Employment status in SMEs A research study for HM Revenue and Customs HMRC report 455 Authors: Peter Cornick, Nilufer Rahim, Francesca Day, Hannah Piggott & Malen Davies Date: 24/03/2017 Prepared for: HM Revenue and Customs At NatCen Social Research we believe that social research has the power to make life better. By really understanding the complexity of people’s lives and what they think about the issues that affect them, we give the public a powerful and influential role in shaping decisions and services that can make a difference to everyone. And as an independent, not for profit organisation we’re able to put all our time and energy into delivering social research that works for society. The views in this report are the authors’ own and do not necessarily reflect those of HM Revenue and Customs. © Crown Copyright 2017 Copyright in the typographical arrangement and design rests with the Crown. This publication may be reported free of charge in any format or medium provided that it is reproduced accurately and not used in a misleading context. The material must be acknowledged as Crown copyright with the title and source of the publication specified. Published by HM Revenue and Customs, November 2017 www.hmrc.gov.uk NatCen Social Research 35 Northampton Square London EC1V 0AX T 020 7250 1866 www.natcen.ac.uk A Company Limited by Guarantee Registered in England No.4392418. A Charity registered in England and Wales (1091768) and Scotland (SC038454) This project was carried out in compliance with ISO20252 Contents Glossary ............................................................................ 1 Executive summary ........................................................... 3 Profile of employment in SMEs ....................................................................... 3 Determining employment status ...................................................................... 3 The Employment Status Indicator tool ............................................................. 4 Introduction........................................................................ 6 Background and objectives ............................................................................. 6 Methodology .................................................................................................... 7 Quantitative survey ........................................................................................... 7 Qualitative interviews ........................................................................................ 7 Interpreting the findings ................................................................................... 8 Quantitative survey ........................................................................................... 8 Qualitative interviews ........................................................................................ 9 1 Profile of employment in SMEs ................................. 10 1.1 Current profile of worker classification .................................................. 10 1.2 Job roles of self-employed workers in SMEs ........................................ 12 2 Determining employment status ................................ 14 2.1 Who categorises employment status within SMEs ................................ 14 2.2 When categorising happens ................................................................. 15 2.3 Approaches to categorising employment status.................................... 16 2.4 Factors informing decisions .................................................................. 19 2.5 Confidence in categorising staff ............................................................ 24 2.5.1 Understanding of employment status definitions .................................... 26 2.6 Difficulties in categorising staff .............................................................. 27 2.7 Processes SMEs follow when categorising staff ................................... 30 2.7.1 Taking advice from government or professionals ................................... 30 2.7.2 Taking out insurance and offering staff a choice .................................... 32 2.8 Presence of risk factors ........................................................................ 33 3 The Employment Status Indicator tool ...................... 39 3.1 Awareness of the ESI tool ..................................................................... 39 3.2 Use of the Employment Status Indicator tool ........................................ 40 3.2.1 Reasons for using the ESI tool .............................................................. 41 3.2.2 Reasons for never using the ESI tool ..................................................... 43 3.2.3 Reasons for not using the ESI tool more often ....................................... 44 3.3 User experiences of the ESI tool........................................................... 45 3.4 Confidence in the ESI tool .................................................................... 46 3.5 User testing ........................................................................................... 50 3.5.1 Locating and accessing the ESI Tool ..................................................... 50 3.5.2 Accessing help and guidance ................................................................ 51 3.5.3 Look and layout of the tool ..................................................................... 51 3.5.4 Language .............................................................................................. 52 3.5.5 Problem questions in the ESI Tool ......................................................... 52 4 Further help and support ........................................... 55 4.1 Improvements to current resources ...................................................... 55 4.1.1 HMRC website, emails and phone line .................................................. 55 4.2 Suggestions for additional resources .................................................... 56 4.2.1 Changes to how employment status is categorised ............................... 56 5 Conclusions ............................................................... 59 Appendix A. Profile of survey respondents .................... 62 Appendix B. Methodological note .................................. 66 Appendix C. Survey questionnaire ................................ 69 Appendix D. Interview topic guide ................................. 92 Appendix E. User testing script ...................................... 98 Tables Table 2:1 Characteristics associated with employment status categories .............. 19 Table 2:2 Whether businesses offer staff a choice of employment status, and how regularly 33 Table 2:3 Profile of higher risk groups compared to overall profile of SMEs .......... 35 Table 3:1 Reasons for the business not currently using the Employment Status Indicator tool (/more often) ..................................................................... 44 Table 5:1 Business size ......................................................................................... 62 Table 5:2 Legal status ........................................................................................... 62 Table 5:3 Years trading ......................................................................................... 63 Table 5:4 Country and government region of businesses taking part in the survey 63 Table 5:5 Industrial classification of businesses taking part in the survey .............. 64 Table 5:6 Seasonality in SMEs .............................................................................. 64 Figures Figure 1:1 Current profile of worker classification in SMEs ..................................... 10 Figure 1:2 Breakdown of employer type ................................................................. 11 Figure 1:3 Job roles of self-employed workers in SMEs.......................................... 12 Figure 1:4 Job roles of self-employed workers in SMEs by business size ............... 13 Figure 2:1 When categorisation happens ............................................................... 15 Figure 2:2 Confidence in categorising staff ............................................................. 24 Figure 2:3 Difficulties in categorising staff ............................................................... 27 Figure 2:4 Taking advice from government or professionals ................................... 31 Figure 2:5 Taking advice from government or professionals by business size ........ 31 Figure 2:6 Taking out insurance and offering staff a choice .................................... 32 Figure 2:7 Presence of risk factors ......................................................................... 34 Figure 2:8 Presence of risk factors by employer type ............................................. 35 Figure 3:1 Awareness of the ESI tool ...................................................................... 40 Figure 3:2 Use of the ESI tool ................................................................................. 40 Figure 3:3 Reasons for not using the ESI tool ......................................................... 43 Figure 3:4 User experience of the ESI tool ............................................................. 45 Figure 3:5 Usability of the ESI tool .......................................................................... 46 Figure 3:6 Confidence in ESI tool outcomes ........................................................... 46 Figure 3:7 Proportion of ESI tool users experiencing an uncertain outcome ........... 48 Figure 3:8 Understanding of ESI tool outcomes ...................................................... 48 Figure 3:9 Advocacy of the ESI tool ........................................................................ 50 Glossary CATI Computer-assisted telephone interviewing. A common telephone survey technique where trained interviewers read and complete a computerised script. Employment status The official classification of an individual based on the work that they do. There are three main types of employment status: employee, worker and self-employed. An individual’s employment status helps to determine their employment rights, their employer’s responsibilities, and how the individual pays tax, National Insurance and some entitlements. For tax purposes, individuals are considered to be either employed or self-employed. ESI tool The Employment Status Indicator tool. An online tool, developed by HMRC, to enable businesses and individuals to check the employment status of an individual or group of workers for tax purposes. HMRC Her Majesty's Revenue and Customs, the UK’s tax, payments, and customs authority. A non-ministerial department of the UK Government. IDBR The Inter-Departmental Business Register. A comprehensive list of UK businesses used by government for statistical purposes and held by the Office for National Statistics (ONS). It is fully compliant with the European Union regulation on harmonisation of business registers for statistical purposes. Medium company A company that has 50-249 employees. This was the definition used in this research. Micro company A company that has nine employees or fewer. For the purpose of this research, micro companies with zero employees are excluded. NatCen The National Centre for Social Research. An independent, not for profit social research company. PAYE Pay As You Earn. A status of employment where the employer deducts income tax and national insurance contributions from an individual’s wages before payment of wages. Self-employed A person is self-employed if they run their business for themselves and take responsibility for its success or failure. Self-employed workers are not paid through PAYE, and they do not have the employment rights and responsibilities of employees. SIC 2007 The current Standard Industrial Classification (SIC). It is used in classifying business establishments and other statistical units by the type of economic activity in which they are engaged. Small company NatCen Social Research | Employment status in SMEs 1 A company that has 10-49 employees. This definition was used in this research. SME Small and Medium sized Enterprises. The usual definition of small and medium sized enterprises (SMEs) is any business with fewer than 250 employees. However, as this project explores SME employers, for the purpose of this research all businesses with zero employees were excluded. Therefore, in this report ‘SME’ should be interpreted as meaning ‘SME employer’. SOC The Standard Occupational Classification. It is a common classification of occupational information for the UK. 2 NatCen Social Research | Employment status in SMEs Executive summary This report presents the findings from research conducted into Employment Status for HM Revenue and Customs (HMRC). The research was designed to provide robust evidence on the nature of employment in SMEs; understand how SMEs determine the employment status of their workers; explore awareness and use of the Employment Status Indicator (ESI) tool; and consider any ways in which HMRC can help SMEs classify the work status of their staff correctly. To achieve this, a mixed method approach was adopted. The approach consisted of a CATI (telephone) survey of 1,722 SMEs, selected and interviewed using a stratified random probability design, and a series of 33 in-depth interviews with SMEs, identified as being potentially at risk of mis-categorising staff based on their responses to the quantitative survey. This research was undertaken by the National Centre for Social Research (NatCen) on behalf of HMRC. Profile of employment in SMEs  More than four in five SMEs employ any staff on a PAYE basis (83%), regardless of whether they engage self-employed workers. Medium sized businesses are significantly more likely to employ PAYE staff than micro businesses (100% compared to 89%).  A quarter of SMEs engage self-employed workers (23%). This proportion does not vary significantly according to the size of a business.  Just over one in ten SMEs take on individuals through agencies (12%). Medium sized businesses are significantly more likely to take on agency workers than micro businesses (56% compared to 11%).  Two in three SMEs only engage PAYE staff (66%). Six per cent only engage self- employed workers, and 17% engage both PAYE and self-employed staff.  SMEs engage self-employed workers for all different job roles, but most commonly for roles in the middle of the occupational hierarchy, such as ‘skilled tradespeople’.  One in five SMEs say that employment numbers are seasonal and vary throughout the year (22%). Determining employment status  Responsibility for determining employment status varies across SMEs. In micro businesses it is ordinarily the role of the business owner or managing director. In small businesses it is commonly the role of a company secretary or operations manager, and in medium sized companies it tends to be the responsibility of a specialist, such as a finance director or HR official.  When determining the employment status of an individual, 71% of SMEs seek advice from an accountant, lawyer, or legal advisor.  Half of SMEs use guidance on the HMRC or GOV.uk websites (49%) and 43% contact HMRC staff directly.  Four per cent of SMEs give staff a choice over their employment status, with two per cent doing so regularly. This rises to 23% of businesses within the arts sector, and nine per cent in the construction industry.  There are five main approaches to categorising employment status in SMEs: NatCen Social Research | Employment status in SMEs 3 o Only employing staff on PAYE terms. This is seen as the safest option, to ensure fair treatment of staff and minimise risk of investigation . o Offering PAYE terms by default but considering self-employment if requested or in exceptional circumstances; o Giving staff a choice. While considered more risky, this is often used when recruiting specialist roles; o Making decisions on a case by case basis. This approach involves consideration of the skills required for a role, the number and regularity of hours, and the duration of the employment; o Engaging staff on self-employed terms by default. This is less common and tends to be used in businesses that are unable to operate a PAYE system, or as a trial for high paid roles.  As well as the nature of the role, such as the length and type of work, a number of factors are considered by SMEs when determining employment status, though these are not necessarily factors that HMRC requires them to take into account. These include: o Whether an individual has existing self-employed status; o Any risk to the business; o The administrative burden of operating a PAYE system; o The costs associated with PAYE, such as pensions, holiday pay and training; and o Historic or industry-standard practice.  Virtually all SMEs are confident that they make the correct decisions when categorising the employment status of their workers (97%).  A lack of confidence can stem from one or both of the following: uncertainty about the distinction between employment status categories, or observed ambiguities between categories in specific workforce roles.  Just one per cent of SMEs say they experience difficulties when categorising staff. This is slightly higher in medium sized businesses (four per cent) and in certain sectors: Agriculture (eight per cent); the Arts (seven per cent); and Health/social work (six per cent).  The difficulties SMEs describe range from experiencing uncertainty about employment status definitions to confronting more concrete situations such as when staff request an alternative classification; when self-employed staff carry out their work in the way employees typically do; and when HMRC has investigated a categorisation decision. The Employment Status Indicator tool  A quarter of SMEs are aware of the ESI tool (24%), with awareness significantly higher among medium sized businesses (38%).  Five per cent of SMEs have used the ESI tool at some point and two per cent currently use it. Reflecting their higher awareness, medium sized businesses are significantly more likely to use the tool (18%).  Businesses in the arts sector are also significantly more likely to use the ESI tool (19%), perhaps reflecting the greater freedom given to workers to choose their own employment status in that sector. (23% of arts sector SMEs give staff a choice over their employment status, compared to an average of four per cent.)  The main reason SMEs use the ESI tool is to address any uncertainty over an individual’s work status, particularly in complex cases.  Those who do use the tool tend to be positive about it. o 94% say that it is easy to use; o 79% say that it makes it easier to make the right decision when classifying workers; and o 77% say that the questions are easy to understand. 4 NatCen Social Research | Employment status in SMEs