Under the Working Time Regulations, annual leave and holiday pay are statutory rights for employees or workers (including agency workers)
The statutory entitlement is 5.6 weeks – if you work 5 days a week, this works out as 28 days (some companies offer more). Your employer may ask you to take bank holidays as part of your holiday entitlement if the business does not operate on these days.
A self-employed contractor is not entitled to statutory holiday pay or sick pay. As they do not receive these benefits, they should ensure their hourly rate or project fees are high enough to cover time off when they need it.
How does holiday pay work for subcontractors?
Subcontractors are self-employed and are therefore not entitled to holiday pay. They may work as a sole trader or a limited company, but either way, they are viewed as a business in their own right and do not receive holiday pay when they take time off.
As a business, they can choose who they provide their services to and what rates of pay they will accept. Some labour-only subcontractors charge by the hour, some by the day, and some by project.
Regardless of how they operate or whether they have fixed hours, they are responsible for their own finances, including tax, expenses, and pay. Because they are not entitled to holiday pay in the same way employed workers are, they must ensure their rates are high enough that they can afford to take holiday if they want to.
Are subcontractors ever entitled to holiday pay?
When a subcontractor works for a company via a recruitment agency, the current regulations mean that they have to be paid through an umbrella company. These umbrella companies can work in different ways.
Some pay the subcontractor as self-employed and under CIS. They can only do this if it is confirmed by the agency that how the subcontractor works is not subject to ‘supervision, direction and control’. They verify your subcontractors, figure out what they should be paid, send out payslips and CIS tax statements, and pay the wages. All you have to do is confirm the timesheets the subcontractors have submitted to the agency are accurate and pay your invoices. Subcontractors working in this way are not entitled to holiday pay.
Other umbrella companies “employ” the subcontractors. In other words, the subcontractor is classed as an employee of that company and will be entitled to holiday pay and other employment benefits. The umbrella company is responsible for ensuring the subcontractors receive all relevant entitlements.
If you are contracting agency workers, you do not need to worry about holiday pay, but you may need to consider whether the subcontractors are being paid correctly. If they are being paid under CIS and subject to DSC, this could come back to bite you.
When is a subcontractor not entitled to holiday pay?
Self-employed subcontractors are not employees and so are not entitled to the same benefits as employed workers. Even if you work with the same labour-only subcontractor long-term, they are not entitled to holiday pay unless you decide to employ them.
If they want to take time off to go on holiday (or for any other reason), they will have to make their own provisions. There is no obligation for them to pre-agree their holiday dates with you, but if you work with them long-term and have established a good relationship, they will likely give you advance notice.
Depending on the nature of their contract with you, they might send a substitute to provide labour in their place. You will still pay the original subcontractor as usual, and they will pay their substitute. If they do not send a substitute, you are not expected to pay them holiday pay.
Can a subcontractor claim backdated holiday pay?
A subcontractor is not entitled to holiday pay because you are not their employer – they are liable for their own holiday pay.
However, if you are claiming a worker is self-employed when in reality they should be classed as an employee, then you are putting yourself at risk. Even if you pay your subbies through an established payroll or umbrella company, you might not be fully protected.
If HMRC decides to reclassify your subbies, you will be liable for backdated holiday pay.
There is also a risk that a disgruntled subcontractor could claim that they believed they were employed and should have been entitled to holiday pay. If the court rules in their favour, you will be liable for any back tax, unpaid leave, and associated fees.
You must not disguise workers as self-employed contractors just to avoid paying more in taxes or to get out of your obligations as an employer.
Do you need a written contract to work with subbies?
If you use labour-only subcontractors on an ad-hoc basis, you don’t need a written contract, however, it can be a good idea to put a formal agreement in place to avoid any misunderstandings.
If you work with the same subcontractors long term or would like to work with the same subbies long term, you should put the terms of the agreement in writing. While there is no legal requirement to do so in the UK, it will help protect you should HMRC open an enquiry into the employment status of a worker.
Having a written agreement in place makes the terms of your relationship clearer. It demonstrates that your relationship is one of contractor and subcontractor and not one of employer and employee. This is key if HMRC does open an enquiry as your subbies will need to prove genuine self-employment.
To learn more about creating a contract check out this blog.
Should you use an umbrella company to contract subbies?
You can but you do not have to. If your only reason for contracting subbies through an umbrella company is to protect yourself from an HMRC enquiry into employment status, then you should consider an alternative option.
Should you use a payroll company to pay your subbies?
Again, you can but you don’t have to. If you don’t want to manage your payroll in-house, using a payroll company will remove the headache.
However, if you use a payroll company, you’ll have to make CIS payments upfront, plus you’ll have to pay VAT on top of your weekly wage bill. This can have a huge impact on your cash flow. Payroll companies also take a small fee from your subcontractors – usually around 2.5% – meaning your subbies lose part of their income every week just so they can get paid.
The other problem is that the contracts used by payroll companies are there to protect them and not necessarily you. In recent years, there have been legal cases where contractors have ended up getting stung for back pay, unpaid holiday pay and even unfair dismissal, despite using payroll companies.
So if your only reason for using a payroll company is to protect yourself from HMRC enquiries, it’s worth considering another option.
Can you work with subbies for longer than three months?
Yes. There are no legal restrictions on how long you work with subcontractors. As long as they are genuinely self-employed, you can work with them for as long as you want.
The “three-month rule” is a myth used by umbrella companies to make construction businesses believe that using a payroll company is the only option for working with subbies long term.
Should you employ your subbies?
If your subbies are employees in all but name, then you probably should employ them. After all, if you’ve found competent, capable, reliable subbies, there are advantages to having them on your full-time payroll.
But employing your best subbies doesn’t always make sense. And if there is a genuine reason for them being self-employed, then leave them as self-employed.
Avoiding the wrath of HMRC all comes down to one simple thing: can you prove there is a legitimate business case for working with your subcontractors the way you do?
The answer has nothing to do with how long you work with them. It has nothing to do with how you pay them. And it has nothing to do with what uniform they wear, whose vans they drive or who pays for their training.
The best way to avoid confusion is to document your true working relationship.
Do subbies have to have more than one client to prove self-employment?
No. A subcontractor can have multiple clients or one client. They can operate as sole traders or limited company contractors. They can be paid by the hour, by the day or on a fixed project rate.
They do not need an office, a website or any company branding to be classed as an established business. But they do need to be able to demonstrate they are genuinely self-employed.
One of the things HMRC looks at to determine whether a subcontractor is a business in their own right is whether there is any financial risk to them. For example, if they make a mistake, are they expected to rectify it at their own expense?
Protect your business and your workforce with a HardHats agreement
We don’t think your subcontractors should have to pay a fee to get paid the money they are entitled to. Or that contractors should have to give over control of their payroll to third-party companies.
And we don’t think you should be worried about HMRC enquiries into employment status if your subbies are genuinely self-employed.
That’s why we specialise in creating watertight subcontractor agreements for construction companies. All you need to do is tell us how you work with your subbies, and we’ll do the rest.
We’ll create bespoke contracts, and then we’ll get your subbies to sign them electronically. No hassle for you – no hassle for them. A few minutes of your time for complete peace of mind.
Plus, we offer an insurance-backed guarantee on all our contracts, meaning if HMRC ever does open an enquiry, we’ll handle it on your behalf.
You can find out more about how it works here, or book a call and let us get started with your bespoke contractor-to-subcontractor agreements.