A recent ruling by HM Revenue and Customs ("HMRC") is a cautionary tale for those engaging staff on a self-employed basis.

The Weight Watchers Case

For many years Weight Watchers has engaged 'leaders' who host local meetings and group weigh-ins on a self-employed basis. Each leader acts under a contract for services with Weight Watchers.

Back in 2007 HMRC scrutinised this contract for services and argued that in practice these leaders were employees of Weight Watchers acting under a contract of service, and should be considered so for tax purposes. HMRC challenged Weight Watchers' argument that its leaders were self-employed and has recently won its case before the Upper Tribunal. This means that Weight Watchers faces a tax bill going back nine years of more than £23m.

What This Means to You

It is vital that when engaging workers in relation to your business you have regard for what happens in reality, rather than the terms of the contract for services. A contract for services will only assist if it reflects the actual relationship between the worker and the business who they work for. This was recently dealt with in the case of Autoclenz where the Employment Tribunal reclassified self-employed valets as employees.

If HMRC decides that a worker has been engaged on an incorrect basis, it will require the engager to pay, in many cases, any income tax and national insurance due, rather than the worker (other than in exceptional circumstances). It will also demand interest and penalties.

What Should You Consider

The court has laid down a number of factors to consider in determining whether a worker is self-employed or an employee. In considering these factors you should ask yourself the following questions:

• Do they have to do the work themselves?
• Can someone tell them at any time what to do, where to carry out the work or when and how to do it?
• Can they work a set amount of hours?
• Can someone move them from task to task?
• Are they paid by the hour, week, or month?
• Can they get overtime pay or bonus payment?

If the answer is 'Yes' to all of the above questions the worker will probably be considered an employee by HMRC. If the answer is 'Yes' to some of these questions then further thought will be required to consider the risk of a worker being treated as an employee.

This case shows the increasing willingness of courts and tribunals to take the reality of the situation into account rather than the terms of a written contract between the parties, so a prudent approach is advisable.

24th November 2011