Sub-contractor or employee – can you tell the difference?

In recent months, several clients have asked me to draft agreements between them and their sub-contractors – and this got me thinking about the fine line that can sometimes exist between being a sub-contractor and being an employee.

Background

As most people know, even when a sub-contractor acts through a limited company or is clearly described in the contract as a ‘self-employed contractor’, there’s still a danger that HMRC will see them as an employee. This means that the fees paid to the ‘sub-contractor’ could be regarded as net salary, in which case the ’employer’ would be required to gross this up and pay HMRC the income tax and National Insurance due on the net sum.

On top of the salary issue, there’s also the matter of protected rights for the ‘employee’, which could potentially lead to their entitlement to redundancy payments or compensation for unfair dismissal, should their services be dispensed with in the future. They may even be entitled to other benefits which are available to the organisation’s actual employees – such as holiday and sickness pay.

So how can you tell if your sub-contractor is, in fact, an employee in the eyes of HMRC? Here are some of my thoughts on the issues to consider if you’re to avoid the risk of your sub-contractors being deemed employees.

How do you and your sub-contractor work together?

If you’re asking them to work set hours, giving them the tools and equipment they need to do the job, providing an office for them and controlling their activities, then they’re starting to look very much like an employee.

On the other hand, if you’ve sub-contracted a specific piece of work to a third party for a set fee and then simply let them get on with it, then it looks like you’re genuinely working with a sub-contractor.

Of course, the work they do will still be subject to the confines of a brief and they’ll be bound by contractual obligations such as completion deadlines and quality standards. But the crux of the matter is that they’ll be working independently – under their own banner as it were, rather than that of your company.

How many clients do they have?

Consider the difference between someone who provides an organisation with their services on a retained basis for a few days a month, but who works for several other clients as well, with someone who only works for one client.

It’s easy to see how, in the latter case, a sub-contractor could be viewed as an employee by HMRC.

Does the agreement sound like a contract of employment?

When drafting an agreement with a sub-contractor, it’s important to avoid using terms that are associated with employees, such as ‘salary’, ‘holiday’, and ‘gross misconduct’.

Whilst it’s OK to specify the name of the individual you wish to do the work, the contract should make it clear that the sub-contractor can send a suitable substitute employee to do the work if necessary. It should also make it clear that the sub-contractor is free to work for other clients, provided there’s no conflict of interest with your firm.

Are they responsible for their own actions?

As an employer, you’re responsible for the actions of your staff, who would be covered by your company’s insurance policies for public and professional liability and so on. You would also have certain rights over the intellectual property (IP) created during the course of their employment.

However, in a genuine sub-contracting situation, whilst you will almost certainly still be liable to your client for your sub-contractor’s inadequacies, your sub-contractor would have its own insurance arrangements in place. The ownership of any IP produced by the sub-contractor would need to be clarified within the contract, as would the treatment of any confidential information.

Other things to consider

The sub-contractor/employee issue isn’t the only thing to consider when drafting agreements with third parties. You’ll also need to cover all the usual things, such as quality of work and how this will be controlled; your right to cancellation/non-payment in the event of substandard work; and the sub-contractor’s obligations to you after termination.

For more information on these areas, please see my earlier posts on using sub-contractors successfully and the risks of being ‘piggy in the middle’.