If you run a small business, especially in the trades, construction, or engineering, the chances are you’ve used subcontractors at some point. Maybe you always have. It’s flexible, it’s practical, and for many businesses it’s simply how work gets done.
But a lot of businesses are getting the classification wrong. And the consequences can be serious.
This isn’t about catching anyone out. It’s about making sure your business is protected.
Why Does Classification Matter?
The way you classify someone (employee, worker, or self-employed subcontractor) determines their legal rights and your legal obligations. Get it wrong and you could be liable for:
- Unpaid holiday pay and statutory sick pay
- Employer’s National Insurance contributions
- Pension auto-enrolment contributions
- HMRC tax investigations and back payments (including penalties and interest)
- Employment tribunal claims
These aren’t theoretical risks. HMRC actively investigates misclassification, and employment tribunals regularly see claims from individuals who were treated as self-employed but legally weren’t.
What Does ‘Self-Employed’ Actually Mean in Law?
One of the most common misconceptions is that calling someone a subcontractor or having them invoice you, makes them self-employed. It doesn’t.
Employment status is determined by the actual working relationship, not the label on the contract. Courts and tribunals look at a range of factors, including:
- Control – do you dictate how, when, and where they work?
- Substitution – can they send someone else in their place, or do they have to do the work personally?
- Mutuality of obligation – are you obliged to offer work, and are they obliged to accept it?
- Equipment – do they use their own tools and equipment, or yours?
- Financial risk – do they carry genuine business risk, or are they just paid for time?
- Exclusivity – do they work for multiple clients, or essentially just you?
If the honest answers to most of those questions look more like an employment relationship than a business-to-business one, you may have a problem.
A Common Scenario in Trade and Construction
Imagine a sole trader who works for you five days a week. They use your van, your tools, and your materials. You tell them what jobs to do and when. They don’t work for anyone else. They invoice you at the end of each week.
On paper, they’re self-employed. In practice, a tribunal would very likely find them to be a worker, or possibly an employee, with the rights and entitlements that come with that status.
This kind of arrangement is extremely common in the trades. It’s also one of the most commonly challenged by HMRC and employment tribunals.
What About the Employment Rights Bill?
The Employment Rights Act will make this issue even more significant. Among other changes, it introduces measures that strengthen protections for workers and creates greater scrutiny around how businesses classify the people they engage.
Now is a good time to review your arrangements before the legal landscape tightens further.
What Should You Do?
The good news is that this is a manageable risk, if you address it proactively. Here’s where to start:
- Audit your current arrangements. Look at everyone you engage on a self-employed or subcontractor basis and honestly assess whether the working relationship matches that status.
- Don’t rely on contracts alone. A self-employed contract is only one piece of evidence. What matters is how the relationship actually operates day-to-day.
- Check your CIS compliance. If you’re in construction and using the Construction Industry Scheme, make sure your deductions and records are in order — HMRC cross-references this data.
- Get proper documentation in place. If someone genuinely is self-employed, make sure the contract reflects the real terms of the relationship and is kept up to date.
- Seek advice if you’re unsure. Employment status can be nuanced. If you’re not confident in your classifications, it’s worth getting professional HR or legal input before an issue arises.
Not Sure Where Your Business Stands?
HR For All Ltd works with small and growing businesses across Essex and beyond to review employment arrangements, get the right contracts in place, and reduce risk before it becomes a problem.
If you’d like a confidential review of your current workforce arrangements, get in touch. It’s a straightforward conversation that could save you a significant headache further down the line.