City jitters about employment rights
Some freelancers working in the City are having their contracts terminated early as clients fear being 'deluged' with claims for employment rights, according to a small business pressure group.
This move is a reaction to the recent Court of Appeal case, Muscat v. Cable & Wireless, which confirmed that a limited company contractor was an employee of his client for employment rights issues.
However, the circumstances of the Muscat case were unusual and were thought not to be relevant in many circumstances where freelancers are used. Mr Muscat was an employee who left work on Friday to return on Monday as a limited company contractor and was still effectively treated as an employee with an employee number and was part of the departmental structure and headcount.
But the Professional Contractors Group (PCG) is concerned that the confusion and uncertainty about freelancers' employment status could be a turn-off for end-clients.
Deluged with claims
A PCG spokesman said: "We are suddenly hearing reports about contracts being terminated early, simply because client HR and procurement departments are afraid of being deluged with claims for employment rights. Mr Muscat's case was not typical, and yet it could have far-reaching consequences for long-term contractors and the economy."
Part of the problem, the group claims, is the absurd situation where employment status and tax status operate independently of one another: a contractor can be taxed as an employee, even when they do not have, and do not want, full employment rights.
It believes that genuine freelance contractors should be able to enter into bona fide business-to-business contracts with their clients, either directly or through an agency, without any of the parties fearing that the relationship might be viewed as one of employment.
The spokesman added: "Companies that engage contractors on proper business-to-business terms will almost certainly have nothing to worry about – but the situation is not totally clear. We want the Government to acknowledge and address this problem. Continued uncertainty will be detrimental to an economy that thrives on the flexibility and skills offered by the UK's freelance workforce."
IR35 caught
IR35 expert, Anne Redston, Chair of Personal Taxes at the Chartered Institute of Taxation (CIOT), has also joined in the debate in an analysis of the Muscat judgment in 'Taxation'.
She expressed the view that when an implied contract of employment exists, as in Mr Muscat's case, the contract cannot be IR35-caught because IR35 applies when no employment relationship exists. In her opinion, the judgment means that the majority of those who fail IR35 will now be found to have implied contracts of employment with their clients.
Initially, it was widely thought that the specific circumstances of Mr Muscat's case meant that it would not have broader implications for regular contractors.
Anne Redston's analysis suggests, however, that the Court of Appeal judgment does not rest on the unusual aspects of the case but in fact relies on factors that are common to many regular contracts. If she is right, most contractors not employed on genuine business-to-business terms could be found to be employees. The tests for being a Muscat-style employee and for being IR35-caught are in some cases similar, but not completely the same. Further test cases will no doubt be needed.
Commission
Following Anne Redston's analysis, the PCG is calling for an urgent and independent review of the way in which employment status is currently assessed and its relationship to tax and employment legislation.
It wants the Government to acknowledge the problem and appoint an independent commission to assess options for clarifying employment and tax status, particularly for freelancers, the self-employed and small business owners.
The confusion arises, in part, because employment status and tax status operate independently of one another.
Whatever the legality of the situation, the reality is more confusion and uncertainty for freelancers and clients.