As every HR leader knows, the days when a business’s talent amounted to little more than a list of permanent, full-time employees are now well and truly behind us. Today, in order to ensure access to the right skills – at the right time – strategic workforce plans often call on the expertise of an army of agency workers, PSC contractors, and sole-trader freelancers.

What’s more, this trend is showing no sign of abating. With a greater number of professionals choosing to work outside of traditional PAYE payrolls, changes that were already evident in 2019 have accelerated. Recent figures indicate that around 14% of UK workers are now self-employed and Companies House data shows that, during 2020 to 2021, new company registrations increased by 21%.

A complex issue
For businesses, the benefits of utilising flexible talent – particularly during these uncertain times – are hard to ignore. Tapping into the power of the contingent workforce not only helps get work done, but can also mitigate risk, improve cashflow and, ultimately, increase the value of the business. However, for HR professionals keeping abreast of compliance when workers are engaged through so many different models can bring its own challenges.

It is important for HR teams to know who is working for the business, how they are engaged, and what their responsibilities are in terms of regulation and tax law. However, how workers are employed has become an increasingly complex and intricate issue – and the goal posts are constantly moving.

Of course, a professional recruitment outsourcing partner will be able to offer tailored support and guidance in this area. In the meantime, APSCo OutSource – in conjunction expert in talent management strategy, TalentIn – is working to help HR and procurement professionals to demystify worker classification.

Who fits where?
There’s a wealth of terminology for a worker’s contract type that can often be confused by the legal definition of these individuals. If we take a look at the legal classification and how these are determined, the breakdown is as follow:

Self-employed: Those who fall into the self-employed category legally are sole traders, PSCs, freelancers and independent workers (including the self-employed). The definition of these individuals covers anyone that is in business for themselves who has entered into a contract with clients or customers to provide work or services. For tax purposes, the self-employed individual is obliged to register with HMRC and submit annual returns to pay income tax and National Insurance Contributions (NICs). PSCs are required to pay corporation tax as well. Employment law doesn’t cover the self-employed in most cases because they are in business for themselves.

Worker: This covers gig and dependent workers. They are classified as ‘dependent’ contractors who are registered as self-employed but provide a service through someone else’s company. Usually, they carry out the work personally themselves rather than substituting another individual for the project and their contract is not usually with their client, but rather another party. Their tax obligations are the same as the self-employed (above), but they are entitled to statutory worker rights under employment law.

Agency Worker: This is the legal definition of a PAYE temp. Essentially, they have a contract with an agency, but work temporarily for a ‘hirer’ – a person or company with employees. Under Agency Worker Regulations, they are entitled to the same employment rights as employees of the hiring company after 12 weeks. However, the agency is responsible for their pay and administering statutory employment rights. There is also no distinction between an agency worker and an employee for tax purposes. The employer is responsible for paying NICs on behalf of the employee.

Umbrella worker: As with an agency worker, these individuals are entitled to the same employment rights as an employee after 12 weeks, but the hiring company is the Umbrella. It is also the Umbrella that is responsible for paying NICs and tax contributions of these workers.

Employees and contractors of a provider (i.e. secondees, outsourced and offshore workers) all fall under the responsibility of the provider for tax and worker classification purposes.

While the above provides a simplified overview of the different legal classifications of workers and where responsibility lies for employment rights and tax requirements, knowing who is responsible for defining what category a worker falls into is also crucial. As a general rule of thumb, responsibility is broken down into the below:

• The supplier responsible for the work and the worker holds the risk and responsibility for classification, as well as relevant insurance for:
  • Individuals providing outsourced services (for example IT or marketing)
  • Offshore support teams
  • Consultants
  • Out of scope PSCs
  • Sole traders, freelances, gig and independent workers
• The intermediary that is in place – whether that’s an agency, payroll provider etc – is responsible for the classification of:
  • In scope PSCs
  • Umbrella workers
  • PAYE temporary staff
  • Offshore workers
• In-house or outsourced HR teams holds responsibility for fixed term contracts
• For freelance and gig workers where the supplier is not responsible for the outcome, the independent or dependent worker is ultimately responsible for their classification

There are risks associated with each category of worker that you need to be aware of regardless of where the responsibility lies. Incorrect worker classification and failure to pay appropriate taxes can have a knock-on effect across the entire supply chain, so be sure to work closely with suppliers and intermediaries.

It’s important to add that the above information is a guide for HR leaders engaging the temporary and non-employed workforce – it is not legal advice and you should always seek expert guidance for your specific circumstances. And while it is all correct at the time of writing, with the pace of change in the world of employment and outsourcing, this is subject to change.

Non-perm workers will often be critical to your talent strategy, particularly when you need more flexibility and specialist skills. As such, the use of flexible workforce solutions is expected to continue increasing as the channels organisations can use to engage workers expands. Getting this wrong can not only put your organisation at risk of significant fines, but also irreparable reputational damage. Get it right, however, and your business will reap the benefits that engaging with the full spectrum of talent at its disposal brings.