![[UK] Hidden employees: who are they and how should employers manage them?](http://globalpayrollassociation.com/cdn/shop/articles/bigstock-A-Green-Man-Stands-In-A-Crowd--430817786_1200x.jpg?v=1632992887)
At one time it was relatively easy to make sure that all people who should be on payroll were put on a payroll. However, this is not the case these days, particularly when it comes to cross border working and the multitude of new and hybrid working arrangements.
Payroll compliance is of course not solely about operating payroll correctly but is also working out who should be on payroll in the first place. This can be particularly hard for employers when it comes to those I call “hidden employees”. That is those people who are not ‘typical’ employees (or may not even call themselves employees at all) but, nevertheless, may well need to be on payroll.
In this article, I explore who the ‘hidden employees’ may be to help you more easily determine where to look, some of the implications of ignoring them and what you should do as an employer to manage this area.
Who are they?
Hidden employees are those ‘non-standard’ employees that don’t get put on payroll (or the correct payroll) from Day 1. They include (but are not limited to):
* Contractors who your business may treat as self-employed but who are in fact employees for tax purposes and who should be on your payroll.
* International commuters who live in the UK but who are employed and work for another part of your group outside the UK.
* Short-term business visitors who are employed by a non-UK Company in your group, are paid outside the UK but undertake duties for your company in the UK.
* Non-resident directors who live outside the UK, are perhaps paid outside the UK but attend UK board meetings from time to time.
* Globally remote workers who are on your UK payroll but who live and work in another country.
In all of these cases, there are highly likely to be PAYE, NIC and other employer compliance obligations or non-UK payroll obligations (in the case of international commuters and globally remote workers). However, despite the risks they present (see below), there is often widespread un-intended non-compliance across the areas above.
In the coming months, I will be exploring the individual categories above from an international perspective in more detail. For now, I consider them as a whole below to help make looking at this more manageable and to draw out key themes.
Why does it matter?
The primary problem with hidden employees is the unknown unknowns. When I get asked to help deal with a hidden employee-related issue, it is normally because something has gone unexpectedly awry (e.g. someone has received a tax demand, you have had a PAYE audit or someone in the know stumbles across something etc.). This area can really throw up some surprises.
If you don't have sight of hidden employees, you will not know if you have:
* current unfulfilled payroll and tax compliance obligations;
* historic financial exposure (underpaid PAYE and NIC) or the extent of this exposure. HMRC can normally look back at four tax years for PAYE and 6 tax years for NIC. Once you add penalties and interest on top, the bill can soon mount;
* non-UK payroll obligations. Again, financial consequences can be significant, particularly in countries like South Africa where there is no Statute of Limitations (i.e. the authorities can look back as far as they want to assess under-reporting); or
* exposure to litigation (I refer here to the contractors who are treated as self-employed but may actually be deemed employees for UK employment law purposes). There have been numerous court cases in this area.
Despite this, hidden employees are often overlooked. There are no doubt a multitude of reasons for this. Here are some of my perceptions:
* Lack of visibility. Quite simply, it is often much harder to try and identify where you may have an issue when it comes to hidden employees because, by their very nature, they and the issues that they may create are not in plain view. It is often only when there is an event (e.g. a tax authority audit) that the issue comes to the fore.
* Who is responsible anyway? Even where we know there may be a potential issue (e.g. you have noticed a lot of non-UK workers in the building of late), you may not see it as your responsibility to get involved (or you may simply not want to add another problem to your in-tray!)
* Complexity/lack of clarity. Even if you manage to identify hidden employees, determining whether or not they create issues for your company can be tricky. The rules are not straightforward and are often nuanced. Of course, it is naturally difficult trying to justify spending time (and cost) on something which may or may not be an issue. Even if you become convinced, convincing others can be even harder, on the same basis.
No theoretical risk
This is no theoretical risk. I have come across many examples (from minor to significant) where hidden employee-related issues come to light too late:
* In one example, an organisation engaged an individual on a self-employed basis for over 10 years. However, following an enquiry, the individual was deemed to be employed rather than self-employed and the company was required to pay over £100k in unpaid historic employers National Insurance Contributions, plus penalties and interest.
* In another case, an employer did not fully understand the UK rules on short term businesses visitors and had concluded that no action was required on account of the visitors being employed and paid by a non-UK firm. This led to a review by HMRC and a settlement of unpaid historic unpaid PAYE and NIC which exceeded £0.5 million.
What can be done?
Taking action is key to preventing the unexpected but is seldom easy in this area. Where do you start? I outline the key steps below:
* Identify where you may have potential exposure under the categories above of hidden employees and any others you may have. This will ordinarily be best undertaken in conjunction with relevant stakeholders across the business, including HR, finance and departmental heads, for example.
* Unearth the hidden employees and get a list together, so you know what you’re dealing with.
* Review the tax, NIC and payroll position and assess whether you may have a problem. Professional advice may be needed at this stage.
* Settle any historic underpayments, where applicable, and/or document why you have determined that there are no obligations.
* Design and implement a new policy and process for dealing with the category/catagories of hidden employees. For example, this may mean putting in place a policy and process to manage your globally remote workers or the onboarding of your contracts.
Above all, don’t ignore the issue as it is sure to surface at some point!
Author: Lee McIntyre-Hamilton
Lee has over 23 years of experience in international mobility, expatriate tax and employment tax. He works with a diverse range of international organisations, from small owner-managed businesses to large multi-national corporations and non-profit organisations. Lee delivers coordinated, joined-up global mobility tax, international social security and payroll advice across many territories globally. He is a published writer on international tax matters, notably the Tiley & Collinson UK Tax Guide.
Contact Lee: lee@globalpayrollassociation.com
Disclaimer:
The information included in this article is guidance only for educational purposes and is provided with the understanding that the Global Payroll Association or any other party are not herein engaged in rendering tax or other professional advice. Therefore, guidance within this article should not be relied upon for taking any particular course of action and should not be used as a substitute for obtaining professional advice where this is required.
At one time it was relatively easy to make sure that all people who should be on payroll were put on a payroll. However, this is not the case these days, particularly when it comes to cross border working and the multitude of new and hybrid working arrangements.
Payroll compliance is of course not solely about operating payroll correctly but is also working out who should be on payroll in the first place. This can be particularly hard for employers when it comes to those I call “hidden employees”. That is those people who are not ‘typical’ employees (or may not even call themselves employees at all) but, nevertheless, may well need to be on payroll.
In this article, I explore who the ‘hidden employees’ may be to help you more easily determine where to look, some of the implications of ignoring them and what you should do as an employer to manage this area.
Who are they?
Hidden employees are those ‘non-standard’ employees that don’t get put on payroll (or the correct payroll) from Day 1. They include (but are not limited to):
* Contractors who your business may treat as self-employed but who are in fact employees for tax purposes and who should be on your payroll.
* International commuters who live in the UK but who are employed and work for another part of your group outside the UK.
* Short-term business visitors who are employed by a non-UK Company in your group, are paid outside the UK but undertake duties for your company in the UK.
* Non-resident directors who live outside the UK, are perhaps paid outside the UK but attend UK board meetings from time to time.
* Globally remote workers who are on your UK payroll but who live and work in another country.
In all of these cases, there are highly likely to be PAYE, NIC and other employer compliance obligations or non-UK payroll obligations (in the case of international commuters and globally remote workers). However, despite the risks they present (see below), there is often widespread un-intended non-compliance across the areas above.
In the coming months, I will be exploring the individual categories above from an international perspective in more detail. For now, I consider them as a whole below to help make looking at this more manageable and to draw out key themes.
Why does it matter?
The primary problem with hidden employees is the unknown unknowns. When I get asked to help deal with a hidden employee-related issue, it is normally because something has gone unexpectedly awry (e.g. someone has received a tax demand, you have had a PAYE audit or someone in the know stumbles across something etc.). This area can really throw up some surprises.
If you don't have sight of hidden employees, you will not know if you have:
* current unfulfilled payroll and tax compliance obligations;
* historic financial exposure (underpaid PAYE and NIC) or the extent of this exposure. HMRC can normally look back at four tax years for PAYE and 6 tax years for NIC. Once you add penalties and interest on top, the bill can soon mount;
* non-UK payroll obligations. Again, financial consequences can be significant, particularly in countries like South Africa where there is no Statute of Limitations (i.e. the authorities can look back as far as they want to assess under-reporting); or
* exposure to litigation (I refer here to the contractors who are treated as self-employed but may actually be deemed employees for UK employment law purposes). There have been numerous court cases in this area.
Despite this, hidden employees are often overlooked. There are no doubt a multitude of reasons for this. Here are some of my perceptions:
* Lack of visibility. Quite simply, it is often much harder to try and identify where you may have an issue when it comes to hidden employees because, by their very nature, they and the issues that they may create are not in plain view. It is often only when there is an event (e.g. a tax authority audit) that the issue comes to the fore.
* Who is responsible anyway? Even where we know there may be a potential issue (e.g. you have noticed a lot of non-UK workers in the building of late), you may not see it as your responsibility to get involved (or you may simply not want to add another problem to your in-tray!)
* Complexity/lack of clarity. Even if you manage to identify hidden employees, determining whether or not they create issues for your company can be tricky. The rules are not straightforward and are often nuanced. Of course, it is naturally difficult trying to justify spending time (and cost) on something which may or may not be an issue. Even if you become convinced, convincing others can be even harder, on the same basis.
No theoretical risk
This is no theoretical risk. I have come across many examples (from minor to significant) where hidden employee-related issues come to light too late:
* In one example, an organisation engaged an individual on a self-employed basis for over 10 years. However, following an enquiry, the individual was deemed to be employed rather than self-employed and the company was required to pay over £100k in unpaid historic employers National Insurance Contributions, plus penalties and interest.
* In another case, an employer did not fully understand the UK rules on short term businesses visitors and had concluded that no action was required on account of the visitors being employed and paid by a non-UK firm. This led to a review by HMRC and a settlement of unpaid historic unpaid PAYE and NIC which exceeded £0.5 million.
What can be done?
Taking action is key to preventing the unexpected but is seldom easy in this area. Where do you start? I outline the key steps below:
* Identify where you may have potential exposure under the categories above of hidden employees and any others you may have. This will ordinarily be best undertaken in conjunction with relevant stakeholders across the business, including HR, finance and departmental heads, for example.
* Unearth the hidden employees and get a list together, so you know what you’re dealing with.
* Review the tax, NIC and payroll position and assess whether you may have a problem. Professional advice may be needed at this stage.
* Settle any historic underpayments, where applicable, and/or document why you have determined that there are no obligations.
* Design and implement a new policy and process for dealing with the category/catagories of hidden employees. For example, this may mean putting in place a policy and process to manage your globally remote workers or the onboarding of your contracts.
Above all, don’t ignore the issue as it is sure to surface at some point!
Author: Lee McIntyre-Hamilton
Lee has over 23 years of experience in international mobility, expatriate tax and employment tax. He works with a diverse range of international organisations, from small owner-managed businesses to large multi-national corporations and non-profit organisations. Lee delivers coordinated, joined-up global mobility tax, international social security and payroll advice across many territories globally. He is a published writer on international tax matters, notably the Tiley & Collinson UK Tax Guide.
Contact Lee: lee@globalpayrollassociation.com
Disclaimer:
The information included in this article is guidance only for educational purposes and is provided with the understanding that the Global Payroll Association or any other party are not herein engaged in rendering tax or other professional advice. Therefore, guidance within this article should not be relied upon for taking any particular course of action and should not be used as a substitute for obtaining professional advice where this is required.