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In brief

What happens when a tribunal, regulator or tax authority determines that an individual, or group of individuals, have been incorrectly classified? Or when new rules or legislation are introduced reclassifying a particular activity?  

The immediate question usually focuses on the action required by the specific rule or decision. Reclassification of individuals or activities for one purpose can have knock on consequences to business models and can lead to issues and liabilities in areas such as employment, wage tax, pensions, tax and regulatory.  

A decision or change in one area of law may be a time to re-assess the business model and consider whether that determination might have wider commercial implications.

Key takeaways 

Historically different parts of a business may have come to their own conclusion in respect of the classification of individuals or activities. HR might have one view and finance, tax or regulatory may take a slightly different view. Now businesses must connect the dots as authorities, individuals and regulators are drawing links between different areas of law. A decision made in one part of a business, can impact the position in another part of the business and companies need to ensure that they are giving a consistent message to third parties, whether those are individuals, tribunals or regulators.

Some initial points to think about are:

  • Which individuals/activities are affected by this decision/rule change? Is it just selected individuals/activities or a wider population?
  • Are there any other avenues of challenge or alternative arguments to raise?
  • What are the risks of other regulators/authorities reaching the same conclusion? What would be the impact of those decisions?
  • What changes would be required in order to reach a different outcome? Are these commercially viable? What wider implications would the changes have?

These questions can touch on employment law, pensions, tax treatment and regulatory to name just a few. Businesses will be looking to their advisers to provide holistic advice so they can navigate through these various issues with a view to minimising risk to its business model across multiple jurisdictions globally. 

In depth

Whilst a reclassification decision or change in legislation may relate to a specific point or area of law, it may have wider legal and business implications. For example, other areas of law may rely on the same test and so a finding by one body may be directly applicable or (at least) highly relevant to another. Even if the test is not identical, a finding by one body may make another regulator or authority consider whether they should be investigating the same issue and testing whether the company has been making the correct decision.  

Companies should manage their communications with third parties so that they are not taking a position in one area that unknowingly backs them into a corner in another area.

Companies assessing the classification of individuals or activities should consider a number of areas. If the company is considering any changes to structure, contractual terms or working practices, the wider implications of those changes should be assessed. Examples of areas that may be affected and issues or liabilities that may arise:

  • Employment rights – depending on whether the individual is determined to be an employee or worker, they will be entitled to varying degrees of protections under employment law, such as paid holiday and protection from unfair dismissal.
  • National Minimum Wage – workers and employees are entitled to national minimum wage and so companies would need to assess whether this is met based on the number of hours worked.
  • Pension auto-enrolment – The Pensions Regulator has been active in following up with companies that have received a worker determination in employment tribunals to ensure that the relevant individuals are subject to pension auto-enrolment.
  • Income tax withholding and social security obligations – there is no status of ‘worker’ under tax law and so HMRC would need to show that an individual is an employee.  To date they have not sought to do so, but there is a fine line between worker and employee in employment law and so HMRC may consider that this is worth an argument at some point for the right case.
  • VAT – whether an activity is provided by an employee or independent contractor has a significant impact on the VAT treatment of activities and the profitability of businesses. .
  • Permanent establishment – whether a company has employees or is contracting with third parties in a country, can impact the extent of a company’s presence for corporation tax purposes in that jurisdiction.
  • Regulatory – companies in regulated sectors may face additional obligations or penalties if activities are reclassified and they need to be aware of who is acting on their behalf and in what capacity.
  • Risk control – companies need procedures in place to manage their risk profile and this could impact the level of control that they have over individuals and the risks that those individuals/activities could impose on the company.  For example, does the company have the ability to require the work to be carried out at a specific location or in accordance with its own standards and procedures?
  • Transfer pricing – salary costs and third party costs may be treated differently under a transfer pricing study and a change could impact the substance behind a particular structure.

Nuances are also likely to arise where the test varies slightly and may have positivie or negative implications one way or the other. Companies should be sure that they are as consistent as possible across all areas and ensure that they document support for their position in each area. Baker McKenzie can help companies look across these different areas to find the balance that is right for them.


Jeremy Edwards is a partner and the head of the Employee Benefits Group in Baker McKenzie’s London office. He advises on all aspects of employee share plans and employee taxation. Jeremy has over 20 years’ experience as a share plan lawyer and two years’ experience as a corporate lawyer. He is currently serving on the advisory panel of ProShare and is a regular speaker at share plan conferences held in the United Kingdom.


David is a partner and has represented clients in VAT disputes for over 15 years at all stages of the litigation process. He specialises in resolving high-value VAT disputes working primarily with clients in financial services and telecommunications and e-commerce sectors.


Gillian Murdoch is an associate in Baker McKenzie's London office. Gill qualified in the employee benefits team in 2014 after joining the firm as a trainee in 2012. Gill was named as a "Next Generation Lawyer" by Legal 500 in 2017.

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