Employment status and pensions - What do you need to know?

7 minute read
16 April 2020

Our employment and pensions experts look at why the classification of an individual's employment status matters in a pensions context, and what employers need to do to ensure they are on top of this ever-evolving area of law.

Key action points for trustees / employers

1. Consider an individual's employment status from day one

Whether or not an individual is an employee, worker, or a completely self-employed independent contractor depends on a number of legal factors that are subject to scrutiny by the courts.

Whether someone is a contractor, a worker or an employee determines what employment rights they have, which is perhaps why the question has come under so much scrutiny in recent cases.

The cost consequences of determining an individual's status incorrectly can be expensive, as well as damaging from a reputational perspective.

2. Remember that no single 'factor' determines status

Importantly, when it comes to worker status, we know from case law that there is no single factor that is definitive. What the individual's contract says is definitely not definitive (!), and a tribunal/court will look behind the wording of the contract to establish what actually happens in practice.

3. Determine who is/isn't a worker and your employer duties under the Pensions Act 2008

The Pensions Act 2008 places employers under an obligation to automatically enrol UK "workers" who meet certain eligibility requirements into a qualifying pension scheme, and pay minimum contributions into that scheme. Employers are also under a duty to give other non-eligible workers access to a qualifying scheme and also to certain prescribed information. This is often referred to as workplace pension reform, and now applies to all employers of UK workers, regardless of size.

Where an employer has incorrectly determined that an individual is a self-employed contractor rather than a worker, they may not have complied with their statutory obligations under the Pensions Act 2008. Not only does this mean that they could have to make back-dated contributions in terms of the individual's pension contributions; they may also be subject to potential fines from the Pensions Regulator.

4. Check any contractual duties in relation to pensions

In addition to Pensions Act 2008 duties, employers may also offer their employees or workers something above and beyond the statutory minimum in terms of their pension provision. Employers should look at this provision in the event that they are considering an individual's employment status, in particular on recruitment, so that contractual provision reflects the agreed position. Some employers use contractual enrolment which now largely tracks the statutory position on timing and process.

5. Employment status, COVID-19 and employee furloughing

The important point to remember is that under HMG's recently launched Job Retention Scheme it is possible for employers/employees to agree to furlough leave for a temporary period, but this means they remain employees during that period if they were employees before being furloughed. It will be necessary to check pension scheme rules to establish the pay-basis for benefit calculations and contributions during that period, and also to understand what can be recouped under the furlough scheme in terms of pension contributions made during this period. Please see our insight COVID-19: Coronavirus Job Retention Scheme (9 April Update) for further details.

Why does all this matter?

Broadly, an employer's pension obligations in respect of an individual working for them, will be dependent on that individual's employment status.

The following minimum statutory pension rights apply:

  • A self-employed contractor has no automatic right to receive a pension from their end client (for more information on self-employed contractors and IR35 please visit our insight at IR35 Reform Delayed Until 2021)
  • A UK worker has the right to be assessed for automatic enrolment and if they meet certain earnings and age criteria (subject to review by the Secretary of State), to be enrolled into a qualifying pension scheme by their employer, and have contributions paid in respect of them;
  • An employee has the same right as a worker set out above. There may also be additional contractual benefits that a company offers to its employees.

In certain scenarios - notably in relation to temporary workers, an employer may trigger postponement of its duties under the Pensions Act 2008, so that a worker is not automatically enrolled from day one.

The Pensions Act and regulations made under it do carve out certain categories of employee or worker from the scope of employer duties under the Pensions Act 2008. Sole directors of companies for example, do not have to automatically enrol themselves in a qualifying workplace pension arrangement.

LLP partners are also exempt. This is specifically set out in regulations, and provides welcome clarity given that case law has established that LLP partners can be 'workers' for other employment law purposes. There are also some easements for employers in terms of not having to enrol individuals with certain pensions tax protections.

Finally, case law has now established that 'workers' fall within the scope of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TEPP). So their pension provisions before and after a TUPE transfer will need to be considered, and employers will need to ensure that what is provided is compliant with TUPE/TEPP.

Case law is highlighting the importance of getting this right

The question of whether someone is a 'worker' or not is one that has dominated employment tribunals over the past few years, with a number of high profile cases such as Uber and Pimlico Plumbers bringing the question into the spotlight.

Uber has appealed the Court of Appeal decision that its drivers should be treated as workers rather than self-employed. The Supreme Court hearing and decision on this is expected later this year, and will again shine a spot-light on the issue, including the pension consequences of any finding. It may be that the Pensions Regulator also decides to become more proactive in requesting information from Uber on its pension arrangements, once the ultimate status of its workforce has been determined.

What should employers be doing?

Employers should ensure that they critically examine an individual's status to determine whether they are a genuine self-employed contractor, or whether they fall under the category of worker or employee. If the individual falls within either of the latter two categories, employers need to understand and comply with their automatic enrolment duties in respect of them.

By failing to do so, and artificially putting individuals into a 'self-employed' category, from a pensions' perspective employers run the risk of a complicated and substantial back-dated pensions bill, as well as potential fines from the Pensions Regulator for non-compliance.

NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.