In many cases, determining the correct employment status of a person who performs work for you  (ie. is it employment or self-employment) can be less than obvious.

The fundamental aspect to this, is that neither you nor the worker can simply declare or choose one or the other.  It is the "facts" surrounding the employment relationship that will determine the actual legally binding employment status.

The main factors that need to be considered are as follows. 

You are most likely self-employed if:-

• you run your own business and take financial responsibility for its sucess or failure
• have several customers at the same time
• can decide how, or when and where you do the work
• are free to hire other people to do the work or help you at your own expense
• provide the main items of equipment/tools to do your work

You are more likely to be employed if:

• you have to do the work yourself
• you work for one person at a time, who is in charge of what you do and takes on the risks of the business/provides equipment and tools to enable you to do your job
• can be told how, when and where you do your work
• have to work a set amount of hours
• you recieve paid holiday and/or sick pay
• are paid a regular amount according to the hours you work, and get paid for working overtime

Being able (or unable)  to comply with any one factor above is not absolute to determining employment status.  Status is determined on the basis of the overall facts of the relationship pointing more towards one rather than the other.

It is essential that Employment Status is correctly determined from the start of work being done for two main reasons, that of employment rights and corect PAYE tax treatment. The employment rights of an "employee" are accrued either immediately upon starting work or after a period of time.  If employment status is not correctly determined, you could find yourself liable to such payments as redundancy pay from a worker who you may (incorrectly) have thought to be self-employed.

With regards deductions of pay, if HM Revenue and Customs become aware that you have wrongly treated the person as "self-employed" and have failed to deduct PAYE tax or National Insurance contributions where necessary, you could then be liable for those deductions of pay going back over the last six full tax years!! (Failure to operate PAYE/Tax is also a criminal offence).

To assist employers, HM Revenue and Customs have an Employment Status Indicator (ESI) tool available on their website, this can be very useful in determining the correct status of a worker.  If employers print off the results of the ESI this can be used as providing a binding ruling if HMRC want to query the employment status of a worker at a later date.

The Employment Status Indicator tool (HMRC)

To assist employers with more detailed information, the following advice guide from CA Plus is available to download below.

Employment Status Advice Note (Word)

Employment Status Advice Note (PDF)