Self-employment is a phenomenon that occurs throughout Europe to varying degrees and it covers a wide range of worker categories. The need to clarify these categories has been discussed for a long time by both politicians and the media, but following the emergence of specialised employment platforms such as TaskRabbit, there now appears to be a real appetite to address the issue at a policy level.
But the significant changes that have occurred in employment relationships over recent years have led to difficulties in even coming up with a standard definition for ‘self-employed workers’. The emergence of the gig economy and an increase in flexible working practices have created something of a grey area for employers and governments alike.
Nonetheless, nearly every European country has made an effort over recent years to find a more effective legal definition for self-employment in order to create a framework to ensure workers obtain adequate social security coverage, are eligible to rights and protections under labour law and pay the correct amount of tax.
Definition issues
According to the European Commission, a selfemployed person is defined as someone who is “pursuing a gainful activity for their own account, under the conditions laid down by national law”. This definition comes from a directive relating to the application of the principle of equal treatment between men and women who have been engaged on a self-employed basis. It contrasts with the definition of an employee, who is subordinate to, and dependent on, an employer.
Unfortunately though, there is no unambiguous European-wide definition to make a clear distinction between people who are genuinely selfemployed and those who are not. Each jurisdiction applies its own legal and regulatory framework to the situation, which, just to make things even more complicated, may differ in relation to tax law, social security and employment law.
This lack of clarity creates major problems for hiring companies that work across borders within the European Union’s (EU) internal market. As a result, the European Parliament’s Resolution on the Renewed Social Agenda suggested that EU member states conduct initiatives that could “lead to a clear distinction between employers, genuine self-employed and small entrepreneurs on the one hand and employees on the other”.
Legal tests
European legal systems apply tests to differentiate between an ‘employee’ and a ‘self-employed’ person. While the EU also has a definition of what a ‘worker’ consists - established by the European Court of Justice - each European country decides who should be considered a ‘worker’ under their national rules and they can extend that definition.
In practice, therefore, there are three general categories:
• Employee;
• Worker;
• Self-employed.
If there is any doubt as to which category an individual falls, it is necessary to judge each situation on a case-by-case basis and confirm which status applies based on a comprehensive test of pertinent criteria.
From April 2017 in the UK, however, if an individual provides their services under some form of wrapper such as a limited company or limited liability partnership and they also work for another organisation in the public sector, their status will be subject to further scrutiny. Where appropriate, UK tax legislation requires that, for tax and social security purposes, they are treated as if they were an employee on the hiring company’s payroll.
The Chancellor intimated in his recent Budget that we would hear more on this issue during 2018, with legislation possibly being extended to cover other areas than just the public sector in April 2019. The same situation applies to taxation. UK (common law), meanwhile, has five main tests that can be applied to the definition issue:
1. Substitution: Can the individual concerned send someone else to perform their services? Are they responsible for paying for that substitute? If the answer is yes, Her Majesty’s Revenue & Customs are very likely to assume they are self-employed;
2. Control: Does the individual report into someone at the hiring company and do they tell them what to do and when? Can they be moved from task-to-task? If the engager is able to exert a high level of control over their working life, an individual is unlikely to be self-employed; 3. Integration: To what extent is an individual integrated into the hiring company and treated like other employees? For example, can they use staff facilities? Do they have an email address and/or telephone extension at the engager’s site? Have they been with the hiring company for a prolonged period of time? Are they a former employee? Are they providing services previously undertaken by an employee? Do they claim expenses through the staff expenses system? The more they are treated like other employees, the less likely their relationship falls under the bracket of ‘selfemployment’;
4. In business on their own account: Does an individual provide any significant items of equipment of their own to do their job? If yes, the situation may help in coming to a conclusion as to their status, but it may simply be the case that no equipment is involved. Do they have other clients? Even if they do, it is not a particularly forceful indicator of status as it is possible to be employed in one situation and self-employed in another. Do they bear any financial risk as a result of being selfemployed or are they paid based on a daily or hourly rate? A project rate might demonstrate more risk, but checking if they hold Public Liability Insurance should also help to a degree;
5. Mutuality of obligation: Is the hiring company obliged to offer work and is the individual obliged to accept it? If they are and have turned down work in the past, this scenario is helpful in determining status. Therefore, it is a good idea to keep a record of all occasions in which this situation has taken place.
By contrast, in many other EU countries, the definition of ‘employee’ and ‘self-employed’ is enshrined in civil law, leaving the courts with much less discretion.
As of 30 September 2017, the UK Criminal Finance Act 2017 created a new corporate offence of “failure to prevent the facilitation of tax evasion” in the UK or overseas, which is punishable by unlimited fines. The Act has broad geographical implications and non-UK companies may also be subject to these new offences.
As a result, it is important for organisations to familiarise themselves with the fine print of the legislation. For example, it could apply if the true employment status of workers is concealed, or if the hiring company failed to notify the relevant authorities on discovering discrepancies.
In terms of consequences for non-compliance, if a freelance or self-employed relationship is found to qualify as an employment relationship, the hiring company will be required to:
- Make a retroactive repayment of social security contributions;
- Grant full statutory rights to the employee concerned in respect to holiday entitlements, sick pay, working time and the like;
- Assume liability for unpaid tax, administrative fines and/or criminal prosecution in case of intent.
Tax lessons from abroad
As the UK Office of Tax Simplification (OTS) pointed out, because different countries across the globe adopt different approaches, the sharing of best practice should be encouraged. For example:
- Canada and Brazil: The difference in terms of the impact on tax and social security for employed versus self-employed people is relatively minor. Therefore, although there is no clear and simple dividing line between the two statuses, in tax or social security terms, it is not much of an issue;
- USA: There are three sets of guidelines to determine an employee’s status here: (1) common law; (2) court decisions and (3) the Economic Realities test. These guidelines illustrate how to decide if an individual would not be categorised as an employee, thus making the default status one of employment.
There is a helpful summary of this point here;
- Ireland: This country makes greater use of withholding taxes from the non-employed. As well as there being an equivalent to the UK’s Construction Industry Scheme (which, incidentally, applies beyond construction), there also exists a withholding tax that is applied to the non-employed working for (broadly) public authorities;
- Australia: The 80/20 rule helps to decide on employment status here. If a contractor derives 80% or more of their income from one client, Pay as You Go must be applied. A “wholly, or mainly labour” test can also be applied to assess how to deal with tax;
- Germany: Although not dissimilar to the UK in how the country determines status, if employers get it wrong, they can face fines and criminal prosecution as well as being required to repay tax and social security contributions. They can also apply for social security status to be determined.
What next?
As governments across Europe and the world try to keep up to date with the changing nature of the 21st century workforce, policymakers must avoid a ‘one-size-fits-all’ approach if they wish to enable genuine self-employment.
Despite Brexit, the UK is also likely to see changes too. Matthew Taylor’s review into working practices in today’s economy made it clear that a legal definition would help all parties to be sure about an individual worker’s status. This would make it easier not only to understand their legal rights, but also to get their tax and social security contributions right. False self-employment has long been an issue in the UK, but such cases are becoming more common and gaining significant media attention.
Conclusion
Today, but also even once the UK leaves the EU, it is clear that hiring companies would benefit from a European-wide robust, yet transferrable definition of what “self-employment” and “worker” status really mean.
Susan Ball is a partner and heads up Crowe Clark Whitehill LLP’s Employers’ Advisory Services. She has over 25 years experience of working in employment tax, investigations and rewards. Susan heads a multidisciplinary team, advising on a full range of employment issues for organisations in the commercial and charity sectors.
Her team was highly commended in the Forum for Expatriate Management’s “Tax Provider of the Year” awards for expatriate tax in 2013. It was also part of a wider group that won the LexisNexis “Best Tax Investigations Team of the Year” for 2012 and 2014.
Self-employment is a phenomenon that occurs throughout Europe to varying degrees and it covers a wide range of worker categories. The need to clarify these categories has been discussed for a long time by both politicians and the media, but following the emergence of specialised employment platforms such as TaskRabbit, there now appears to be a real appetite to address the issue at a policy level.
But the significant changes that have occurred in employment relationships over recent years have led to difficulties in even coming up with a standard definition for ‘self-employed workers’. The emergence of the gig economy and an increase in flexible working practices have created something of a grey area for employers and governments alike.
Nonetheless, nearly every European country has made an effort over recent years to find a more effective legal definition for self-employment in order to create a framework to ensure workers obtain adequate social security coverage, are eligible to rights and protections under labour law and pay the correct amount of tax.
Definition issues
According to the European Commission, a selfemployed person is defined as someone who is “pursuing a gainful activity for their own account, under the conditions laid down by national law”. This definition comes from a directive relating to the application of the principle of equal treatment between men and women who have been engaged on a self-employed basis. It contrasts with the definition of an employee, who is subordinate to, and dependent on, an employer.
Unfortunately though, there is no unambiguous European-wide definition to make a clear distinction between people who are genuinely selfemployed and those who are not. Each jurisdiction applies its own legal and regulatory framework to the situation, which, just to make things even more complicated, may differ in relation to tax law, social security and employment law.
This lack of clarity creates major problems for hiring companies that work across borders within the European Union’s (EU) internal market. As a result, the European Parliament’s Resolution on the Renewed Social Agenda suggested that EU member states conduct initiatives that could “lead to a clear distinction between employers, genuine self-employed and small entrepreneurs on the one hand and employees on the other”.
Legal tests
European legal systems apply tests to differentiate between an ‘employee’ and a ‘self-employed’ person. While the EU also has a definition of what a ‘worker’ consists - established by the European Court of Justice - each European country decides who should be considered a ‘worker’ under their national rules and they can extend that definition.
In practice, therefore, there are three general categories:
• Employee;
• Worker;
• Self-employed.
If there is any doubt as to which category an individual falls, it is necessary to judge each situation on a case-by-case basis and confirm which status applies based on a comprehensive test of pertinent criteria.
From April 2017 in the UK, however, if an individual provides their services under some form of wrapper such as a limited company or limited liability partnership and they also work for another organisation in the public sector, their status will be subject to further scrutiny. Where appropriate, UK tax legislation requires that, for tax and social security purposes, they are treated as if they were an employee on the hiring company’s payroll.
The Chancellor intimated in his recent Budget that we would hear more on this issue during 2018, with legislation possibly being extended to cover other areas than just the public sector in April 2019. The same situation applies to taxation. UK (common law), meanwhile, has five main tests that can be applied to the definition issue:
1. Substitution: Can the individual concerned send someone else to perform their services? Are they responsible for paying for that substitute? If the answer is yes, Her Majesty’s Revenue & Customs are very likely to assume they are self-employed;
2. Control: Does the individual report into someone at the hiring company and do they tell them what to do and when? Can they be moved from task-to-task? If the engager is able to exert a high level of control over their working life, an individual is unlikely to be self-employed; 3. Integration: To what extent is an individual integrated into the hiring company and treated like other employees? For example, can they use staff facilities? Do they have an email address and/or telephone extension at the engager’s site? Have they been with the hiring company for a prolonged period of time? Are they a former employee? Are they providing services previously undertaken by an employee? Do they claim expenses through the staff expenses system? The more they are treated like other employees, the less likely their relationship falls under the bracket of ‘selfemployment’;
4. In business on their own account: Does an individual provide any significant items of equipment of their own to do their job? If yes, the situation may help in coming to a conclusion as to their status, but it may simply be the case that no equipment is involved. Do they have other clients? Even if they do, it is not a particularly forceful indicator of status as it is possible to be employed in one situation and self-employed in another. Do they bear any financial risk as a result of being selfemployed or are they paid based on a daily or hourly rate? A project rate might demonstrate more risk, but checking if they hold Public Liability Insurance should also help to a degree;
5. Mutuality of obligation: Is the hiring company obliged to offer work and is the individual obliged to accept it? If they are and have turned down work in the past, this scenario is helpful in determining status. Therefore, it is a good idea to keep a record of all occasions in which this situation has taken place.
By contrast, in many other EU countries, the definition of ‘employee’ and ‘self-employed’ is enshrined in civil law, leaving the courts with much less discretion.
As of 30 September 2017, the UK Criminal Finance Act 2017 created a new corporate offence of “failure to prevent the facilitation of tax evasion” in the UK or overseas, which is punishable by unlimited fines. The Act has broad geographical implications and non-UK companies may also be subject to these new offences.
As a result, it is important for organisations to familiarise themselves with the fine print of the legislation. For example, it could apply if the true employment status of workers is concealed, or if the hiring company failed to notify the relevant authorities on discovering discrepancies.
In terms of consequences for non-compliance, if a freelance or self-employed relationship is found to qualify as an employment relationship, the hiring company will be required to:
- Make a retroactive repayment of social security contributions;
- Grant full statutory rights to the employee concerned in respect to holiday entitlements, sick pay, working time and the like;
- Assume liability for unpaid tax, administrative fines and/or criminal prosecution in case of intent.
Tax lessons from abroad
As the UK Office of Tax Simplification (OTS) pointed out, because different countries across the globe adopt different approaches, the sharing of best practice should be encouraged. For example:
- Canada and Brazil: The difference in terms of the impact on tax and social security for employed versus self-employed people is relatively minor. Therefore, although there is no clear and simple dividing line between the two statuses, in tax or social security terms, it is not much of an issue;
- USA: There are three sets of guidelines to determine an employee’s status here: (1) common law; (2) court decisions and (3) the Economic Realities test. These guidelines illustrate how to decide if an individual would not be categorised as an employee, thus making the default status one of employment.
There is a helpful summary of this point here;
- Ireland: This country makes greater use of withholding taxes from the non-employed. As well as there being an equivalent to the UK’s Construction Industry Scheme (which, incidentally, applies beyond construction), there also exists a withholding tax that is applied to the non-employed working for (broadly) public authorities;
- Australia: The 80/20 rule helps to decide on employment status here. If a contractor derives 80% or more of their income from one client, Pay as You Go must be applied. A “wholly, or mainly labour” test can also be applied to assess how to deal with tax;
- Germany: Although not dissimilar to the UK in how the country determines status, if employers get it wrong, they can face fines and criminal prosecution as well as being required to repay tax and social security contributions. They can also apply for social security status to be determined.
What next?
As governments across Europe and the world try to keep up to date with the changing nature of the 21st century workforce, policymakers must avoid a ‘one-size-fits-all’ approach if they wish to enable genuine self-employment.
Despite Brexit, the UK is also likely to see changes too. Matthew Taylor’s review into working practices in today’s economy made it clear that a legal definition would help all parties to be sure about an individual worker’s status. This would make it easier not only to understand their legal rights, but also to get their tax and social security contributions right. False self-employment has long been an issue in the UK, but such cases are becoming more common and gaining significant media attention.
Conclusion
Today, but also even once the UK leaves the EU, it is clear that hiring companies would benefit from a European-wide robust, yet transferrable definition of what “self-employment” and “worker” status really mean.
Susan Ball is a partner and heads up Crowe Clark Whitehill LLP’s Employers’ Advisory Services. She has over 25 years experience of working in employment tax, investigations and rewards. Susan heads a multidisciplinary team, advising on a full range of employment issues for organisations in the commercial and charity sectors.
Her team was highly commended in the Forum for Expatriate Management’s “Tax Provider of the Year” awards for expatriate tax in 2013. It was also part of a wider group that won the LexisNexis “Best Tax Investigations Team of the Year” for 2012 and 2014.
