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If you’re wondering whether it’s possible for a sole trader to have employees, the answer is yes, but it is not commonplace. In this post, we will discuss this question, in addition to related matters such as employment law, contractors, freelancers, and limited companies.
Are sole traders allowed to be employers?
Yes, sole traders can be employers. You do not have to set up a limited company to employ other people to work for you. Whilst the name ‘sole trader’ implies that someone is working on their own, this is not the legal definition of the term.
The term ‘sole trader’ applies to anyone who is self employed and works for themselves, as opposed to someone who sets up and operates through a separate legal structure like a limited company.
Sole traders often hire other people to work for them, either as employees or independent freelancers or contractors.
Can a sole trader be an employee in their own business?
A big difference between sole traders and company directors is that a director can be an employee of their own business. Sole traders are always self employed. Whilst they can employ other people, they cannot employ themselves.
The individual sole trader is the business, so they cannot have an employment contract with themselves. A company, on the other hand, is classified as a separate legal entity (person) in its own right. It is separate from its owners and directors, which means that a company can have a contract of employment with its own director(s).
How can I set up as an employer?
The basic steps of setting up as an employer are the same for sole traders as for limited companies. The first step is to register as an employer with HM Revenue and Customs (HMRC). PAYE registration should generally take place before the first payment of salary, but not more than two months before this first payment.
Sole traders can register for PAYE by filling out this online form. The following information will need to be gathered to fill out the form:
- Sole trader name
- Unique taxpayer reference
- National Insurance number
- Trading name (if applicable)
- Official business address (this cannot be a PO Box)
- Official business phone number
- Nature of business
- Number of employees expected to be employed in the current tax year
- Whether any payments have already been made to employees
- If expenses and benefits are intended to be paid to employees
- If the sole trader will be acting as a Troncmaster
- If an Occupational Pension Scheme will be operated
After registering as an employer, HMRC will issue PAYE and Accounts Office reference numbers, which may take up to 5 working days. These reference numbers are required for enrolling for PAYE Online.
HMRC’s PAYE Online service is used to:
- send payroll reports to HMRC
- view the balance of what is owed to HMRC
- access tax codes and notices about one’s employees
- appeal any penalties
- receive alerts from HMRC in relation to late payment etc.
The PAYE Online login details will need to be used in any payroll software for purposes of submitting reports to HMRC. But the PAYE Online service itself cannot be used to send payroll reports, other than expenses and benefits returns.
Processing salary payments without a PAYE reference
To process any salary payments before an employer PAYE reference number has been obtained, it is necessary to:
- Run payroll
- Store full payment submission
- Send a late full payment submission to HMRC
Employment law for sole traders
It is important for a sole trader to establish if anyone working for them is an employee, a worker, or a self-employed contractor/freelancer.
Determining this is critical for understanding the extent of one’s employment law obligations. We will consider these different types of work status below:
A member of staff will normally be classed as a worker if the following apply:
- the individual has a contract to perform work or services personally in exchange for money or a benefit in kind; and
- they are not generally allowed to subcontract the work; and
- they are regularly required to attend a place of work; and
- they are entitled to work for the duration of the contract; and
- they are not contracting with the ‘employer’ in the manner of a customer or client (e.g. via a limited company).
Despite not being classed as employees, workers are legally entitled to certain employment law rights, including:
- National Minimum Wage (NMW)
- protection against unlawful deductions from wages
- statutory minimum level of paid holiday
- statutory minimum length of rest breaks
- protection against unlawful discrimination under the Employment Equality Act 2010 (e.g. race, age, sex discrimination)
- protection from whistleblowing
- statutory maternity, paternity, adoption and shared parental pay (in certain cases)
Employees work under an employment contract. However, they can also be classed as employees in the absence of a contract of employment, if most of the following attributes apply:
- they are required to work regularly unless they are on leave (e.g. holiday leave)
- they are required to do a minimum number of hours per week/month and they expect to be paid for any time worked
- a manager or supervisor is responsible for their workload
- they are not allowed to subcontract any of their work
- National Insurance contributions (NICs) and income taxes are deducted from their wages at source (i.e. through PAYE)
- they are entitled to annual paid holiday leave
- they are entitled to contractual or Statutory Sick Pay (SSP)
- they are entitled to maternity or paternity pay
- they are entitled to join a pension scheme operated by the business
- disciplinary and grievance procedures apply to them
- they have to work at a specific location such as an office
- redundancy procedures are set out in their contract
- they are provided with materials, tools and equipment for their work by the business
- they only work for the business – or if they have any other work for another business, it’s a completely different type of work
- their contract contains terms such as ‘employer’ and ‘employee’
Employees have all the employment rights afforded to workers, and are additionally entitled to:
- Statutory Sick Pay (SSP)
- statutory maternity, paternity, adoption, and shared parental leave
- minimum notice periods regarding termination of employment
- protection against unfair dismissal
- the right to request flexible working
- time off work to deal with emergencies
- Statutory Redundancy Pay
Please note: Some of these rights require a minimum length of continuous employment before an employee becomes entitled to them.
Self-employed contractors and freelancers
If a person is neither an employee nor a worker, they are likely to be considered as a self employed contractor or freelancer. This status includes sole traders.
If a sole trader contracts with another self employed individual (who is not a worker or employee), then there will be no employment law obligations involved, other than for health and safety and certain protections from discrimination.
It is important to note that HMRC can sometimes regard someone as self-employed for tax purposes, even if they have a different status in employment law.
If most of the following are true, then they will generally not be considered as employees for tax purposes, and will therefore not need to be paid through PAYE:
- they run their own business
- they are able to decide what type of work they do – and when, where, and how to perform the work
- they are entitled to subcontract out their work
- they are responsible for rectifying any work which is deemed unsatisfactory without being paid for the extra time required
- they work on a fixed price basis, as opposed to being paid by the hour
- they are entitled to work for other clients
- they provide their own materials, tools and equipment necessary to perform the work
Separately to the above conditions which relate to PAYE, someone will probably be considered to be self-employed for the purposes of employment law if most of the following apply:
- they provide quotes and/or take part in bids to obtain work
- they are not under any direct supervision
- they submit regular invoices in respect of completed work
- they are responsible for completing their annual self assessment tax returns
- they are not entitled to any holiday or sick pay
- they operate under a contract which includes terms such as ‘self-employed’, ‘consultant’, or ‘independent contractor’
Is there any advantage to employing people as a limited company compared to a sole trader?
As we can see above, taking on employees, or even workers, can be a risky proposition.
Although employers’ liability insurance covers certain expenses related to potential legal claims made by employees, defending an employment law case will typically set back an employer several thousand pounds at least.
For a sole trader with limited funds, exposure to a serious employment law claim can often result in personal bankruptcy, as they are personally liable for any debts, including compensation which may need to be paid to an employee.
So it’s worth considering protecting one’s personal finances when becoming an employer, by registering as a limited company, which limits the exposure of shareholders. The whole process can take just a matter of hours when using a specialist company formation agent such as Rapid Formations.