IR35 detailed comment

Employee benefits

The issue

The issues here would appear to be whether there is anything either in the contract, or in the actual relationship between Individual and Client, in relation to this factor which

·         helps towards a decision on whether that relationship, had it been direct and without a company in between, would have been an employment contract - a contract of service - or a contract for services, or

·         would be inherently inconsistent with a contract of employment.

Legal issues, and the Revenue Guidelines

Guidelines

Employee benefits - Employees are often entitled to sick pay, holiday pay, pensions, expenses and so on. However, the absence of those features does not necessarily mean that the worker is self-employed - especially in the case of short-term engagements where such payments would not normally feature.[1]

The following paragraphs are extracted from the Employment Status Manual, section ESM1045 & 1046:  [2]

Only employees are entitled to Statutory Sick Pay(SSP). Normally membership of a firm's superannuation fund is open only to employees. In both cases the right to participate is an indication of the relationship the parties think they have created rather than a test of whether an employment exists.

Both parties may genuinely believe a worker is self-employed. But, if the worker is in fact an employee, entitlement to the rights of an employee will follow. Entitlement to SSP etc does not determine employment status. It is the other way round.

The absence of benefits such as sick pay, pension scheme membership, maternity rights, etc. in a short-term engagement will almost certainly be because they are inappropriate in such circumstances. Their absence may therefore be of little relevance in this type of situation and certainly will not inevitably lead to the conclusion that an employment does not exist.

On the other hand, the existence of such entitlements in a long-term part-time engagement can be regarded as a strong indicator that an employment exists.

The important point to remember though is that the presence or absence of these rights does not necessarily determine whether a worker is employed or self-employed. On the contrary, it is the employment status (and the length of the contract) which determines whether the worker is entitled to many of these rights.

Entitlement to paid leave by virtue of agreed contractual terms and conditions suggests an employment exists.  It is normally inconsistent with a contract for services. The Courts took this view in Alpine (Double Glazing) Company Ltd v The Secretary of State for Social Services (1982) (unreported) in which it was held that the company's service engineers were employed.

Not all employees have a contractual entitlement to paid leave, particularly where the engagement is short-term and hence little significance can be attached to their absence in such circumstances.

Where entitlement to paid leave exists solely because of the rights a worker has under the Working Time Regulations, it is not a factor to be taken into account in determining status. Employed workers and some self- employed workers acquire rights to paid leave under the Regulations if they have been continuously engaged for 13 calendar weeks. However, if any changes were made to contracts giving rights to paid leave, these should be taken into account in the normal way.

In O’Murphy v Hewlett Packard it was said (para 27)[3]:

‘The Tribunal referred in paragraph 17(2) to the fact that Mr O'Murphy received no holiday or holiday pay or sick pay. The exclusion of sick pay is not a contraindication of a contract for service. The lack of a paid holiday is a contraindication but when put in a balance against the other factors it is not decisive.’     

In Montgomery v Underwood [4], the lack of any review or grievance procedures as between the individual and the agency was commented on as a potentially significant factor:

I also agree with the Judge that the Tribunal appear to have taken little, if any, account of the absence of any review or grievance procedures as between the agency and Mrs Montgomery. These factors were present in the McMeechan case and doubtless played a not insignificant part in the final decision.

The cases suggest:

·         lack of benefits does not necessarily mean self-employment [5]

·         receipt of some 'employee type' benefits does not necessarily rule out self-employment [6]

·         thus the presence or absence of such benefits appears to be a minor factor

Comment

what would the position be likely to be in relation to this factor for a hypothetical employee?  Logic and experience suggests that:

·         an individual such as an artisan or semi-skilled person might, or might not, have employment benefits, over and above statutory rights;  however,

·         an employee at the level of the Consultant in this case - a professional consultant, capable of grossing a substantial annual amount - would almost certainly expect to have a substantial benefits package, incorporating pension etc

what would the position be likely to be in relation to this factor for a hypothetical obviously self-employed person or consultancy (eg Andersens, or by PWC, or EDI?)  Logic and experience suggests that a hypothetical obviously self-employed person or consultancy would be most unlikely to have any such benefits.

do the facts here actually provide a helpful pointer towards either view?

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This page was last updated on 3^rd March 2001.

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