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Employers unaware of freelancer misclassification risks

A new article from digital staffing platform Coople reveals the risks and rights associated with hiring freelance workers in the UK.

The UK is home to over 4.39 million freelancers, according to data from March 2023. Offering work-hour flexibility and the ability to set your own rates, self-employment has become a popular choice in recent years. However, there are several important factors that workers and employers alike should be aware of when taking a freelance route. 

A new article* revealed the rights that freelance workers have in the UK, alongside warning companies using self-employed workers about the various risk factors that exist when classifying freelance workers from company employees. 

Yves Schneuwly, Group Chief Commercial Officer at Coople comments: While freelancing can offer increased flexibility surrounding work hours and pay that is desirable to many, being self-employed comes with a significant amount of admin and can also lead to exploitation or the risk of penalty fines. 

“Freelance workers are not entitled to the same employee rights and benefits that regular employees receive – including minimum wage. While many set their own pricing, not all are in a position to do so – which can leave them vulnerable to exploitation from companies using their services. 

Undervalued work can be a big problem for those working for themselves, and a lack of protection from employee laws means that there is very little that can be done if their client sets a low price during contract negotiations. 

“Additionally, freelancers are financially responsible for their own tax and NI contributions. Failure to pay the correct amount can result in severe fines.  

“Ultimately, there are a lot of factors to fully consider before rushing into self-employment. Though freelancing can offer desirable lifestyle benefits, there are always risks associated that ordinary employees do not have to worry about.”  

One of the most important things to remember about freelancing is its definition. For both legal and taxation purposes, freelancers are defined as self-employed individuals. They are solely responsible for setting their own working hours and pricing rates, and ensuring that any agreed-upon work is completed to a satisfactory standard. 

Freelancers are responsible for declaring their income and paying their own tax and National Insurance contributions on an annual basis – so must be vigilant about keeping track of the tax they owe to HMRC. Failure to pay the correct amount of tax can result in severe fines. 

Additionally, as self-employed individuals, freelancers are not entitled to worker benefits – such as minimum age, maternity leave, pension contributions, or statutory sick pay. This means that freelancers are at an increased risk of being exploited by companies, particularly by undervaluing their services in situations wherein they are unable to set their own pricing terms. 

For companies hiring freelancers, there are also risks associated. For example, misclassifying employees as freelancers can result in the company being held responsible for any unpaid tax. 

The government determines who can be defined as ‘self-employed’, as this can be used as a potential means to avoid paying taxes. To avoid this, an assessment process called the «IR35» was introduced by HMRC to determine whether a freelancer providing a service to a company is genuinely self-employed or needs to be treated as an employee. 

Previously, freelancers were responsible for assessing whether their services constituted genuine freelancing. However, as of the 6th of April 2021, the responsibility for «IR35» has largely fallen on the shoulders of private-sector companies and public-sector authorities. 

The wrong classification can result in fines for companies inappropriately labelling workers as freelancers, alongside being held liable for unpaid tax and needing to implement employee benefits. 

Not only can this have financial implications for businesses, but failure to correctly pay employees can also significantly damage a company’s reputation. Surprisingly, according to the freelance report, only 30% of companies are aware of employee and independent contractor misclassification risks. These risks can be avoided by hiring workers via a digital agency, such as themselves, rather than taking on freelance workers.  

Doing so can not only help companies avoid the risks associated with freelancing, but also provides the same level of flexibility for both the company and the workers – while providing the company with full control over who they work with. 

Using a digital agency instead also benefits workers – meaning they do not have to undergo the «IR35» assessment process, nor do they need to worry about paying their own tax or National Insurance contributions. Instead, this is paid via PAYE by the agency themselves, who acts as their legal employer. 

Those hired through an agency are also entitled to all of the employee benefits not available to those that are self-employed – including the right to minimum wage and holiday allowances.

*Report by Coople

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