The question of whether a pharmacy locum is employed or self-employed is not as straightforward as it might at first appear. Many people assume they are free to choose, but HM Revenue and Customs (HMRC) tells us this is not the case. So how do you decide if a locum that you employ regularly at your pharmacy is in fact an employee?

There is no clear-cut answer to this question, but HMRC has published a guide to help employers and employees decide their employment status. This covers areas such as: who is a worker, employment rights, casual or irregular work, employment shareholder jobs, differences between the self-employed and contractors, working out if someone is self-employed, and directors and office holders.

What are the practical differences?

Employees are taxed under the Pay As You Earn (PAYE) system, and are liable to class 1 national insurance contributions (NICs). These contributions are automatically deducted by the employer. Employees who fall into this national insurance class earn more than £155 a week and are under state pension age.

If the pharmacy worker is an employee, the employer also has to pay class 1 NICs. Over a limit set each year, the employee’s national insurance rate reduces to 2%, but for employers, NICs continue at the full rate, with no upper limit. As the employer, you must also assume responsibility for paying statutory sick pay, as well as statutory maternity, adoption and paternity pay.

Another difference is that employees have rights under health and safety and employment laws, which offer them safeguards such as the right to redundancy payments and protection from unfair dismissal. Moreover, the range of social security benefits is greater for employees than for people who are self-employed.

On the other hand, self-employed workers are taxed under self-assessment, so are allowed more scope when claiming expenses. They also pay class 2 NICs (which are voluntary, for those earning less than £5,965 a year) and class 4 NICs (for self-employed people earning profits over £8,060 a year) – the combined burden of which is lower than class 1 NICs.

However, class 2 NICs are to be abolished in 2018. When this happens, a self-employed individual’s class 4 NICs will pay towards their state pension and benefits entitlement. 

As all employers must offer their workers a workplace pension by 2018, and contribute towards it, it is not surprising that many businesses are showing a preference for their workers to have self-employment status.

Which conditions favour self‑employment?

If you want to formalise a pharmacy worker’s self-employed status, we strongly recommend that you get legal advice and a contract that defines the services to be provided. You will need to give consideration to the following points:

Pricing – One of the main requirements is that self-employed workers bear some element of risk in the arrangement, which means you should not pay hourly rates, but instead a price for the job. The main principle is that the price, scope, and timing of the work should be agreed, and evidenced in writing, before the job commences.

Workmanship – The more freedom the pharmacy worker has in the way the work is carried out, the better. You must also make it clear that the worker will have to put right any faulty work at his or her own expense.

Substitution – One of the strongest tests of self-employment is whether the worker has the right to substitute another worker who is capable of carrying out the job. A pharmacy locum probably is self-employed if they can hire their substitute to cover a shift.

Insurance – All self-employed workers should hold public liability insurance.

Provision of equipment – Where practical, the worker should supply at least some of their equipment. The extent of this depends on the nature of the work, so may not apply to your pharmacy.

How do you know which is which?

HMRC provides an online tool which can be used in working out the employment status of individuals or groups of workers.

It’s important to get advice if you are unsure about your locums’ statuses, as it is the responsibility of the person making tax payments and NICs to get it right.

If you treat a locum as self-employed and the HMRC subsequently rules they are a pharmacy employee, you could find that all the payments you have paid the locum will be treated as net payments, and you will have to pay the corresponding tax and employees’ NICs, as well as employer’s NICs.

You have no right in law to recover this money from your employees, and you may also have to pay interest and penalties for making incorrect returns.

Umesh Modi is a chartered accountant and tax advisor, and a partner at Silver Levene LLP.

This article is based on current legislation and practice and is for guidance only. Professional advice should be taken before acting on matters mentioned here.