FRIDAY HR FAQS – Employee or Contractor?

The rules around distinguishing between an employee and an independent contractor may be subtle, but getting it wrong and breaching IR35 rule can result in serious tax and legal consequences for your business!

We thought we’d try and clear this blurred line and clarify the differences!

The three main differences are:

1. Control

Employees generally have limited control over their work, their hours these are set in place at the commencement of employment and the relationship is ongoing. They are restricted from working for another company, customer or generating their own work. Contractors on the other hand cannot be treated with the same level of control, dictating their own working hours, working on multiple projects for multiple businesses simultaneously. A business has no obligation to provide the contractor with work and employment rights do not apply to the relationship.

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2. Pay

Employees are generally paid a regular set amount, agreed on the commencement of their employment in return for working the set agreed hours. The employer will also deduct tax and national insurance contributions from their wages, whereas contractors will need to invoice for their services at an agreed rate per day/week month or fixed price basis. They are not paid via PAYE therefore are responsible for looking after their own tax and NI contributions.

3. Benefits

Whilst contractors do have certain protections, for example for their health and safety whilst on business premises and, in some instances, protection against discrimination, they are not entitled to any employee benefits such as paid holidays, sick pay, company pension or medical insurance.

This can be a grey area, which many employers struggle with, so hopefully the above has given you some starting points to think about!

There is a third status known as a ‘worker’, sitting somewhere between an employee and contractor. This category of the workforce have some, but not all employment rights, as an employee would but more than a contractor. The classification depends on the level of flexibility of the working relationship … but we’ll leave that for another day!

If you need any HR help, advice or tips, get in touch:+44 203 538 5311 or email: hello@hrrevolution.co.uk or visit www.hrrevolution.co.uk where our expert CIPD HR professionals are waiting to help you with any questions you may have.

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What is PILON? and what you need to know from April 2018

PILON (payment in lieu of notice) is a payment made to an employee when their employment has been terminated immediately without notice.

How should an employer deal with it?

PILON only arises when you want an employee to leave straight away therefore ending employment immediately and is a payment to compensate the employee for money they would have earned during their notice period if they had worked it. It is different from ‘gardening leave’, in which the employee is still in employment during the notice period and is paid, even though he or she is not present at work.

PILON will usually depend on what provision has been made for it in the contract of employment. In some instances, a contract may specify that termination can be made immediately by making a payment in lieu of basic salary for the notice period. Benefits and other extra costs that would have accrued during the notice period may not need to be paid. Employers are generally required to pay benefits and any extras when the contractual provision for PILON doesn’t specify what the pay should be, or if there is no contractual clause for PILON.

Employers need to know that without contractual provision, a termination of employment with PILON is likely to be a breach of contract. Usually the employer would compensate for this by including all the remuneration and benefits the employee would have been entitled to during the notice period. To avoid any later disagreement, employers could include a payment for any holiday that may have accrued during the period, even though they may not technically be required to.

Sometimes there can be confusion about when the termination date falls in a PILON situation. To make sure there are no disputes, it is always advisable to make this clear in the contract, whether it’s the date notice of termination is given, or the date the PILON is made or in the end of what would have been the notice period. Some employers prefer to give notice of termination and make the PILON at the same time so that there are no misunderstandings.

Usually in the event of a dismissal for gross misconduct, PILON is not normally paid.

Currently an employer may pay up to £30,000 free of tax and National Insurance but as of 6th April this is set to change in an attempt to make termination payments ‘fair’ and provide more clarity on the rules behind the payments.  From this date all employees will pay tax and Class 1 NICs on the amount of basic pay that they would have received if they had worked their notice, even if they are not paid a contractual PILON.  This means the tax and NICs consequences are the same for everyone and it is no longer dependent on how the employment contract is drafted or whether payments are structured in some other form, such as damages.

Here is a quick overview of the changes:

1. PILON will be subject to deductions for income tax and National Insurance contributions.  This is irrespective of whether there is a PILON clause in the contract of employment;

2. Employers National Insurance contributions (but not employee NI) will be payable on any part of a compensation payment that is taxable; and

3. Foreign Service relief will be abolished.

The good news:

1. The £30,000 tax exemption will stay in place.

2. The tax treatment of legal fees paid under a settlement agreement will remain as it is now.

3. Statutory redundancy payments remain exempt from income tax and NICS.

If you need help or guidance regarding PILON please do get in touch, HR Revolution are here to help: +44 203 538 5311 or email: hello@hrrevolution.co.uk or visit www.hrrevolution.co.uk  where our expert CIPD HR professionals are waiting to help you with any questions you may have.

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Why bother with Employment contracts?

Despite it being a legal obligation, many business owners think that it’s in their interests to delay giving an employee a contract, or not bothering at all, but this blog will explain the importance of having employment contracts in place.

Firstly…It’s the Law!!

It is a legal requirement to have an employment contract in place within two months of hiring an employee but if you didn’t know act now – don’t ignore it!

Contracts actually benefit both employers and employees; it helps the employer by setting out clearly what is expected of the employee the hours they should work, how much and how often they are paid, holiday and sick pay arrangements and other day to day issues. It is important for the employee because they then know in addition to items above, how to lodge a grievance, what notice to give and their rights under family friendly policies such as maternity or paternity leave and the company expectations in larger company for more senior employees this is a vital tool for the employer often overlooked. Contracts should be regularly reviewed and updated and if an employee is promoted they should always be issued with an updated contract reflecting their new rights and responsibilities.

Also, given this is a contractual agreement you are putting in place between you and the employee, I would advise that you take professional advise so that you can clearly articulate what you want the contract to say and that you fully understand what you as the employer are committing to.

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It avoids disputes

Even without anything written down, when an employee turns up  for work and gets paid, there is a basic employment contract agreement between the two parties.

Without any written terms then it’s either statutory rights that are in place (which often benefit the employee), or oral agreements which can be open to interpretation and misinterpretation.  Dealing with disputed oral terms is at best time-consuming and at worst can also be financially costly.

Decide the terms that work for your business, by offering a job with terms and conditions that you have set, you are not only presenting a professional image and setting the tone for the employment relationship, but giving clear guidelines to what the employee can expect when working with you.

You can specify working hours, any overtime payments (or not), the notice period you require from them, how much sick pay they can expect, how much holiday they are due, and when they can or cannot take holiday, amongst many other things.

It protects your business

If an employee leaves your employment, you can put restrictions in place (within reason) so that your business is not adversely affected if their next role is in competition with your business. You also need to put in place protection for your business regarding critical, confidential information.

If it’s not specified in the contract, you may be taking a risk if you decide to put someone on gardening leave, or pay them in lieu of notice, if your rights to do this are not detailed in the employment contract.

Finally, to reiterate we would always advise that you take professional guidance so that you can clearly articulate what you want the contract to say and that you fully understand what you as the employer are committing to.  HR Revolution have fully comprehensive contract templates available to download on our website www.hrrevolution.co.uk  and we can also tailor them for you, please do get in touch for further details.

Businesses often wonder if there are contracts in place, do they also need a Company handbook… the answer is yes! A contract is a legally binding document mutually agreed and any variation to it again needs to be mutually agreed and to undergo a period of consultation before any change is implemented. A handbook is a document setting out company policies from expenses to confidentiality, to dealing with harassment and bullying, email, social media and internet policies and many others. It is not legally binding and therefore does not have to be mutually agreed. It gives the employer the ability to change and amend policies to deal with the changes in legislation and social trends eg. Maternity/Paternity etc.

HR Revolution would advise that employers and employees need both.

If you need any further advice on employment contracts or handbooks get in touch, call +44 203 538 5311 or email: hello@hrrevolution.co.uk or visit www.hrrevolution.co.uk  where our expert CIPD HR professionals are waiting to help you with any questions you may have.

HR Revolution; supporting you, your employees AND your business.

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