Termination of self-employed contracts
The impact of the spread of COVID-19 has already had a huge influence on many companies. Many are now facing the reality of having to change their working arrangements, cutting back their services or temporary closure. As a result, companies may not be able to offer any further work to self-employed individuals.
Typically, a self-employed individual operates under a contract for services or “consultancy agreement”. They are independent and are responsible for paying their own tax and national insurance and often submit invoices for the work carried out.
Unlike employees who are afforded maximum employment protection through implied terms in employment contracts, rights under the Employment Rights Act 1996 and the Working Time Regulations, self-employed individuals are not entitled to any employment protection. If a self-employed individual is not able to work due to illness or for any other reason, then they will not be entitled to statutory sick pay or paid holiday.
Termination of a self-employed individual
Due to the impact of the spread of COVID-19, companies may not be able to offer any further work to self-employed individuals. If the individual is genuinely self-employed then it is ultimately up to the company to decide whether to offer any further work to the individual or not. Due to the lack of mutuality of obligation with self-employed status, companies are not obliged to offer any work to the individual and equally, there is no obligation for this work to be accepted.
In a genuine self-employed situation, termination may occur at any time in accordance with the terms of the contract.
Companies must take care to consider the reality of the arrangement with the individual and question whether the individual is genuinely self-employed before terminating.
The risk is that if a company terminates an individual’s contract, the individual may seek to argue that in reality the arrangement was one of employment and are therefore entitled to pursue a claim in the employment tribunal.
A number of high profile cases have highlighted the importance of correctly classifying an individual’s status and the blurred line between self-employed and ‘worker’ status. Ultimately it is for an employment tribunal to decide whether an individual was genuinely self employed, a worker, or an employee.
Factors which are considered include; the reality of the relationship, an obligation to provide personal service, substitution clauses and whether these are genuine and any other relevant factor.
If action is taken to terminate a self-employed contract and it is found that the working relationship does not mirror that of true self-employment, a company may face the following:-
1. Employment tribunal claim –by the individual against the company. Firstly the employee would have to persuade the
employment tribunal that they were in reality an employee, due to the circumstances of the case and based on the tests listed above.
The types of claims that an employee or worker could pursue include: notice, holiday, minimum wage, or unlawful discrimination.
If an individual had over 2 years service at the time of termination and were able to show they were an employee, they may be able to claim compensation for unfair dismissal.
2. Tax risk – In the event that HMRC investigates the individual’s employment status and it is found that they are not genuinely self-employed, there is a potential tax (and penalties) risk.