RIFT Legal Services was founded to offer practical help with the regulations around employment status and agency legislation. It outlines the main issues affecting construction firms.
With the growth of the gig economy – where people source their income from various short-term tasks – more questions than ever before are being asked about how to define different workers and working practices.
A recent employment tribunal decision that classified two people earning money driving for Uber as employees was described by Leigh Day employment lawyer Annie Powell, who worked on the case, as “ground-breaking”.
“It will impact not just on the thousands of Uber drivers working in this country, but on all workers in the so-called gig economy whose employers wrongly classify them as self-employed and deny them the rights to which they are entitled,” she said.
The issue is not limited to Uber and has been raised at a parliamentary level concerning other employers.
Birkenhead MP Frank Field in October urged the examination of certain Hermes couriers’ self-employed status, and it also emerged last month that 100 freelance BBC presenters were being investigated by HMRC. In addition, Amazon recently hit the news in relation to the status of delivery drivers working through agencies.
But it doesn’t stop there. Spurred on by pressure from trade unions and MPs, prime minister Theresa May has ordered a review of employment practices.
Royal Society for the encouragement of Arts, Manufactures and Commerce chief executive Matthew Taylor, who will deliver that review has gone on record, writing in the Guardian in October: “Around six million people are not covered by the standard suite of workplace rights.
“Worryingly, that number continues to grow, and it shows how rapidly changing business models and working practices are continually stretching the limits of our employment rules.”
Impact on construction
Focused attempts to convert contractors to employees could affect the construction industry in a big way.
Independent professional membership body the IPSE estimated that in 2015 there were almost 800,000 self-employed workers in the UK construction sector.
The scale of the issue
Many companies and workers enjoy this relationship, with its flexibility and lean productivity. A report by Cranfield School of Management professor Andrew Burke found that freelancers created six forms of economic value in the construction sector, including reducing the upfront cost of projects, keeping build prices down and boosting competition.
“Industry executives in our case study analysis highlighted that the industry business model relies on the ability of firms to use freelancers,” says the report.
However, trade unions are keen to see employment rights conferred on more construction workers.
Ucatt acting general secretary Brian Rye said last month: “If the government’s commitment to force companies to properly comply with rules on employment status is genuine then construction must be a key priority.”
“It shows how rapidly changing business models and working practices are continually stretching the limits of our employment rules”
Matthew Taylor, RSA
There is also a financial motivation for the government to end what is often labelled ‘false self-employment’ in construction.
Employers currently have to pay HMRC national insurance contributions equivalent to 13.8 per cent of salary for many employees. If a tribunal judgement goes against a firm it can be charged any National Insurance it should have paid over the previous six years. This represents a substantial sum that HMRC wants to make sure it collects where due.
Even if this is only £50 per worker, per week, it could be more than £150,000 for 10 workers over the full time period – plus interest and penalties.
A serious issue
HMRC is getting serious about the issue, promising training and support towards “high-quality and hard-hitting results”. On top of this, a 2014 change in legislation is threatening to make it much harder to defend employment status decisions.
A spokesman for HMRC says: “HMRC is currently transforming its compliance approach with the creation of a new employment status and intermediaries team to focus on status and employment intermediary risks. This dedicated resource will allow HMRC to better focus their resources and expertise to ensure these issues are effectively tackled.
“Where companies are believed to have misclassified individuals as self-employed, HMRC establishes the facts of the case and will take steps to ensure that all the appropriate tax, NICs, interest, and penalties are paid.
“The agency legislation at section 44 [of the of the Income Tax (Earning and Pensions) Act 2003] applies where there is a body between the worker and the user of the labour. A construction firm engaging workers directly will need to consider whether they should be properly treated as employees and PAYE be applied.”
|Potential risk and solution – based on a construction firm workforce comprised of 10 self-employed individuals|
|Weekly cost of workforce = 10 x £700 cost p/w||£7,000|
|Annual workforce costs to company, based on 48 weeks p/a||£336,000|
|If HMRC challenges its employment status, potential liability for the company on
National Insurance for workers could be…
|RIFT’s fee = 1.50% of annual gross workforce cut||£5,040|
|Net cost to company after RIFT’s fee (after 20% tax)||£4,032|
|Cost p/w to indemnify against a £43,680 liability||£78|
As demonstrated in guidance issued by HMRC, these changes could significantly impact current common building industry arrangements and make it much simpler for HMRC to bring a successful employment status challenge.
Proving that a worker is employed now means showing that the manner in which he or she provides the services can be ‘supervised, directed or controlled while working on the project’.
Although some skilled trades would come and scope their own jobs on site, this may not be a watertight defence.
“Most people doing work for anyone else would say that if they are being paid they can be told how to work. “ Says Mr Burchmore. “The courts will probably take a practical view on this, if the worker is a skilled tradesmen with experience, it is unlikely there will be the need for control but whether the client actually retains the right of control will depend on the facts of the case and the witness evidence.
“This makes it difficult for construction companies to feel certainty about worker status.
“Word spreads and customers start to know you have an enquiry. People might assume you are doing things you shouldn’t be – even if you’re not”
Kye Burchmore, RIFT
“Especially as many are not aware of the legislation or think they don’t fall into the definition of agency,” says Mr Burchmore. “Assuming is not enough, companies need to be prepared.”
The consequences of an employment status enquiry can be far-reaching.
“Word spreads and customers start to know you have an enquiry. People might assume you are doing things you shouldn’t be – even if you’re not.” Says Mr Burchmore
“Legal representation is vital. There is a huge administrative element and the need for extremely specialist legal expertise that most organisations will not have internally. In addition, needing to find and engage legal advice at short notice comes with its own risks, as does the fact that many firms will have had no prior experience. Undergoing an employment status enquiry is also highly stressful,” he says.
“Opportunity costs can be high as a result of reputation damage. It may become more difficult to win contracts or attract workers. Worse still, even if the liability is further down the supply chain you may suffer the negative effects of such a case hitting the media if your brand is better known and so makes it into the news. This has recently been seen with what is being called ‘The Amazon Case’ although it’s actually an investigation into the agencies supplying the drivers.
Mr Burchmore advises firms to look in detail at the employment conditions and circumstances of all workers they pay, preferably using an expert.
“If you know you’ve looked at status and done everything you can then you’re in a better position than most.
“We have unrivalled experience in this field and we go in to construction companies to look at how they operate. We advise on which people we feel should be classified as self-employed and who needs to be employed for everyone’s benefit. We provide contracts and review documentation to ensure everything stacks up and piece together the right answer for each organisation,” says Mr Burchmore.
“RIFT Legal Services handles any HMRC enquiries for its construction clients, defending any cases brought through to tribunal and are so confident in our expertise that should the judgement differ from the way we advised our client we will pay the liability.”
- RIFT Legal Services will be publishing a digital white paper, in collaboration with Construction News, on employment status in construction on 9 December.
An ‘in-depth understanding’
“I founded RIFT Group in 1999 to help individuals and businesses in the construction industry who were being disadvantaged by complex HMRC tax refund regulations and fought to claim back over £135m in tax refunds,” says RIFT Group founder and managing director Jan Post.
“Our experience in the construction sector and relationships with HMRC, employers and unions means we anticipated that 2016 would be the year that businesses would need practical help with the regulations around employment status and agency legislation,” she says.
“We’ve already built a specialist team at RIFT Legal Services with an in-depth, practical understanding of the legislation from all angles due to their varied backgrounds which include ex-HMRC status inspectors, litigators, through to tax and employment law professionals. With 40 years combined experience in defending HRMC challenges and successfully representing clients at tax tribunals under their belts you can be sure you’ll be in safe hands,” says Ms Post.
RIFT Legal Services is part of the RIFT Group. You can find out more by going here