Do we need more HR support for SMEs?

Matthew Taylor, HR Dept
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We were delighted to welcome Matthew Taylor, chief executive of the Royal Society of Arts, and the author of “Good work: the Taylor review of modern working practices”, to The HR Dept’s annual conference last month.

Mr Taylor is advising the Government with recommendations on how UK law can develop to make a fairer system which better represents modern working practices.

A panel debate at our event also saw Mr Taylor indicate that he will raise with decision makers a key issue not covered in his report but put forward by The HR Dept, in its submissions to the Government’s Business, Energy and Industrial Strategy select committee.

The committee is undertaking an inquiry into the changing nature of work, and the status and rights of workers in non-traditional employment roles.  

This key issue is the fact that the lack of clarity over employment status extends to those advising businesses.

So what is the issue?

Business advisers, accountants and bank managers do often not understand worker and self-employed status. They either misinform or make checks with HMRC – of course tax and employment law is misaligned.

In providing HR advice and support to SMEs, our company is frequently at the coal face, educating SME business owners about the risks they may have in their business.

This is often needed because of genuine ignorance or incorrect advice given by other business advisers who may not specialise in HR and Employment Law.

The HR Dept believes the SME sector needs education and support to combat what is widespread unawareness, rather than malintent. We are not criticising those professional advisers. How can they be expected to know what they don’t know? 

The problem is complexity, in having different tax and employment rules in determining self-employment status. It just adds to further confusion and better awareness is required.

The importance of expert advice

We would also like to see SME owners given the chance to understand the value of professional HR support when growing their business, to help them make the best resourcing decisions.

As Mr Taylor said at our conference: “HR is good for productivity and for a relatively small investment it can stop people ending up at tribunal. People don’t end up at employment tribunals because they’re bad people; they end up there because they don’t know what they’re doing. Government should also incentivise management training.”

The risks to SMEs

Businesses which make resourcing decisions, then take on individuals as self-employed consultants or freelancers, will find it difficult to change their ways once they become aware of the risks of the ‘worker’ category, namely the requirements for National Minimum Wage rates, holiday pay and auto-enrolment contributions.

Once aware of these risks, many are reluctant and then fearful to do anything about it. They usually prefer to wait for a challenge, on the basis that ‘nothing will be a problem until it is a problem’.

This generally happens where both parties have opted for the solution of ‘self-employment’ – a situation the individual is not being forced into, and where exploitation would not be recognised.

There is often no ‘mutuality of obligation’, with no expectation that work has to be offered nor that work offered has to be accepted.

Also, the self-employed person is probably not working under the ‘control’ of the employer. 

The issue of substitution

A common risk to employers is failing the ‘substitution’ test. It is the consultant’s or freelancer’s personal skill and reputation that is being engaged and therefore in practice there really isn’t an unfettered right to send a suitably qualified substitute.

I frequently conduct seminars on employment status, advising SME business owners and managers about the three categories of self-employed, worker and employee.

Without fail, the vast majority are completely oblivious about worker status and don’t really understand the criteria for true self-employment.

Once aware of the potential risk, they then question the substitution requirement because they are engaging the freelancer on the basis of their personal skill, experience and credibility. 

Some industries where this is the case are self-employed musicians, home tutors, trainers, designers, architects, IFAs, dental hygienists and rent-a-chair hairdressers. The list goes on.

‘Self-employed’? Maybe not

In some cases the ‘self-employed’ individual is probably not even a worker, but actually fully employed. Take cleaning companies, for example, set up with advice from their accountant or bank manager.

Like lots of their competitors, they intend to engage cleaners as self-employed. In reality, these cleaners are employees. Why? Firstly, there is mutuality of obligation as they have defined hours that they are expected to work. They also work under the control of the employer, often transported by them between jobs, using the employer’s cleaning equipment.

Also, they are required to provide a personal service, without being given the right or responsibility to send a substitute. The job of finding a replacement is often taken by the employer in conjunction with the end client.

Many cleaning and other types of companies and franchises are set up on this basis. Once aware of the potential risks, business owners who want to try and do the right thing often choose to ignore the advice.

They will not be able to compete with having to pay National Minimum Wage rates, holiday pay and auto-enrolment contributions.

This is a different situation to the one of freelancers, explained above, where there is genuine choice in the relationship. There is no real choice for the cleaner in these situations; they are not running their own business and not marketing their services to the world at large.

It could be regarded as exploitation and is often referred to as a ‘race to the bottom’ in regards to payments being minimised and reduced in competition with others.

The solution, for SMEs and their advisers

Employment status is complex for SMEs. Substitution is often the stumbling block, as to whether a self-employed freelancer (not engaged as a limited company) is truly self-employed or a worker.

The rules need legislation, to remove or seriously reduce the impact of substitution when defining employment status. Simplification would go some way to reducing the current complexity and confusion.

Genuine choice between being truly self-employed, or a worker, would no doubt impact on tax revenues. At the moment, however, engagement of many self-employed freelancers in the SME sector is often a sham, with their complete ignorance that they are in fact workers.

We need more joined up thinking between tax and employment law. The chancellor has announced in the Autumn Budget a consultation on the extension of this year’s new IR35 rules from the public sector into the private sector. This would have significant repercussions for SMEs and increase complexity.

With increasing auto-enrolment contributions and a rise in the National Living Wage, this impact has to be addressed.

SME owners also need better education and awareness on the risks they face with employment status. 

About Jill Bottomley

Jill Bottomley of The HR Dept

Jill has spent over 25 years working in HR; 15 years in blue chip corporate businesses and the last 10 years working in the SME sector, owing and running a franchise of The HR Dept.

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