Understanding worker status is one of the first steps when arts organisations take on workers. Before making payments, you must determine whether the individual is employed or self-employed. This process is known as a status test, and it has a fundamental impact on how payments are made and how tax rules apply.
Payments to the self-employed can normally be made gross, whereas payments to employees must be made under the Pay As You Earn (PAYE) rules. However, a worker’s claim that they are self-employed does not remove the organisation’s responsibility. The engager must carry out a proper check to determine the correct worker status.
The Difference Between Employment and Self-Employment
The essential characteristic of employment is a contract of service, while that of a self-employed worker is a contract for services. A contract of employment must contain an obligation for the employee to provide their services personally. Without such an obligation, a court or authority is unlikely to consider the contract a contract of service.
However, the terms of a contract are not conclusive in determining status. Over the years, a number of factors have developed that indicate a contract for services and therefore point towards self-employment.
Some of these factors include:
- a right of substitution of personnel
- the worker using their own money and taking financial risks
- flexibility regarding working hours and place of work
- the worker’s right to decline to perform certain work
- a statement confirming that the worker is responsible for their own tax affairs
- responsibility for rectifying work in their own time and at their own expense
Organisations must judge each case based on its individual circumstances and merits. For this reason, there is no formula that determines worker status in every situation.
Worker Status in the Performing Arts Sector
In the arts sector, organisations engage actors, ballet dancers, opera singers, musicians, and other performers under either contracts for services or contracts of employment when they appear live in theatre, opera, ballet, clubs, or perform in film, video, radio, or television productions.
Where performers or artists have independence from a particular regular paymaster, this may indicate that individual engagements are not contracts of employment, even though the initial view based on the particular terms of the engagement may suggest otherwise. In these circumstances, assessment of a performer’s earnings as self-employed will normally be appropriate.
Organisations are more likely to apply PAYE when they engage a performer or artist:
- for a regular salary to perform in a series of different productions over a period of time
- in roles that the engager may stipulate from time to time, providing a minimum notice period before terminating the contract
This situation may apply, for example, to permanent members of some orchestras or to permanent members of an opera, ballet or theatre company.
Organisations may engage a designer, director, or choreographer as self-employed when they work on a specific production for a limited period and receive a fee and royalty. In other cases, organisations engage them as employees.
Why Correct Worker Status Matters
The cost to an organisation of getting the classification wrong can be significant. If an organisation treats a worker as self-employed when the worker must pay employee tax, the organisation may owe the tax and National Insurance and face additional penalties and interest.”
Penalties can reach as much as 100% of the tax and National Insurance underpaid and may extend to previous years. In addition, the tax authorities have increasingly challenged self-employment arrangements, as shown by a growing body of case law.
For this reason, compliance has become an important issue. Arts organisations effectively act as unpaid tax collectors, so they must ensure they determine the correct worker status whenever they engage performers or creative professionals.
This article was written by Mahmood Reza (I Hate Numbers) and first appeared in Arts Professional magazine.
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