Legal, financial and regulatory information provider, Mondaq, has provided a series of steps designed to protect genuine contracting professionals and end clients from the danger of employment misclassification.
The advice comes from employment law firm Ogletree, Deakins, Nash, Smoak & Stewart in response to the European Court ruling in November that people misclassified as contracting staff when they are actually workers may claim back holiday pay dating back to 1996, the year the EU’s Working Time Directive was introduced. Prior to the ruling, liability was restricted to one to years’ back pay.
Workers in the UK, following the Working Time Regulations Directive, are entitled to 5.6 weeks of paid leave every year. Self-employed contracting workers, however, have no entitlement to paid annual leave or any of the other statutory employment benefits that come with being designated a “worker” or “employee.”
The exception is with contractors who work via compliant PAYE Umbrella Companies, who do receive these benefits while retaining their status as independent flexible workers.
As recent gig economy tribunal cases have shown, when contractors succeed in challenging their status and are found to be workers, employing companies can face large back payments for the benefits that were not provided.
When assessing possible misclassification cases, courts consider the following factors:
- Does the individual own, manage and invest in his or her own personal service business?
- Is the individual paid a wage or by results?
- How extensively is the individual integrated into the employer’s business?
- Does the individual work on specific, defined tasks?
- To what extent does the individual exercise control over what they do?
To minimise risks of misclassification, Ogletree, Deakins, Nash, Smoak & Stewart explain that flexible worker’s contracts should include the following measures:
- A description of the contractor as a registered independent personal service provider, along with his or her business registration number.
- A clear statement that the contractor will comply with all laws and taxation requirements.
- Clear exclusions of the contractor from employee compensation, bonus or benefits plans.
- A clear statement on any business card, badge or email address provided by an end client that the individual is an independent contractor.
- Precise use of terminology: “services”, not “work”; “liaison”, not “supervision” and “defect in performance”, not “discipline.”
- Inclusion of a deterrent clause requiring the contractor to agree to indemnify the company or pay a specified amount if he or she ever claims to be an employee.
Require individuals who are not contracting via an Umbrella Company to set up their own company and contract with that company. This usually lowers the risk of misclassification.