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Can Sole Traders Have Employees?

The simple answer to this is yes, but it’s not as commonplace as you think. This post looks into the legalities you need to consider before you, as a sole trader, can take someone on as an employee.

So, sole traders are allowed to be employers?

Simply, yes. You don’t need to start a limited company before you can become an employer. You might think that “sole trader” means one person, working on their own, but that’s not the legal definition of the term.

The legal definition of a “sole trader” is a person who is conducting business without setting up a separate legal structure through which they operate, such as a limited company or a partnership.

Could a sole trader be an employee of their own business?

This is one of the big differences between company directors and sole traders. Company directors can be employed within their companies. For more information on this please check out: Is a director an employee of a company? However, sole traders are always self-employed, even though they can employ other people, they cannot employ themselves.

The reasoning behind this is that the limited company is classed as a separate legal entity in its own right, and is able to have a contract of employment with its director(s). However, with a sole trader set-up, the individual is classed as the business, and they cannot have a contract of employment with themselves.

What’s the process for setting up as an employer?

Whether you are a sole trader or a limited company, the basic steps of setting up are the same.

Firstly, you will need to register as an employer with HMRC. Registering for PAYE should generally take place before the first salary payment, but no more than 2 months before the first payment.

Sole traders can register for PAYE by filling out the: Register as an employer - Sole trader Form. To fill out this form, you will need the following information:

  • Sole trader name
  • Unique Taxpayer Reference (UTR)
  • National Insurance (NI) Number
  • Trading name (If applicable)
  • Official business address (you cannot use a PO Box for this)
  • Official business phone number
  • Nature of the business
  • Number of employees expected to employed in the current tax year
  • Whether payments have already been made to employees
  • Whether you intend to make expense or benefit payments to employees
  • If the sole trader will be acting as Troncmaster (more information on this can be found on the HMRC Website)
  • If an Occupational Pension Scheme will be operated

Once you have registered with HMRC, they will issue PAYE and Accounts Office reference numbers, this can take up to 5 working days. Both of these numbers are required for enrolling for PAYE online.

PAYE Online

You will need to use HMRC’s online PAYE service to:

  • Send payroll reports to HMRC
  • View the balance of what you owe to HMRC
  • Access employee tax codes and notices
  • Appeal any penalties
  • Receive alerts from HMRC in relation to late payment etc.

You will need to use your PAYE log in details with any payroll software which you use. This will allow the software to submit reports to HMRC. The PAYE online service itself cannot be used to send payroll reports, other than expenses and benefits returns.

How can I process salary payments without having a PAYE reference?

If you need to process any salary payments before you have an employer PAYE reference number, you will need to:

  1. Run payroll
  2. Store the full payment submission
  3. Send a late full payment submission (FPS) to HMRC

Employment law - what you need to know as a sole trader

As a sole trader, you need to work out whether the person working for you is an employee, a worker, or a self-employed contractor/freelancer.

Determining this is crucial for understanding the extent of the employment law obligations. So let’s go further into what each of these will mean.

Workers

Your employee is usually classed as a worker if the following apply:

  • They have a contract to perform work services in exchange for money, or benefit in kind; and
  • They are generally not 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.

Even though these workers are not classed as employees, they are legally entitled to certain employment law rights, including:

  • National Minimum Wage (NMW)
  • Protection from unlawful wage deductions
  • Statutory minimum level of paid holidays
  • Statutory minimum length of rest breaks
  • Protection against unlawful discrimination
  • Protection from whistleblowing
  • Statutory maternity, paternity, adoption and shared parental pay (in certain cases)

Employees

Employees work under an employment contract. However, workers can also be classed as employees in the absence of an employment contract if the following applies:

  • They are required to work regularly unless they are on leave
  • They are required to do a minimum number of hours per week/month and they expect to be paid for these hours
  • A manager or supervisor is responsible for their workload
  • They are not allowed to subcontract their work
  • National Insurance Contributions (NICs) and income taxes are deducted from their wages
  • They are entitled to annual holiday leave
  • They are entitled to 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 in a specific location
  • 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
  • Their contract contains terms such as “employer” and “employee”

Employers are entitled to the same rights as 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 to deal with emergencies
  • Statutory Redundancy Pay

Note: Some of these rights may require a minimum length of continuous employment before the employee is entitled to them.

Contractors and freelancers

If they’re neither a worker nor an employee, the individual is likely to be a contractor or freelancer.

Note: 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 generally they will not be considered an employee for tax purposes, and therefore do not need to be paid through PAYE:

  • They run their own business
  • They decide what type of work they do
  • They are able to subcontract their work
  • They are responsible for rectifying any work which is deemed unsatisfactory without being paid for the extra time required
  • They work based on a fixed-price basis
  • They are entitled to work for other clients
  • They provide their own materials, tools and equipment required to perform the work
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