How to Understand the Government’s Help on Smaller Businesses

The government has made much of the help it has given to small businesses, not least in the area of employment law. Two of the most significant changes here concern the obligation to hold open the jobs of women for up to nine months while they take maternity leave, and unfair dismissal rights of employees in companies with fewer than 20 workers. There are two changes that could be made, with little if any impact on employees, that would go a long way towards simplifying life for the smaller business.

The first point concerns the status of those carrying out work for companies. Many smaller businesses prefer to use self-employed workers, so that they do not have to pay secondary National Insurance contributions and will not have problems with redundancy or unfair dismissal claims when the job ends or if the person proves to be unsatisfactory. The problem, though, lies in determining whether the law will agree that a person is truly working on his own account, rather than being an employee. There is no simple test that can be used, and even an agreement between the person and the company will be dis­regarded by the courts in almost all cases.

To give an example: a man was offered a job and given the choice of being self-employed or being an employee. He opted for self-employed status and this was accepted by the authorities for both tax and National Insurance purposes. However, when his job came to an end, he made an unfair dis­missal application, claiming that he was after all an employee. His claim was upheld by the Employment Appeal Tribunal (partly because he worked alongside employees of the com­pany, doing the same work). Though not of much consolation to the company, which had to pay him compensation, it was a Pyrrhic victory for the employee: the tribunal appeared to dis­like people trying to have their cake and eat it, and made it clear that they would be sending a copy of their decision to the Inland Revenue, having calculated that, as an employee, he now owed rather more in tax than he had won as compensation for his dismissal. The test used by the courts is a four-part one:

  1. Does the person concerned work as part of the employer’s organisation? Does he use the employer’s premises and equipment? Does he have regular working times? Is he paid weekly or monthly? If the answer to these is yes, it would suggest he is an employee.
  2. What degree of control – in terms of method of working, quality control, output, priorities – is exercised over his work by the employer?
  3. What are the contractual terms, including the method of paying tax, PAYE or Schedule E, and National Insurance contributions, Class 1 or Classes 2 and 4?
  4. Is there a mutual obligation on the employer to provide work and on the employee to carry out the work?

None of these factors, individually, will give the answer; it is a question of whether, taken together, they point strongly one way or the other. However, given that the courts often come up with different answers to apparently similar questions, it is al­most impossible for small companies to know whether they are acting within the law, or merely lulling themselves into a dan­gerously false sense of security.

This point also has strong implications for businesses which employ homeworkers. The main reason for putting work out in this way is to cope with the peaks and troughs that most businesses experience, but in some cases the courts have de­cided that homeworkers are employees and so enjoy all statu­tory rights, including protection against unfair dismissal.

The second point that urgently needs clarification – the cal­culation of continuous service – is more esoteric but still very important for companies. Most rights given by law to em­ployees depend on their having a specified amount of continu­es service. The rules on calculating this (which are set out in Schedule 13 of the 1978 Employment Protection [Consolid­ation] Act) are extremely complex but, with one exception, are precise. It is this exception that causes the difficulty.

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About the Author: Marie Mayle is a contributor to the MegaHowTo team, writer, and entrepreneur based in California USA. She holds a degree in Business Administration. She loves to write about business and finance issues and how to tackle them.

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