Do Casual Workers Need to be on Payroll as Employees?

Employment rules exist in the UK to protect both employees and employers. They have been conditioned over the years to try and make the relationship fair to both parties. 

If you are paying casual workers, it’s imperative you know their rights and your obligations, including queries around permanent employment and payroll. 

It’s very important to get the basics right in your business.  There are three main types of employment status under employment law.

• Worker.
• Employee.
• Self-employed.

If you have casual workers in your business this may lead you to wonder what their rights are in relation to an employee and fundamentally ask whether those performing casual labour need to be on your company’s payroll.

Do casual workers need to be on payroll? Yes, casual workers do need to be on the payroll. Their pay is taxable income, and as employees they are required to pay any tax due. To calculate tax and NI contributions and submit the relevant data to HMRC casual workers will need to be on the payroll.

There is no concession from HMRC for what a small business owner might consider ‘casual workers’ and this has been more stringent since the introduction of RTI. It is vital to understand what your duties are in relation to employing people.

What is a casual worker?

Personnel Today describes casual workers as those ‘who are not part of the permanent workforce, but who supply services on an irregular or flexible basis, often to meet a fluctuating demand for work’.

The term ‘casual workers’ is not defined in employment law. Employers often use the term ‘casual’ with both the terms ‘employee’ and ‘worker’, which causes confusion around the legal status of the individual.

Casual workers could potentially be employees, workers or self-employed.

How the relationship works in practice will be a determining factor. The rights and protection of the individual are determined by the working practice so it is important to understand how the laws would see the relationship and not just what you have documented.

You’re more likely to be classed as a worker if:

• Your work for the organisation is more casual, for example, your work is less structured or not regular.
• You’re employed to do the work yourself.
• You’re not offered regular or guaranteed hours by your employer.
• You have very little obligation to make yourself available for work, but should do work you’ve agreed to.

A key consideration is whether any mutuality of obligation exists in the working relationship.  Where there is no obligation on either party to provide work or accept it then a casual worker will not be an employee.

According to the Office of National Statistics, 15% of the entire British workforce are self-employed, with five million classified as casual workers (freelancers, agency workers and those on zero-hour contracts). Some 60% of those who fall under the self-employed bracket fill highly skilled professional roles.

Casual workers and how it relates to payroll obligations

Do casual workers pay tax?

Casual workers’ pay is taxable income, and these employees will be required to pay any tax that may be due.

The only concession to this is when you pay harvest workers and casual beaters if you employ them for 2 weeks or less, you may not have to deduct tax. 

Can I pay casual workers cash?

It is perfectly legal to make payments to casual workers or any other type of employee via cash. How you make the payment to the casual worker is up to you, whether it be by bank transfer, cheque, or cash. The key thing is that it is paid net of any tax and NI deductions applicable i.e., it has been run through the payroll.

If you are attempting to pay casual workers cash as a means of circumventing the tax system, then you are not complying with the law.  

If you operate a cash business for example it would be perfectly legitimate to pay employees out of cash takings to avoid bank fees when banking cash, provided you have complied with the tax and NI obligations.

Paying casual workers

You usually must pay your employees through PAYE if they earn £123 or more a week (£533 a month or £6,396 a year).

You do not need to pay self-employed workers through PAYE.

As a rule, someone is:

• Employed if they work for you and do not have any of the risks associated with running a business.
• Self-employed if they run their own business and are responsible for its success or failure.

You must check each worker’s employment status to make sure they’re not self-employed. If you get it wrong you may have to pay extra tax, National Insurance, interest, and a penalty.

Handy Hint: Here are some stark warnings on how a business might trigger an HMRC investigation.

Temporary or agency workers

You need to operate PAYE on temporary workers that you pay directly if they are classed as an employee.

You do not need to operate PAYE if a worker is paid by an agency, unless the agency is based abroad and does not have either:

• A trading address in the UK.
• A representative in the UK.

There are special rules for harvest workers or shoot beaters employed for less than 2 weeks.

Employees you only pay once

You operate PAYE differently for employees you only pay once.

Set up a payroll record with their full name and address. If you give them a payroll ID, make sure it’s unique.

When you send your Full Payment Submission (FPS):

• use tax code ‘0T’ on a ‘Week 1’ or ‘Month 1’ basis
• put ‘IO’ in the ‘Pay frequency’ field
• do not put a start or leaving date

Give your employee a statement showing their pay before and after deductions, and the payment date, for example, a payslip or a letter. Do not give them a P45.

How much can you pay someone before putting them on payroll?

You can pay someone £123 a week before putting them on the payroll. You usually must pay your employees through PAYE if they earn £123 or more a week (£533 a month or £6,396 a year).

You do not need to pay self-employed workers through PAYE.

When does a casual worker become an employee?

The employment status of casual workers depends on the nature of the relationship between the worker and the employer. 

If an employer engages people on an ad hoc basis to help during staff shortages or at busy times of the year, or when an emergency arises, accepting that they may or may not be available when it needs them, they are unlikely to be employees. 

But, if it regularises the arrangement with those workers and undertakes to provide them with work on specified days and at specified times of the week, on the understanding (accepted by them) that they will present themselves for work on those days and at those times, the chances are that the relationship between the employer and the workers will change to that of employer and employees. 

In the final analysis, it will be for the tribunals and courts to determine the true nature of the contractual relationship, based on the facts of each case.                            

Frequently asked questions on whether casual workers need to be on payroll

Do casual workers pay PAYE?

Casual workers’ pay is taxable income, and these employees will be required to pay any tax that may be due.

The only concession to this is when you pay harvest workers and casual beaters if you employ them for 2 weeks or less, you may not have to deduct tax.

Do all employees have to be on payroll?

As an employer, you normally must operate PAYE as part of your payroll. PAYE is HM Revenue and Customs’ (HMRC) system to collect Income Tax and National Insurance from employment.

You do not need to register for PAYE if none of your employees are paid £123 or more a week, get expenses and benefits, have another job, or get a pension. However, you must keep payroll records as evidence that you did not need to set up a PAYE scheme.

Once you are registered as an employer all the staff you employ will need to be registered on the payroll even if they earn below the Lower Earnings Limit. You cannot choose which employees to have on payroll.

Can you pay casual staff cash in hand?

Paying casual workers cash without making the relevant deductions whilst seeming clever could cause a huge problem for your business. 

If you are caught by HMRC they can take the amount you have paid as being the net payment and gross it up for tax and NI contributions. 

The business owner is liable for anything that should have been paid to HMRC.  Pus the potential of penalties and interest.

Example

The business owner agrees to pay a casual worker £100 per day and they worked 5 days.

• Assuming they were a basic rate taxpayer the PAYE would be £77 (£625-£242 x 20%)
• The employee national insurance would be £53 (£625-£242 x 13.8%)
• The employer’s national insurance would be £58 (£625-£242 x 15.05%)

The total was £688 and an amount owing to HMRC of £188 (38% of £500) for one person for one week.

You can imagine the amount of damage that would do to a small business if this happened over a period of time.

Does casual work count as employment?

A ‘casual worker’ is more likely to count as a ‘worker’ rather than employment.

A person is generally classed as a ‘worker’ if:

• They have a contract or other arrangement to do work or services personally for a reward (a contract can be written or unwritten).
• Their reward is for money or a benefit in kind, for example the promise of a contract or future work.
• They only have a limited right to send someone else to do the work (subcontract)
• Their employer has to have work for them to do as long as the contract or arrangement lasts.
• They are not doing the work as part of their own limited company in an arrangement where the ‘employer’ is actually a customer or client..

Workers are entitled to certain employment rights, including:

• Getting the National Minimum Wage.
• Protection against unlawful deductions from wages.
• The statutory minimum level of paid holiday.
• The statutory minimum length of rest breaks.
• To work no more than 48 hours on average per week or to opt out of this right if they choose.
• Protection against unlawful discrimination.
• Protection for ‘whistleblowers’ who report wrongdoing in the workplace.
• Not to be treated less favourably if they work part-time.

They may also be entitled to:

• Statutory Sick Pay.
• Statutory Maternity Pay.
• Statutory Paternity Pay.
• Statutory Adoption Pay.
• Shared Parental Pay.

Workers usually are not entitled to:

• Minimum notice periods if their employment will be ending, for example, if an employer is dismissing them.
• Protection against unfair dismissal.
• The right to request flexible working.
• Time off for emergencies.
• Statutory Redundancy Pay.

Conclusion

Working out whether people you pay are workers, employees or self-employed is the starting point. Once this has been established you can consider the correct treatment of how to remunerate those groups and what your legal responsibilities are towards them.

It is not merely enough to write a set of rules that provides you with the outcome you desire. The way in which your relationship works, and the processes and procedures in place will determine the correct employment status.

The rights of different groups of staff are there to protect them. Trying to circumvent those rights can lead to big problems for the employer. You must also adhere to your rights and obligations to HMRC in relation to reporting and paying the correct amounts of PAYE and National Insurance through running a payroll. 

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