Employment status determines the legal rights and protections an individual has at work. Employees have the most extensive rights, including unfair dismissal protection and redundancy pay. Workers have intermediate rights, such as holiday pay, the national minimum wage, and protection from unlawful deductions from wages. Self-employed contractors, in contrast, generally have no statutory employment rights but operate their own businesses.
IR35 is a tax regime designed to prevent 'disguised employment', where individuals provide services through a personal service company (PSC) while working in conditions similar to employment. When an engagement falls inside IR35, the end-user or agency (the “deemed employer”) is responsible for deducting income tax and employee National Insurance contributions (NICs). The deemed employer must also pay employer NICs directly to HMRC. It cannot pass this cost onto the worker.
In Appiah v Tripod Partners Ltd, the Claimant, an independent social worker, was engaged through the Respondent, a recruitment agency, on an assignment with the Home Office. Initially, she worked outside IR35 and was paid via umbrella companies. However, following an HMRC Check Employment Status for Tax assessment, the Home Office determined that her role fell inside IR35.
As a result, the Respondent offered the Claimant three options: to be engaged via PAYE, through an umbrella company, or through her own PSC. The Claimant chose the PSC route. Under this arrangement, the Respondent deducted income tax, employee NICs, and crucially, also deducted employer NICs from her pay.
The Claimant argued that the deduction of employer NICs was unlawful. She maintained that employer NICs are a cost to the employer, not the worker, and should not have been deducted from her hourly rate. The Respondent defended the deductions by claiming that the Claimant was not a worker and that, because she operated through her PSC, the deductions were justified under the contractual arrangements.
The Tribunal ruled in favour of the Claimant, concluding that she was a worker in law, despite being engaged through a PSC. While the contract described her as an independent contractor, the reality of the working relationship indicated otherwise. The Tribunal found that she performed work personally, submitted timesheets rather than invoices, and was subject to the supervision and direction of the Home Office. She was not genuinely running her own business, and neither the Home Office nor the Respondent were her clients in the traditional sense.
The Tribunal confirmed that employer NICs must be paid by the deemed employer and cannot be deducted from the worker’s earnings. The Claimant had never agreed in writing to such deductions, and the Respondent’s contract did not state that employer NICs would be taken from her pay. The Tribunal concluded that the Respondent had misapplied IR35 and ordered it to repay the deducted sums.
As this is a first instance decision, it is not binding on other tribunals, and it remains to be seen whether there will be an appeal. Nonetheless, the case underlines the risks of assuming contractual wording alone will determine employment status. Businesses engaging individuals through PSCs should carefully assess the actual working arrangements and ensure that they are not unlawfully passing employer NICs onto workers. If a worker is required to perform tasks in a way that mirrors employment, they may qualify for statutory protections, including protection from unlawful deductions. Clear contractual documents are also vital, so that any permitted deductions are explicitly authorised in writing.