Could individuals engaged as self-employed become entitled to holiday pay and the National Minimum Wage, even where their tax status remains unchanged?
A new government consultation proposes changes that businesses using contractors and freelancers should understand. However, some individuals described as self-employed may already qualify for these protections under the existing rules.
What is the background?
The government launched its consultation on employment status reform and protections for the self-employed on 14 October 2026. It seeks views on changes to the way employment status is determined for employment rights, alongside measures to improve compliance and strengthen protections for genuinely self-employed individuals. The consultation closes at 11:55 pm on 8 January 2027 and covers England, Wales and Scotland.
Importantly, the consultation does not propose changes to employment status for tax purposes. Its focus is the employment-rights framework, particularly the boundary between self-employment and “limb (b) worker” status. Workers in this category have core protections, including paid holiday and the National Minimum Wage, without necessarily having the wider rights available to employees.
The consultation does not specify an implementation date for these proposed status reforms. The final approach will depend on the consultation outcome and any subsequent legislation.
What are the proposed changes?
Less emphasis on substitution clauses
A genuine right of substitution can prevent an individual from satisfying the personal service requirement for worker status, depending on the nature and extent of that right. A limited substitution right does not necessarily prevent worker status.
The government proposes reducing the decisive role of personal service, including by giving greater importance to the direction or control exercised by the business. The intention is that a substitution right should not, on its own, prevent access to worker protections where other features point towards worker status.
The government is not proposing to remove personal service from the assessment altogether. Under its principal proposal, personal service would also be considered when assessing whether the individual is genuinely operating a business on their own account. A substitution clause would therefore remain relevant, but would not necessarily prevent worker status where the other circumstances support it.
A presumption of worker status
The government proposes a presumption of worker status at an employment tribunal when determining entitlement to rights associated with that status. Rather than the individual having to establish that they are a worker, the business would have to demonstrate that they are not.
A similar presumption already applies to qualification for the National Minimum Wage in civil proceedings under section 28(1) of the National Minimum Wage Act 1998. The consultation proposes extending this approach to other rights flowing from limb (b) worker status.
The proposed presumption would concern the individual’s status. It would not automatically establish that a particular right had been breached, and would not introduce a presumption of employee status or employment for tax purposes.
Stronger compliance and enforcement
The consultation proposes expressly treating repeated failures to recognise employment status as an aggravating factor under the existing employment tribunal financial penalty regime. This would be particularly relevant where colleagues working in broadly similar circumstances had already succeeded in establishing their status. It is not a proposal for an automatic standalone penalty for every incorrect classification.
The government is also considering how the Fair Work Agency’s civil proceedings and legal assistance powers could help resolve status disputes and improve compliance.
Additional protections for the self-employed
The consultation explores a right to a written statement of key engagement terms for certain self-employed individuals, alongside extending blacklisting and health and safety protections. These remain proposals, rather than new obligations introduced by the consultation.
Does this change the tax position?
No changes to the tax status framework are proposed by this consultation. The document expressly distinguishes employment rights from tax and states that its proposals concern the former.
An individual can be a worker for employment-rights purposes while remaining self-employed for tax purposes. Equally, a self-employed tax assessment does not establish that the individual has no employment rights.
The proposed presumption of worker status and changes to the treatment of substitution clauses are therefore not proposed changes to the tax employment status test or the IR35/off-payroll working rules. Acquiring worker rights would not, by itself, establish an obligation to apply PAYE and Class 1 National Insurance contributions: the tax position would require separate consideration.
Our recommendation is nevertheless to consider both areas when reviewing engagements. If contracts or working practices are changed in response to employment-rights concerns, businesses should separately assess whether those changes affect their tax analysis.
What should businesses do now?
Businesses should not assume that worker-rights obligations only arise if these proposals become law. Individuals currently engaged as self-employed may already qualify for paid holiday and minimum wage protection under the existing rules. Contractual labels do not determine the outcome: the actual relationship must be considered.
We recommend that businesses use this opportunity to:
- Identify their off-payroll workforce, including sole traders, freelancers and other contractors.
- Review contracts against actual working practices, particularly substitution arrangements and the degree of direction or control exercised.
- Assess current employment-rights compliance, as well as the potential impact of future reform.
- Check that employment rights and tax status have been considered separately, rather than relying on one assessment for both.
- Consider potential additional costs, such as holiday pay and minimum wage compliance, if more individuals acquire worker status.
- Bring HR, finance, procurement and payroll teams together so that engagement decisions are supported by consistent information.
- Consider responding to the consultation where the proposals could materially affect their operating model.
These are suggested preparatory steps, not new legal requirements arising from the consultation. Businesses should take advice before changing contractual arrangements or the treatment of payments.
How can UNW help?
UNW’s multi award winning employment tax team can help businesses review the tax treatment of contractor engagements, identify potential risks and consider practical improvements to their processes.
Our support can include reviewing contracts and working practices from an employment tax perspective, assessing employment status and off-payroll working obligations, and identifying where separate employment-law advice is needed.
If you would like to discuss your contractor arrangements or have any other employment tax queries, please contact your usual UNW adviser or our employment taxes team.
