Contract lawyer (UK) Roger Sinclair Egos Ltd

Financial risk - An individual who risks his own money by, for example, buying assets needed for the job and bearing their running costs and paying for overheads and large quantities of materials, is almost certainly self-employed. Financial risk could also take the form of quoting a fixed price for a job, with the consequent risk of bearing the additional costs if the job overruns. Another example of a financial risk is where a skilled worker incurs significant amounts of expenditure on training to provide himself with a skill which he uses in subsequent engagements. This can be treated in the same way as investment in equipment to be used in a trade, as a pointer to self-employment, if there is a real risk that the investment would not be recovered from income from future engagements (Market Investigations Ltd v The Minister of Social Security (1968) 2QB173).[1]

The following paragraphs are extracted from the Employment Status Manual, section ESM1031: [2]

Individuals, who risk their own money by, for example, buying assets, bearing their running costs, paying for overheads and materials, are almost certainly self-employed. Employees do not usually need to risk their own capital.

The absence of financial risk does not always mean the worker is an employee. Nor does the absence of what would normally be regarded as a business organisation. Yet it is fair to say that workers without either are unlikely to be self-employed.

An example of an exceptional case is the session musicians who were held to be working under contracts for services. They did not have their own business structure or risk their own capital. The Court's decision was based largely on the fact they remained essentially freelance musicians pursuing their own professions as instrumentalists with individual reputations even when playing for an orchestra. (Addison and others v The London Philharmonic Orchestra Society Limited (1981) ICR261 and Midland Sinfonia Concert Society Limited v The Secretary of State for Social Services (1981) ICR454)

Case law appears to suggest:

· if a worker carries significant financial risk, the relationship will be self-employment

· if a lesser degree of financial risk is carried (though still greater than would be borne by an employee), this is a pointer towards self-employment, but not necessarily conclusive in itself

· the risk of not finding work is not an indicator of self-employment

· it is possible for the relationship to be self-employment, even if there is no financial risk

· Investment (eg in equipment or in training - particularly where the investment is speculative) may be taken as accepting a financial risk

· A relatively low level of financial risk (bad debts and outstanding invoices) , over and above that accepted by an employee, may be sufficient for the relationship to be self-employment [3]

Logic and experience also suggests:

· engagement of administrative assistance in order to maximise fee-earning time may amount to taking a financial risk

Comment

what would the position be likely to be in relation to this factor for a hypothetical employee? logic and experience suggests that a hypothetical employee would probably be exposed to very little in the way of financial risks.

· (S)he would be expect to be paid regularly, on the due date, and without the need for either invoice or reminder, and to receive his / her regular salary, from which no deductions could lawfully be made without his / her express consent (with the right to bring the matter before the Industrial Tribunal if any unlawful deduction is in fact made - Employment Rights Act 1996)

· There is a cushion of legislation entitling an employee to a range of benefits (thereby reducing further financial risk) if (s)he were for some reason unable temporarily to work - SSP, SMP, etc; in the event of the employer becoming insolvent, (s)he ranks as a preferential creditor in the insolvency, and additionally would have rights to statutory payment in relation to unpaid salary and in lieu of notice; and if redundant, there would be rights to a redundancy payment

· Whilst it is not impossible for an employer to sue an employee for negligence in the course of his / her duties, in practice this is unusual, and the employee who is so negligent can more realistically expect to face disciplinary proceedings or dismissal, than to be sued for damages. And if dismissed, again, employment protection legislation extends to allow for claims for unfair dismissal

· Whilst in a limited range of professions (eg doctors, architects), some employees may carry their own professional indemnity insurance, but generally employees will rely on their employers and their employers' insurers for such protection. Employers' insurers almost invariably agree that where a claim is made under employers' liability policies in relation to an employee's negligence, they will not seek indemnity from the employee.

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 probably

· be paid against invoice, incurring the risks of late payment, or of withholding, or of non-payment (whether as a result of inability to pay, or otherwise), or insolvency - in which latter event the Individual would rank as unsecured)

· be unable to take advantage of the cushion of employee-protection legislation

· be expected to remedy defective work without charge

· be liable (whether as a matter of common law, or under an express contractual indemnity) to indemnify others against losses they suffer as a result of negligence or failure to perform or deliver to the required standard, and would probably expect primarily to be sued, and (if the contract was then current) possibly also termination

· seek to mitigate risk by carrying insurance against the possibility of professional negligence and public liability claims

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

If you're another lawyer or an accountant reading these pages, I'd be happy to discuss any points arising with you - particularly if you'd like to debate any points where you disagree with my views - mail me!

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[1] http://www.inlandrevenue.gov.uk/ir35/guidance.htm

[2] http://www.inlandrevenue.gov.uk/manuals/esmmanual/part1000/esm1031.htm

[3] Hall v Lorimer 1994 IRLR 171

Financial Risks

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