Why the PGMOL v HMRC Case Matters for SMEs

Determining the employment status of workers is critical for businesses of all sizes, particularly small and medium-sized enterprises (SMEs) that may not have dedicated HR or legal teams. Whether a worker is classified as an employee, or a self-employed contractor affects tax obligations, legal rights, and business liabilities. Misclassification can lead to costly disputes with HM Revenue & Customs (HMRC), legal claims from workers, and financial penalties.

The recent Supreme Court decision in Professional Game Match Officials Ltd (PGMOL) v HMRC in September 2024 has clarified how courts will assess employment status, focusing on two key factors: mutuality of obligation and control. The case arose because HMRC challenged the way PGMOL treated football referees, arguing they should be considered employees rather than self-employed individuals. The judge found in favour of HMRC, meaning PGMOL was liable for unpaid income tax and National Insurance Contributions (NICs).

For SMEs, this ruling reinforces the importance of correctly categorising workers. Below, we break down the key legal principles from the case and what they mean for businesses.

Key Supreme Court Findings on Employment Status

1. The Role of ‘Mutuality of Obligation’

One of the key tests for employment status is whether there is mutuality of obligation between the worker and the business. In simple terms:

  • The worker must be required to personally provide their services.
  • The business must be obligated to provide work and pay for it.

In the case of PGMOL, the Supreme Court found that referees were under mutual contractual obligations once they accepted a match appointment. Even though referees had the ability to turn down matches, once they accepted, they were required to officiate the game, and PGMOL had to pay them. This contractual commitment indicated an employment relationship, at least for the duration of each match.

For SMEs, this means that offering flexible work arrangements does not automatically mean a worker is self-employed. If there is a binding obligation once work is accepted, the worker could still be classified as an employee.

2. Employer Control and Its Impact on Employment Status

The second major factor in determining employment status is control—specifically, the extent to which the business directs and supervises the worker. Control can take various forms, including:

  • Direct supervision: The employer dictates how the work is performed.
  • Rules and procedures: The worker must follow specific conduct guidelines or performance standards.
  • Disciplinary processes: The employer has the authority to sanction or dismiss the worker for misconduct.

In the PGMOL case, the referees had to comply with a strict set of rules before, during, and after matches. They were subject to performance evaluations and disciplinary action if they failed to meet the required standards. The Supreme Court ruled that this level of control was sufficient to suggest an employment relationship.

For SMEs, this is a crucial takeaway: Even if a worker operates independently for the most part, they could still be an employee if the business exerts significant control over how they perform their tasks. If you have procedures in place that dictate how work is done, monitor performance, and impose sanctions for non-compliance, your workers may be employees rather than self-employed contractors.

3. Looking at the Whole Relationship

While mutuality of obligation and controlare key factors, the Supreme Court stressed that employment status should not be determined based on just one or two elements. Instead, courts must assess the totality of the relationship, considering:

  • Whether the worker is financially dependent on the business.
  • Whether they are integrated into the organisation (e.g., appearing on staff directories, using company equipment).
  • Whether they are truly running their own business or just working exclusively for one company.

This means that SMEs cannot rely solely on written contracts stating that someone is “self-employed.” Courts will look beyond contractual wording to examine the real working arrangements. If a worker is treated in practice like an employee, they may be legally entitled to employment rights and protections.

Implications of employment staus for SMEs: Why Getting It Right Matters

The Supreme Court’s ruling highlights the serious financial and legal risks businesses face if they misclassify workers. Below are some of the key consequences of getting it wrong:

1. Tax Liabilities and Penalties

If HMRC determines that a worker has been wrongly classified as self-employed when they should have been an employee, the employer may be liable for:

  • Unpaid Income Tax and NICs – Employers are responsible for deducting tax and NICs under the PAYE system. If workers have been incorrectly classified as self-employed, HMRC can demand back payments, plus interest.
  • Penalties and Fines – HMRC may impose financial penalties on businesses that fail to comply with tax laws.

For SMEs, these unexpected costs can be devastating. Proactively reviewing worker classifications can prevent costly tax disputes down the line.

2. Employment Rights and Legal Claims

Employees are entitled to a range of legal protections, including:

  • Paid holiday leave.
  • Sick pay and maternity/paternity leave.
  • Protection against unfair dismissal.
  • Minimum wage and working time regulations.

If a business misclassifies an employee as self-employed, they could later bring claims for backdated holiday pay, unpaid wages, and unfair dismissal. High-profile gig economy cases, such as Uber v Aslam, have shown that courts are willing to reclassify workers as employees if their working conditions suggest an employment relationship.

3. Reputational Risks

Beyond financial penalties, misclassifying workers can damage a business’s reputation. Negative publicity from legal disputes with workers or HMRC investigations can harm customer trust and employee morale.

For SMEs, avoiding these risks means getting employment status right from the outset.

What SMEs Should Do Now about employment status

Given the Supreme Court’s clear stance on employment status, SMEs should take proactive steps to ensure compliance:

1. Review Your Contracts and Working Arrangements

  • Ensure that contractual agreements accurately reflect the real working relationship.
  • Avoid labelling workers as “self-employed” unless they genuinely run their own business and operate independently.
  • Consider whether there is an ongoing obligation to provide work and whether you exercise control over how tasks are completed.

2. Assess Your Control Over Workers

  • If you impose strict rules, performance monitoring, and disciplinary procedures, this could indicate an employment relationship.
  • Independent contractors should have genuine freedom over how, when, and where they work.

3. Seek Expert Legal and Tax Advice

  • Employment status is a complex area with no one-size-fits-all solution.
  • Consulting with an employment lawyer or tax specialist can help ensure that your business is compliant and avoid future disputes.

Final Thought: The Importance of Getting Employment Status Right

The Supreme Court’s decision in PGMOL v HMRC reinforces that employment status is not just about contractual wording but real-world working practices. For SMEs, this means taking a careful, informed approach to worker classification.

By correctly identifying employment relationships, businesses can avoid costly tax liabilities, legal claims, and reputational damage. More importantly, ensuring fair treatment of workers helps foster a positive, legally compliant work environment, ultimately benefiting both employers and employees.

Now is the time for SMEs to audit their workforce arrangements, clarify employment terms, and seek professional advice where needed. With employment laws under increasing scrutiny, getting it right today will prevent costly problems tomorrow.

Our employment law and HR teams are highly experienced at supporting SMEs to ensure they stay compliant with all new and existing employment legislation. Get in touch to find out how we can help.