Flexible work is a big trend, with companies increasingly relying on temporary, fixed-term, or selectively deployed skilled workers to stay competitive. Companies usually hire these workers as freelancers or via an agency like Coople, a digital staffing platform, that employs its workers.
While both models offer flexibility, they have different legal implications that affect employee rights as well as taxation. Freelancers, agency workers and hiring companies need to understand the differences between these working models to avoid potential risks and respect the law.
Working as a freelancer: What does it mean?
Freelance jobs are on the rise. As of February 2023, there were around 4.39 million self-employed workers, in the UK. While some people choose to freelance full-time, many do so as a “side hustle”, which contributes over £70 billion to the economy.
What is freelancing?
From a legal and taxation point of view, freelancers are self-employed. They have the freedom to determine their own working hours and rates and can accept assignments from various clients. They enter contracts, negotiate and agree to terms, and complete the work accordingly. This is why freelancers are often referred to as independent contractors.
Typically, freelancers work independently without assistance from others to accomplish their tasks. Their ability to choose their own schedule and to work off-premisses also enables them to hold a regular job alongside their freelance work. It is common for freelancers to handle multiple projects simultaneously, allowing them to generate income from various sources. Unless otherwise specified in their contract, they can outsource their work to others.
In addition, freelancers are responsible for the success or failure (including fixing any unsatisfactory work in their own time) of their business and can make a loss or a profit.
What to consider before starting to freelance
In many situations, going freelance is the right choice – especially if someone prefers managing projects independently, negotiating their rates, and entering contracts with companies to provide their services.
While freelancing offers flexibility, it comes with certain responsibilities and drawbacks. One of these is the obligation to report income and pay taxes as a self-employed individual. Additionally, freelancers miss out on employee rights and benefits such as minimum wage, paid holiday, maternity / paternity leave, sick pay, and pension contributions.
Let’s take a closer look at these risks:
Getting tax and national insurance payments right can be time-consuming
Being a freelancer means that individuals are responsible for paying the correct amount of tax and National Insurance (NI). This responsibility involves submitting annual returns and ensuring that sufficient funds are set aside throughout the year to cover these costs. The process can be quite demanding and costly, requiring the retention of contracts, receipts, and other important documentation. In many cases, it is necessary to hire a tax advisor to ensure that everything is done correctly.
Foregoing the minimum wage may lead to exploitation
By being self-employed workers forego their right to minimum wage. This is not an issue when workers are able to negotiate their individual rate or can directly influence their pay rate with their performance. In these situations, being able to set prices or make more money by working harder can be beneficial. However, when workers receive a fixed hourly pay or have less power to negotiate their prices, the situation can be different. In these situations, freelancing might make it easier to find work as it is cheaper for the client. However, if there is a choice, workers who perform hourly work at minimum wage level or just above are likely to be better off by being employed (directly or via an agency) as this means that their rights will be protected.
Losing out on further employee benefits
Lastly, being employed comes with a range of benefits that freelancers may not have access to, such as sick pay, maternity / paternity leave, holiday pay, pensions, and various other protections. It’s easy to overlook these advantages when everything is going smoothly, but it’s crucial to consider the long-term implications and seek out work opportunities that offer a safety net in case circumstances become more challenging. Planning ahead and securing employment that provides such protections can prove to be invaluable in the face of potential difficulties.
Potential consequences for businesses who hire freelancers inappropriately
Freelancers don’t have employee rights. For companies, it can be cheaper and easier to hire them. However, it is important to consider the risks associated with misclassifying workers and taking steps to protect employee rights, avoid potential penalties, negative PR, and ensure fair and legal working conditions.
The right levels of tax must be paid
The government defines who can be self-employed, because this working model can be used to avoid paying taxes. «IR35» was introduced by UK’s Revenues & Customs Department (HMRC) to assess whether a freelancer providing their services to an organisation is considered a genuine freelancer or needs to be treated as a worker or an employee.
With IR35, lawmakers have in most cases moved the burden of this classification to businesses. In the past, freelancers were responsible for assessing whether their services qualified as genuine freelance work or should instead be classified as that of an employee. As of April 6, 2021, this responsibility has mostly shifted to private-sector companies and public-sector authorities
The wrong classification opens tax liabilities to companies. These can include backdated payments of both tax and national insurance. In addition, it can lead to severe fines, potential negative PR and in the case of public-listed companies, this can also impact the performance of their stock price.
If workers are wrongly classified as freelancers, the government takes a substantial financial hit. Therefore, it has a high incentive to enforce these rules. The government recently announced that it will look into tougher consequences for promoters of tax avoidance.
Companies that fail to pay their workers correctly risk damage to their reputation and high legal costs
To provide an example, UK’s Competition and Markets Authority (CMA) is currently investigating a potential wage-fixing cartel involving four sports broadcasters. Besides legal costs and distraction, this case is also an example of the negative PR companies can face when not honouring employee rights.
In recent years, a few high-profile legal cases have also been brought against gig economy companies regarding the employment status of their workers. For example in 2018, the UK’s Court of Appeal ruled that drivers of a provider of ride-hailing services were entitled to basic employment rights such as minimum wage and holiday pay, in a case brought by the GMB union.
These cases can have far-reaching consequences that go well beyond legal costs. In July 2020, a British online fashion retailer lost GBP 3.7bn in market value within 2 days following breaking news that workers supplied by an agency had been paid below minimum wage.
Businesses that fail to pay the National Minimum Wage risk huge damage to their business through loss of reputation but also lower productivity and high staff turnover.
Outsourcing risks to a staffing agency
According to the freelance report, only 30% of companies are aware of employee and independent contractor misclassification risks. Hiring workers via an agency instead of hiring freelancers can avoid legal and reputational risks, as well as ensure that employee rights are upheld.
Staffing agencies act as a middleman between companies and their workers, ensuring that both parties are operating within the legal framework and that the rights of the worker are being upheld. When workers choose to work through a digital staffing agency like Coople, they still enjoy the benefits of a flexible work schedule while being assured that they will be paid at least the minimum wage and receive the benefits that they are entitled to. Furthermore, workers won’t need to worry about paying their taxes and NI as these are paid through PAYE by their employer (the staffing agency). They also don’t face any risks from IR35 investigations.
Staffing agencies also have a keen understanding of employment laws and regulations and are thus able to ensure their clients are fully compliant. Given the intricacies of these laws, it is critical that companies follow them closely to protect the rights of their employees. These regulations are specifically designed to safeguard workers from exploitation and other forms of abuse, and staffing agencies play a key role in upholding these standards.
At the same time, agency workers get access to additional benefits such as pension contributions, holiday pay and protections, as well as support in the event of a dispute or disagreement. By opting for a staffing agency, workers can ensure that their rights are being upheld and that they are being treated fairly and equitably in the workplace.
Hiring Coople’s flexible workers combines the best of both worlds: strong compliance and high flexibility
The trend towards flexible work is set to continue. It is increasingly important for companies to ensure that they meet their legal obligations and provide fair treatment to all workers, whether permanent or temporary. Hiring through Coople can help to ensure compliance and provide peace of mind for both companies and workers as all statutory duties are regulated.
Coople’s staffing solutions give companies access to specialised skills when needed without having to hire full-time staff. Our temporary workers offer flexibility in terms of working hours and project timelines, which can not only be beneficial for businesses with fluctuating workloads. In return, they always receive at least minimum wage, holiday pay, and benefit from other protections.
We have expertise in navigating the legal aspects of hiring flexible workers and can provide a range of services, including payroll management. Employee rights are ensured by making Coople the legal employer.