21: Recent tribunal decision on employment status: a reminder of the pensions implications
High-profile employment tribunal cases such as the Uber and Pimlico Plumbers disputes have focused on the employment law implications of wrongly categorising individuals as self-employed when they are in fact workers or employees. However, the distinction between these three categories also affects an individual’s pension entitlements. All workers are entitled to be auto-enrolled into a workplace pension, subject to meeting the minimum age and earnings threshold. For auto-enrolment purposes, a ‘worker’ covers both employees and individuals who have a contract to perform work or services personally, but not as part of their own business.
Getting employment status wrong can be costly in a pensions context, particularly in a workforce which engages large numbers of contractors who are found to be workers or employees. It could lead to complex claims for backdated as well as future pension contributions, a potentially significant cost even when employers are making only minimum contributions. The Pensions Regulator is likely to be interested in employment status cases and may impose fines, penalties or criminal sanctions to ensure that employers comply with their auto-enrolment duties. Depending on the circumstances, the Pensions Regulator may also require that employers pay unpaid staff contributions as well as employer contributions.
Deciding whether someone is a worker, employee or self-employed can be a tricky and uncertain exercise involving consideration of the contractual documentation and practical workplace arrangements as well as other factors such as mutuality of obligation, the right to send a substitute, and the degree of control exercised by the employer. This is illustrated by the recent Tribunal decision in Harris and Kearny v Excel Brickworks Ltd in which two construction labourers who been engaged on a self-employed basis were found to be employees. Mr Harris had worked as a site foreman for 17 years and Mr Kearny as a bricklayer for under a year.
Excel Brickworks argued that the claimants were self-employed because their contracts stated that they could do whatever work they wished, refuse any offers of work, choose their hours and method of work, leave a site without permission, and send a substitute with similar experience and qualifications to carry out their work. They had never been paid sick pay, holiday pay or pension contributions and paid national insurance on a self-employed basis. They also occasionally took on other work. However, the Employment Tribunal ruled that the written contract did not reflect the reality of their working relationship and that this was actually an employer/employee relationship. For example, despite the contractual wording, Excel exercised a significant degree of control over when and how the claimants worked, and the right of substitution was unworkable in practice due to site security and health and safety requirements. Rather than being genuinely self-employed, both claimants were found to be integral to Excel’s operations.
Tribunal decisions on employment status are specific to the facts of a particular case and it is likely that Excel Brickworks will appeal. However, given that about half of the UK’s construction workers are labelled as self-employed, this decision has potentially wide implications. It should also be a reminder to trustees and employers involved with any workforce which includes self-employed contractors to consider whether in reality they should be classed as employees or workers with auto-enrolment or other pension rights, particularly given the extension of IR35 to the private sector in April 2021 (which will make small and medium companies responsible for assessing the tax status of contractors). This issue could also be relevant in insolvency and restructuring arrangements. For example, a judgment which confirms worker or employee status could lead to a significant increase in the value of preferential claims for pension contributions.
We have the expertise and experience to help you establish employment status and consequent pension obligations. For further information or advice please contact BDB Pitmans’ pensions team.