NOTE: In the last of our three-part series of articles on the groups of people that payroll might pay who are not employees, this article considers specific withholding schemes, independent contractors, volunteers, and interns. Previous articles were published in the October and December 2022 Global Payroll issues.
Have you ever asked a trade person to complete some vital maintenance task at your home with the offer of a cash payment? Of course, none of our readers would ever yield to such temptation but I am willing to bet that a chippie (carpenter), sparky (electrician), or a plumber has at some stage offered to come early “for cash.” While there are many completely legitimate construction companies, this industry has a reputation for “off the books” working. And, for this reason, it is often subject to special withholding rules.
A great example of this is in the U.K. with the Construction Industry Scheme (CIS). This scheme requires any business commissioning building projects (either new builds or renovation work) of more than £3 million to register as an engager for the duration of the relevant project.
The engager must then check that all subcontractors are also appropriately registered for CIS purposes and withhold either nothing, 20% for registered contractors, or 30% for unregistered contractors from the labour element of any invoice submitted by the sub-contractor.
Here is an example: Bob is a chippie registered with CIS. He submits an invoice to Mega, Inc. for some repair work which includes £500 for materials and £1,000 for the work performed. Mega, Inc. must withhold £200 (20% of the labour element of £1,000) as a CIS deduction.
So where is the payroll connection? Bob is clearly not an employee of Mega, Inc.
The CIS deduction must be reported to His Majesty Revenue & Customs (HMRC) together with the monthly PAYE deducted from salaries, and it must be remitted to HMRC at the same time as the PAYE pay over. For this reason, payroll needs to work in tandem with other finance department colleagues to gather details of Bob’s invoice, provide totals for all CIS deductions taken for the month across the company’s sub-contractor base, and pay these amounts over to the tax authority at the same time as salary tax deductions. Other countries run similar schemes including Ireland (Relevant Contracts Tax for contractors in the construction, forestry, or meat processing industries), and Austria (special withholding tax for writers, architects, sports people, and entertainment artistes at 27.5%).
Payroll’s Role in Scheme Enrolment
The purpose of such withholding schemes is clear—to ensure tax authorities receive a slice of the pie—broadly like what would be deducted from an employee. This provides the next category to consider—the difference between “workers” and employees. By this we are not referring to blue collar vs. white collar work, but instead, the concept of rising rates of self-employment which when looked at in detail just doesn’t meet the full criteria set in many countries. Consider the rash of court cases across the globe launched by Uber drivers to determine whether they are self-employed or in fact employees of the taxi hiring app. From California to France, courts have come up with contradictory rulings on this subject.
Consider again the U.K.’s position. Where individuals provide labour only on an exclusive basis, they are likely to be classified as “workers” rather than “employees.” This entitles them to certain basic employment rights, without extending the full coverage that an employee would receive. These rights include paid vacation and auto enrolment pensions scheme membership, which is where payroll comes in. The workers would need to be enrolled in a qualifying scheme and have contributions deducted from their invoices. This will usually necessitate the creation of a shadow payroll record to report earnings and pension contributions to the company’s chosen pension provider.
Consider this example: Bob is engaged by Big Housebuilders to work exclusively on a project for 12 months. He is classified as a “worker” and while he submits invoices for payment (with appropriate CIS deductions), he must also be enrolled in an appropriate pension scheme. Payroll will have to find out the labour element of each of Bob’s invoices, create a shadow payroll record to report this, and ensure that finance colleagues make a deduction for Bob’s pension contribution when they pay his invoice.
Some countries may go one step further. In the Netherlands, an engager and self-employed contractor can voluntarily bring their relationship under wage tax and national insurance obligations by declaring Pseudowerknemer (or Pseudo worker) status. Invoices issued by the contractor are subject to wage tax, employee national insurance, and employer health Zvw contributions necessitating the creation of a payroll record, but other employer insurance contributions do not apply. Opting-in to these arrangements has no employment law consequences—the contractor has no protection from dismissal or any other employment rights.
Reporting non-employee payments made to named individuals may also be a payroll obligation. Staying with the Netherlands, companies are obliged to make an annual return known as the Uitbetaalde bedragen aan derden (UBD) of payments and benefits in kind provided to individuals who have not been payrolled. Examples of payments that must be included on this return include payments to freelance cleaners, writers and authors, and payments made to participants in medical trials. The return must be made by 31 January each year in respect of the previous calendar year. It is used by the tax authority to check that the recipients have included the payments on their personal tax returns. Often this return ends up in the payroll department for no good reason other than it is a return to the tax authority about people.
Payrolling Volunteers, Interns
Volunteers may also appear on the payroll in certain countries. This might seem like an oxymoron—surely the point of volunteering is that you don’t get paid. Some countries take the view that it is a good thing to encourage people to volunteer and to encourage this behaviour with a small tax-free payment. Germany, for example, allows the payment of a tax-free stipend of up to €840 pa for those involved with general administration and work for a not-for-profit organisation in their spare time—such as bookkeeping. Great news for German soccer parents who end up being the treasurer of their child’s junior soccer team.
Lastly, the perennial thorny question: Should interns be paid?
The common answer in most countries is an unequivocal “yes.” Minimum wage legislation will often ensure that interns must receive an appropriate payment. Although some countries may allow interns specifically to be paid less than the minimum wage. France, for example, mandates a payment of 15% of the hourly social security income ceiling. This ceiling is currently €27 so the minimum hourly rate that you may pay an intern in France is €4.05, which is contrast to the full rate payable to anyone aged 19 years old or older of €11.52 per hour.
So, you may end up with an eclectic group of people on a payroll who are unequivocally not employees. Don’t forget to exclude these people from any reporting of employee headcount statistics, particularly to government. Such headcount statistics are routinely used for determining liability for work accident contributions, deciding whether special contributions such as disability contributions or maternity cover are due, working out whether claim refunds for such items as redundancy pay or sick pay may apply, and working out the deadline for paying payroll deductions to the authorities (small organisations often get additional time). Adding people to the stats who turn out to not be employees could therefore have long lasting financial consequences for your company.