Is a contractor in the construction industry required to pay holiday pay to a subcontractor?
Although this question is set in the context of the construction industry, it is equally relevant to employers that engage contractors to work on a project.
The answer to the question depends on the nature of the contractual relationship between the contractor and the subcontractor.
If the subcontractor is a limited company, the contract for the services provided cannot in any circumstances be a contract under which holiday pay would be due. The subcontractor, however, would have to consider the IR35 issues raised in connection with the services provided to the contractor.
If the subcontractor is an individual, the contractor must consider whether the subcontractor is an employee, a worker or self-employed.
Employed or self-employed?
The first issue is whether the subcontractor must be treated as an employee or self-employed. Every contractor must address this issue when engaging a new worker, using the recognised employment status indicators, and must indicate on the monthly CIS300 Return that none of the payments listed relate to contracts of employment. The fact that an individual is a registered under the Construction Industry Scheme, whether for gross payment or for payment under deduction, does not, in itself, indicate that the contractor is entitled to treat the worker as being self-employed.
In general, a contract to perform a specific task within a short period of time is likely to be self-employment. If the contract is to perform on-going work over a long period of time, it is likely to be employment. That is not a rule, however, and there are other factors to consider. HMRC’s booklet CIS349 Are your workers employed or self-employed? - Advice for contractors, available at www.hmrc.gov.uk/manuals/cisrmanual/Pdfs/cis349.pdf, considers these issues in the context of the construction industry and indicates the kinds of workers that are likely to be employees and self-employed.
If the contractor decides that the nature of the contract with the subcontractor is such that it is employment, the person must be put on the payroll and PAYE tax and Class 1 NICs must be calculated as for any other employee. The employee is entitled to holiday pay - at least the 4.8 weeks per year (rising to 5.6 weeks from April 2009) required by the Working Time Regulations 1998 (WTR), but more if the employment contract specifies it.
If the contractor decides that the subcontractor is not an employee, there is a further issue to consider.
Worker or self-employed?
The WTR provides statutory rights for "workers", the definition of which includes employees. Having decided that a subcontractor is not an employee, the second issue for the contractor is whether the subcontractor is a "worker".
A subcontractor who runs a business and does work for a variety of customers and clients of that business is not a "worker". It would be expected that such a subcontractor would have business premises, equipment and stock, would not necessarily be required to perform work under the contract personally, and be able to work for more than one customer or client at a time. Such a self-employed subcontractor is not entitled to any of the WTR rights, including paid holiday leave. A subcontractor registered for gross payment has had to demonstrate an established business structure and is very unlikely to be a "worker".
On the other hand, a subcontractor registered for payment under deduction who is not set up as a business, who is engaged for the duration of a project and who is required to perform the work under the contract personally, is a "worker". As such, the contractor is entitled to all of the WTR rights, including the right to paid holiday leave and to holiday pay on termination.
There have been a number of tribunal cases that have considered the employment status of subcontractors and their entitlement to holiday pay. A notable decision is that of an Employment Appeal Tribunal, subsequently confirmed by the Court of Appeal, in the case Redrow Homes (Yorkshire) Ltd v Wright, Roberts and others, where a gang of bricklayers were found to be "workers" because they were required to perform work personally for the duration of the construction project and were not set up as a business. The particular factors in this case that indicated that they were "workers" were:
- the bricklayers worked exclusively for Redrow during the relevant period
- they could be ordered to rectify defective work
- the payment method was a fixed hourly rate or piece rate
- there was no opportunity to profit and there was no risk of loss
- payments were subject to tax on account.
An important point made by the Court of Appeal decision was that, if Redrow’s contract had been with the gang as a whole rather than with the individual members of the gang, with the effect that the members of the gang could have changed during the period of the contract, the work would not have had to have been performed personally and they would not, as a result, have been "workers".
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