When is a freelancer really an employee?

So the answer to ‘who cares?’ is firstly the HMRC. It will want to make sure the correct tax payments are being received (that is, the appropriate National Insurance Contributions and PAYE) and because a freelancer can claim more expenses against any potential tax liability, the HMRC will also scrutinise expenses claims. The second ‘who cares?’ is the freelancers themselves. If a freelancer is not considered genuinely self-employed but actually is, to all intents and purposes, an employee, then they will have a plethora of legal statutory rights from protection from dismissal to maternity rights, minimum wage rights and so on. In both cases, the company is likely to be liable for taxes and/or any other rights as the case may be. It is therefore essential that a freelancer or any company engaging a freelancer is aware of how to distinguish a genuine freelancer from an employee.

There are three main determining factors: control, mutuality of obligation and substitution.  Control focuses on how much freedom and flexibility the individual has with regard to working hours, their overall movement and the level of personal responsibility in carrying out the work in question. The more an individual can decide what hours he or she works, the more likely they are to be freelance.   

The next significant factor is mutuality of obligation. In a freelance relationship, there must be no obligation on the freelancer to undertake the work and, for the company, no obligation to provide any work. This may appear impracticable in reality but it is possible to keep the relationship more at arm’s length: the less interdependent, the less likely it is a full-employment relationship.

Substitution is the third determining factor. An employee cannot substitute themselves with another person because the employment contract is with that employee in particular. With a freelancer, there has to be greater flexibility. Often freelance contracts will contain the right for the freelancer to send a substitute. It does not necessarily matter that the right is rarely exercised; the right of a potential substitution should still be there. However, the substitution clause should be considered carefully, as it goes to the heart of the nature of the arrangement: employees and workers are engaged under a contract for personal services. 

Although the above three factors are the main issues to consider, a few other points should be kept in mind.  Firstly, a freelancer should not be treated as an employee. This may seems obvious, but in practice it is very easy to slip into bad habits. Many businesses like to foster a harmonious relationship with freelancers by treating them as employees, for instance, by giving them certain benefits, or putting them on company lists or fully integrating freelancers as part of a team for the benefit of clients.  It should be clear both internally and externally that the individual is a freelancer. 

Be careful of the tools of the trade a freelancer uses. Genuine freelancers ideally should use their own tools. However, that does not mean that the freelancer cannot use items such as company computers but, instead of having a designated desk, they could have a hot desk and only be given access to certain areas of the IT system.  A company should avoid giving out personal BlackBerrys and instead provide a handset from a pool of spares.

Consider the length of the contract. The longer the contract and therefore the more ingrained within the company the freelancer is, the greater the risk of them being seen as employees. Last but not least, the freelancer should not work exclusively for the one company but should be free to be engaged with other businesses. Although this might be harder if the freelancer is working on a long project, this is one of the best ways to show that the person is a ‘genuine’ freelancer.

It is worth noting that not all the factors have to be ticked off: the taxman and the tribunal will look at all the determining factors and decide the overall position. But be warned that the wording in the freelance agreement is not enough. The authorities will look beyond the documentation at the intentions of both the freelancer and the company and what actually took place in practice.  In any case, a company needs to consider the commercial benefits of the freelance arrangement along with the legal risks that go with it.

Janvi Patel is director and employment law specialist at Halebury