Therefore, in order to make sure their HR department is ready to take on the scheme, employers are being encouraged to prepare early for auto-enrolment and work out whom to auto-enrol, when and in what circumstances. This crucial first step is also likely to influence the employer's choice of pension arrangement. However, it may not be straightforward for those employers with a variety of consultants, contractors, casual or atypical workers.
The starting point is that employers must automatically enrol "eligible jobholders", that are workers:
(a) Ordinarily working in the UK;
(b) Aged between 22 and state pension age; and
(c) With "qualifying earnings" above a trigger threshold, likely to be £8,105.
The Pensions Act 2008 (in common with the Working Time Regulations 1998 and the National Minimum Wage Regulations 1999) defines "worker" as an individual who has entered into or works under a contract of employment, i.e. a contract of service or apprenticeship (and is therefore an employee); or any other contract by which the "individual undertakes to do work or perform services personally for another party to the contract", but excluding contracts where the other party is a client or customer of the individual's profession or business undertaking.
The contract may in either case be express or implied, and if express, oral or in writing. However, there are a few express exclusions. The director of a company with no employees, members of the armed forces, office holders (who are not also workers in respect of other duties) and volunteers are not workers, but these exceptions may cease to apply if circumstances change, for example if the excluded company employs someone.
Otherwise, the position of each consultant, contractor and "self-employed" worker will need to be assessed against the facts, and monitored on an on-going basis, to determine whether he is in fact an employee, a worker or genuinely outside of auto-enrolment under the second limb of test.
Under employment law, it is the true nature of the relationship between the individual and his "employer" which determines the individual's status. The "label" or particular contractual terms used by the parties provide a starting point, so the description of an individual as "self- employed" or a "consultant" is not definitive, nor is his tax status.
There are three key tests which determine employment status. These boil down to whether the individual provides a personal service in return for pay (mutuality of obligation) under the control of the "employer". However, the remaining factors which make up the relationship in practice also need to be consistent with employment status.
Case law indicates that an unqualified (as opposed to a limited) right to send a substitute or to delegate work fails the "personal service" test, but this will depend on all the facts and on whether a contractual term to this effect forms a genuine term of the contract.
Separate contracts or assignments (such as those undertaken by casual or seasonal workers) may form part of an overall employment relationship depending on whether, in the circumstances, there is "mutuality of obligation" over the period in question . The employment relationship may otherwise be limited to the period of each contract or assignment Whether the assignments are separate or not may impact on when (or whether) the relevant earnings triggers for auto-enrolment are reached.
"Control" relates to control over the individual's working arrangements, hours and his day to day management or direction. Other relevant facts, particularly for senior or other autonomous individuals, include where the risk and profit lies, who provides the equipment or help, how the individual is paid and to what extent, if at all, he is integrated within the employer's business. These factors, taken together, need to point to a master and servant relationship .
Those who fail under the above tests to establish that they are employees may still qualify as "workers" (and hence be entitled to certain protections and to automatic enrolment rights). The test of personal service still applies and the mutuality of obligation and control tests remain relevant, but the bar is set lower. The key issue is the status of the "employer" and whether it is a customer of the individual's profession or business undertaking. An individual may be carrying on a separate business undertaking if, for example, he is not integrated into the "employer's" business, he has the ability to determine his own working hours and arrangements (subject to emergencies), he is not subject to company procedures (such as appraisals or disciplinary), he is not paid when not at work, and he has specialist skills (and hence a stronger bargaining position).
Case law applying these tests has tended to find that tradesmen (such as electricians or painters) are not workers, but individual cases must be determined on their own facts. In contrast, salesmen and labourers described as "self-employed" have been held to be workers, even where they had a limited right to send a substitute to work in their place. On the facts, they were not pursuing a separate business.
Understanding what constitutes a worker and how auto-enrolment applies to them specifically is key for HR managers implementing the new pensions reform. We recommend that employers with atypical workers review their working arrangements and contracts, and the pension implications, well before their auto-enrolment date.
Claire Rankin is a senior associate in the pension team of Burges Salmon
