What are the risks of employee misclassification in the UK?

Knowing the difference between a contractor and an employee can save you from serious legal, financial and reputational consequences. 

Employers today have the opportunity to tap into a vast global talent pool comprising of millions of potential candidates. This has facilitated expansion across borders in ways that were previously unimaginable, including the new world of remote working. However, it’s a challenge for fast-growing businesses to remain legally compliant when hiring internationally, as local regulations on employment and taxation laws are constantly changing. 

In the complex world of UK employment, there are various terms that employers need to familiarize themselves with to ensure legal compliance and foster a harmonious work environment. One major risk is employee misclassification: the act of improperly categorizing an individual’s employment status, which can lead to legal liabilities, financial penalties and reputational damage. 

In this article, we’ll go over the difference between a contractor and an employee in the UK, set out the penalties that might be incurred for misclassifying workers in the country, and explain how partnering with an Employer of Record (EOR) can ensure you’re compliant with global labor laws.  

What is the difference between a “contractor” and an “employee” in the UK? 

Classifying a contractor versus an employee in the UK can be confusing, even leading to high-profile court cases with unpredictable outcomes. In Uber BV v Aslam, for example, the UK’s Supreme Court upheld the Employment Appeal Tribunal’s decision that Uber drivers were workers and not self-employed contractors. On the other hand, in the Independent Workers Union of Great Britain v Roo Foods Ltd, the Supreme Court held that Deliveroo riders were not in an employment relationship. 

Generally, an employee is a worker who performs a job defined by you. While an employee might have some freedom (like flexible hours), you have the right to manage and direct them. On the other hand, contractors are hired to work on specific projects needed by your business. While you specify the results of their work, they have control over how the work is done. 

According to HMRC, if a worker is economically dependent upon a company, the worker is likely an employee. If the worker has their own business and is economically independent of the company, the individual is likely an independent contractor.  

To understand how to categorize a hire, consider the following questions: 

• Are they required to work regularly, unless they’re on leave? 

• Are they entitled to paid holiday, sick pay, and maternity or paternity pay? 

• Are they required to do a minimum number of hours for a set wage or salary? 

• Is a manager or supervisor responsible for their workload, including setting deadlines and processes? 

• Can they send someone else to do their work? 

• Does the business deduct tax and National Insurance contributions from their wages? 

• Can they join the business’s pension scheme? 

• Do they work at the business’s premises or at an address specified by the business? 

• Does their contract set out redundancy procedures? 

• Does the business provide the materials, tools and equipment for their work? 

• Is the business their sole employer (or, if they do have another job, is it completely different to their work for the business)? 

• Does their contract or offer letter use terms like “employer” and “employee”? 

If the above conditions apply to an individual, they are deemed an employee. If any of the above changes (for example, if a contractor begins to work for you more regularly), it’s worth revisiting these conditions to check they are still classified correctly.  

Penalties for misclassifying workers in the UK 

When a contractor is treated as self-employed but works under conditions similar to those of a permanent employee, this is known as misclassification. The UK Government has recently stepped-up efforts to combat employee misclassification, so it’s important to be careful when classifying your team members so you can avoid unintended consequences.  

Whether it happens accidentally or by deliberate malintent, misclassification can have legal and financial consequences for both employer and employee across the following areas.  

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National Insurance

Employers are responsible for paying National Insurance contributions and income taxes on behalf of their employees. If an employer misclassifies an employee, they are violating wage, tax and employment eligibility laws, and can incur fines and/or legal action from HMRC.  

Employment law

Employers must have P45 forms on record for each individual employee to provide their employment eligibility. If you are found to have misclassified an employee as an independent contractor, you may be fined for not retaining these forms.  

Taxation 

Employers are also required to file payroll taxes (independent contractors are responsible for their own taxes) and may be fined for failing to do so if they are found to be misclassifying employees. They may also end up facing back taxes.  

Reputation

Misclassifying employees can erode trust between employers and their workforce and make it difficult to attract and retain talent. In extreme cases, employers might face lawsuits from misclassified workers looking to seek compensation.  

Hire compliantly in the UK with Atlas  

If you’re unfamiliar with local labour laws or have a large workforce, it can be worryingly easy to accidentally misclassify an employee or contractor. To mitigate the risks, it’s important to take proactive measures to ensure you’re compliant. This includes: 

• Using accurate written contracts. 

• Assessing all working relationships and contractual agreements. 

• Communicating clearly with workers regarding their rights, including any benefits they may/may not be entitled to. 

• Regularly reviewing and updating employment practices. 

Alternatively, partnering with a direct EOR such as Atlas allows you to reap the benefits of being an international company — regardless of your business’ size — while avoiding many of the complexities. 

Atlas simplifies the process of international expansion, cutting through the red tape so that you can quickly onboard and legally pay employees while complying with local labor laws. As well as handling the process of worker engagement, Atlas also has verified on-demand data and insights on salary ranges, local laws and onboarding speeds.  

This guidance can be invaluable; take inDrive, who were able to successfully navigate the gig economy and power a rapid overseas expansion by using Atlas to differentiate between contractors and employees across diverse global employment laws.  

Partnering with Atlas when expanding into the United Kingdom can dramatically reduce the standard brick and mortar processes of doing business in foreign markets and allow you to focus on what you do best — growing your company. 

Disclaimer: The information contained in this article is intended for informational purposes only and is not intended to be construed as legal advice. The content is provided as updated at the time it was published only without any warranty of any kind, expressed or implied. Atlas is not a law firm and the material provided should not be used in lieu of professional legal consultation. It is recommended that readers seek legal advice from a qualified attorney or legal expert for guidance on any legal issues addressed in this article. Atlas shall not be responsible for any damages or problems that may arise from the use of the information provided in this article.