest breaks.
What are casual workers and what are their rights?
Casual workers are often flexible workers who supply their services in irregular or informal working arrangements. They are frequently used to meet fluctuating demand on projects and many seasonal industries rely upon casual workers. They are generally individuals who work on an “as required” basis.
Whilst the term ‘casual worker’ is often used, it is not a recognised category of employment status and therefore, in theory, a casual worker can fit into any of the three employment status categories. However, it is often intended that a ‘casual worker’ is a ‘worker’ from an employment status perspective, and therefore is entitled to the rights of a worker. This is often the case in reality, although the specific circumstances of each individual need to be considered.
How do you identify self-employed contractors and how does the Construction Industry Scheme (CIS) fit into issues around employment status?
Self-employed contractors run and manage their own business, providing services to a client, either directly or through a personal service company. Advice should be sought when dealing with personal service companies as they give rise to further status considerations which fall outside the scope of this article.
In reality, genuinely self-employed contractors are likely confined to individuals working in vocational and professional roles – i.e. as an archetypal ‘sub-contractor’. In contrast, individuals who are brought in as ‘labour-only’ workers are unlikely to be genuinely self-employed for both employment and tax purposes.
The CIS sets out a framework for deducting tax and National Insurance at source from payments made under a “construction contract”. Given that tax and National Insurance should already be deducted from payments to employees and workers under the PAYE system, the CIS only covers self-employed individuals.
Importantly, however, being enrolled in the CIS does not have the effect of determining an individual’s employment status as a genuinely self-employed contractor. Instead, the burden of assessing the employment status of sub-contractors falls on the contractor (in accordance with the principles on employment status set out above). The contractor’s monthly returns to HMRC under the CIS must include a declaration that the employment status of its sub-contractors has been considered; if any such statement is inaccurate, HMRC will seek to recover any shortfall in payments and may impose penalties – which is why getting it right is so important.
Liam Faulkner is associate in in the employment team at Walker Morris.
This article was originally published in Construction Management.
