Determining Employment Status: A Guide for Construction Employers

One of the most important and most misunderstood responsibilities for any construction business is correctly determining the employment status of its workforce. Whether engaging individuals through PAYE, CIS, or limited companies, construction employers must understand and apply HMRC’s employment status rules with care.

Failure to do so can lead to HMRC investigations, backdated PAYE liabilities, and serious financial penalties, not to mention disrupted projects and reputational damage.

In this guide, we break down what employment status means in construction, how to get it right, and how to protect your business using a clear and compliant process.

What is Employment Status?

Employment status refers to the legal classification of a worker. HMRC recognises three main categories:

1. Employee (engaged under a contract of employment)
2. Self-employed subcontractor (usually working under CIS)
3. Off-payroll worker (typically operating through a limited company, subject to IR35)

The correct status determines how a worker is taxed, what rights they’re entitled to, and who carries the tax liability. HMRC is less interested in the label you use and more focused on the actual working relationship.

Why It Matters in Construction

Construction is unique in its reliance on fluid, project-based labour, often involving a blend of:

• Full-time employees
• Sole traders
• Self-employed subcontractors under CIS
• Ltd company workers (Personal Service Companies)

This mix makes the industry especially prone to misclassification risk, which HMRC has flagged as a key enforcement priority in recent years.

Risks of Getting It Wrong

Misclassifying a worker, whether by mistake or misunderstanding can lead to:

• Backdated PAYE tax and NIC payments
• Interest charges and penalties
• Potential employment tribunal claims
• Loss of contracts or failed audits during due diligence

In 2024 alone, several construction firms were hit with six-figure liabilities after HMRC found their subcontractors should have been employees or inside IR35. Use our Free Liability Calculator to check the risks for your company.

How HMRC Determines Employment Status

HMRC looks beyond contracts and titles. They assess the reality of the working relationship based on several core factors:

Control

• Does the business control how, when, and where the worker carries out their tasks?
• Employees are usually under supervision and direction.

Substitution

• Can the worker send someone else to do the job in their place?
• A genuine right of substitution is a key indicator of self-employment.

Mutuality of Obligation (MOO)

• Is the business obliged to offer work? Is the worker obliged to accept it?
• Ongoing mutual obligations point toward employment.

Financial Risk and Investment

• Does the worker supply their own tools, take on commercial risk, or invoice for work?
• Employees do not bear these risks, businesses do.

Integration

• Is the worker integrated into the business? (e.g. company email, uniform, team meetings)
• Integrated workers are more likely to be seen as employees.

Steps to Take as a Construction Employer

Getting it right means being proactive and organised. Here’s how:

1. Conduct a Status Assessment for Every Worker

Use HMRC’s CEST (Check Employment Status for Tax) tool as a starting point. But beware it’s limited, especially in nuanced construction arrangements. For more certainty, seek specialist support.

2. Document the Decision-Making Process

Keep a full record of how and why you reached your determination:

• Signed contracts for services (or employment)
• Invoices and payment terms
• Substitution clauses and working patterns

This evidence will be vital in the event of an audit.

3. Regularly Review Status as Projects Change

A worker’s status can change over time. What starts as a freelance engagement can evolve into disguised employment if not carefully monitored.

4. Be Transparent with Workers

Clearly communicate their status, what it means for them (e.g. taxes, rights), and what systems are in place to support them.

How Subby Supports Status Compliance

At Subby, we help construction firms take the guesswork out of employment status.

Our system includes:

• Digital onboarding with structured status assessments
• In-built criteria to assess risk in real-time
• Support from ex-HMRC and tax compliance experts
• Generation of compliant documentation and audit trails
• Ongoing monitoring and alerts if working arrangements change

We also provide insurance-backed protection for employment status decisions, giving you peace of mind and protection from HMRC exposure.

Final Thought: Status Isn’t a Box to Tick, It’s a Risk to Manage

Employment status is no longer just an HR issue. It’s a financial, legal, and reputational risk, and construction firms must treat it as such. With increasing HMRC scrutiny, stricter client expectations, and changing labour laws, your business can’t afford to get it wrong.