“Direct employment is too difficult, I’ll just put them on an independent contractor agreement”.
This assertion is one I hear frequently in the Salon industry, but it is a belief that is fraught with danger for two major reasons:
- The Independent contractor claiming they are actually an employee and therefore due holiday pay etc.
- The IRD claiming that they are actually an employee and therefore the employer is liable for their tax.
Sadly, in both cases, an employer will not realise they have a problem until there is already a significant financial liability accrued against them.
The claim that they are an employee
Whilst everyone is happy and getting along the chances of this type of claim arising are minimal.
However, in a recent case I dealt with, the employee had been on the wrong agreement for 10 years, but she was happy with the flexibility it afforded her. Out of the blue she got a call from her boss saying “clear your desk, you’re out”. After the initial shock she, unsurprisingly, decided to get her own back. Item 1 on her claim was 10 years of back holiday pay… she won.
When the IRD wants to be paid
Death and taxes are the only two certainties in life, and whether we like it or not the IRD likes to get paid. So if it gets to the end of the year and “employee/contractor” gets a tax demand from the IRD which they can’t pay, there is a significant risk to employers that they take the line that “I thought my employer had been paying my tax”.
Admittedly, it is certainly not so simple that the IRD will immediately turn to the employer for the tax payment. The employee/contractor and the IRD both have an onus of proof, but if they can prove the case then the employer will be liable for the tax, and this will generally be calculated on the basis that what has been paid to the “employee/contractor” is NETT and therefore the tax liability is the grossed up amount of that value.
Myth Buster about Employee status
The tax rules are such that, if you get more than 80% of your revenue from one source then you pay tax based on the lower “Company” tax rates, you pay the same tax as the “employee” rates. However, this does NOT mean the person is automatically an employee just because they do more than 80% for one company, the ONLY automatic change is to their tax status.
How do I protect myself?
Firstly, you need to review the current situation, and take action as necessary:
- Do you have independant contractor agreements in place for all people you engage?
- Are you 100% certain that everyone has the same understanding as you?
How to rectify the situation?
If you are in any doubt about the peoples understanding of their status then open discussions with them, and keep notes of those discussions.
If their response is “no, totally happy and fully understand that I am a contractor”, then make sure you have a written agreement in place, and ensure that you have, in writing (e-mail or in the cover letter of an agreement) that they have acknowledged their understanding of the status. In the event of things going badly, this will be a very important piece of your defence if they try to say they genuinely believed they were an employee.
If their response is one of shock or uncertainty about the implications of being a contractor or employee, then give us a call on 0800 HRTOOLKIT (0800 47 86 65) to discuss how to proceed. Often it can be resolved quite readily when everyone is talking but can cause huge issues if it comes up in a dispute.
Help is available
Call the HRtoolkit team on 0800 HRTOOLKIT (0800 47 86 65) for more help and advice, NB we don’t charge for the 10-minute issues, and in the vast majority of cases, 10 minutes is all it will take our specialists to solve the issue with you.