October 2013

LEGAL EASE: What am I, and does it matter?

Sally AzarmiThe status of an individual in employment, whether they are a partner, employer, self-employed or a worker, is a question which sometimes arises for individuals and businesses, with far-reaching implications for their rights, obligations and their liability to pay tax.

Members of UK-based limited liability partnerships (LLPs) – that is, the partners – will be aware of the HM Revenue and Customs (HMRC) recent consultation and proposals for LLPs and a review of tax rules.

There is a presumption that all individual members of an LLP are treated as partners and are therefore self-employed for tax purposes, which can result in significant tax savings (for example, no employer national insurance contributions being payable). Some LLPs have used this presumption and treat all employees as partners, regardless of whether they are true partners or not. HMRC is targeting this “disguised employment” to prevent the use of LLPs to avoid liability to national insurance and income tax.  

Although the distinctions between different employment relationships are often discussed in the context of tax or other forms of avoidance (we also see disguised employment in immigration cases) and this is a highly complex area of law (a person who may be held to be an employee by an employment tribunal may still be a partner for partnership law or tax purposes), the distinctions have some fundamental implications in employment law which are worth noting.

The fact that parties to a contract may label a relationship as, say, self-employment, will not in itself determine that relationship either for an employment tribunal or HMRC, although it may be a factor to take
into account. An employee is an individual who has entered into or works under the terms of a contract of employment or a contract of service, which can be expressly agreed in writing or orally, or implied by the nature of the relationship. To have employee status:

  • an individual must be obliged to do the work rather than being able to send a substitute; and
  • the employer is obliged to offer a minimum amount of work and the employee is obliged to accept it “mutuality of obligation”; and
  • the employer needs to have some control over the way the employee carries out the work

By contrast, a self-employed person enters a contract for services. Simply, under a contract of service a person agrees to serve another and under a contract for services they agree to provide certain services to another. It is established law that a relationship between partners and a partnership is very different from an employment relationship and more akin to a contract for services.

Importantly, self-employed individuals and partners enjoy no statutory employment rights, although partners will be protected by discrimination laws. For example, if expelled on the grounds of race, disability, sex and so on.  

Therefore, some core legal protections only apply to employees.  These include the right to:

  • claim unfair dismissal (including constructive dismissal);
  • receive a statutory redundancy payment;
  • maternity rights and sick pay;  
  • minimum notice;
  • written particulars of employment

Another important distinction is that restrictive covenants are often far more onerous in partnership agreements than in employment contracts and are more readily enforced against partners than employees.  
In short, if you are entering into a new employment relationship or reviewing your existing relationship or LLP structure, careful thought should be given to the true status of the employment and the rights and obligations arising

Sally Azarmi is the founder of Azarmi & Company

©2013 funds europe