Can you pay subcontractors an hourly rate?
The short answer is yes. But we understand why you might think otherwise.
It’s because there are so many rumours in the construction industry about how you can and can’t work with subbies and how you can and can’t pay them.
Well, here is the truth: you can pay subbies by the hour, by the day, by the measure, per brick, per metre, on a schedule of rates, or at a fixed project fee – you can pay subbies however you want. Fact.
How you pay your subbies is irrelevant.
What is relevant is whether the relationship is one of contractor and self-employed subcontractor or one of employer and employee.
Are your subbies genuinely self-employed?
If they are, you can pay them how you want and work with them for as long as you want.
The three tests
When HMRC and the courts are determining employment status, there are three key “tests” they use:
- Personal service – is the subcontractor expected to carry out the work personally?
- Control – do you tell them when to work, what to do, and how to do it?
- Mutuality of Obligation (MOO) – do you have an obligation to keep offering your subcontractors work, and do they have an obligation to accept it?
You can ensure you don’t fall foul of these tests by documenting how you work with your subbies in a subcontractor agreement.
Your subcontractor agreement should match up with reality – in other words, it should reflect the true working relationship. And if that relationship includes paying your subbies hourly, this should be clear in your agreement.
As long as you have a genuine business reason why you work that way, then there’s no problem.
What about timesheets?
If you pay your subbies hourly, you need them to complete timesheets, right? And timesheets are something employees complete, aren’t they?
HMRC could certainly look at it that way if they wanted to make a case against you.
But what if your subbies didn’t complete timesheets? What if they completed attendance records?
And what if those attendance records weren’t simply to track time for payment? What if they were to record time on site for health, safety and security reasons?
After all, if an incident occurred at one of your sites, you’d need to know who was there, wouldn’t you?
That means there’s a legitimate business reason for why your subbies complete attendance records.
And if you can give HMRC legitimate reasons for why you work with subbies the way you do, they’ll be less likely to open an enquiry.
Of course, the easiest way to ensure nothing is left open to misinterpretation is to have it all documented in your subcontractor contracts.
The more transparent your contracts are, the harder it is for HMRC to make a case against you.
What if you pay subbies through a third party?
Too many contractors have fallen into the trap of believing they are covered if they pay subbies via a payroll company or umbrella firm. They aren’t. And you won’t be either.
Payroll companies put a buffer between you and your subbies, but HMRC can still deem your subbies to be employees if they find enough evidence.
The contracts between payroll companies and subcontractors are designed to protect them. That means they won’t necessarily protect you.
If HMRC opens an enquiry into the employment status of your subbies, they won’t simply take a contract at face value. They will check that what the contract says happens matches up with what actually happens.
And if they believe you are trying to pass off employees as subcontractors, then you are liable for all the costs – fines, penalties, backdated tax, and NI. You could also find yourself having to cough up for unpaid holiday, sick pay and pension contributions. And it’s highly unlikely your payroll company will offer to chip in.
That’s not to say payroll companies don’t serve a purpose. They are a great option for some firms.
But if you are only considering using a payroll company because you think it offers you complete protection from HMRC, you should reconsider your options.
Complete peace of mind
It is possible to work with subbies long-term, pay them an hourly rate and keep HMRC off your back. And it’s possible to do all this without using a payroll company.
We create bespoke, watertight contracts that accurately reflect how you work with subbies and give legitimate business reasons for why you work that way.
Not only that, but our contracts are underwritten by Markel – a multi-billion-dollar international insurance company that specialises in ‘hard-to-place’ risks. That means we’ll take care of any HMRC enquiries into employment status and cover any associated costs if they do reclassify your subbies.
Plus, we get all your subbies to sign the contracts electronically using our app, so you don’t even have to worry about the paperwork.
You keep control of your payroll and cash flow and have complete peace of mind that you’re protected. All you have to do is be completely honest with us about how you work with your subbies (and pay our invoices on time).
If that sounds good to you, book a call to get started.