Mutuality of Obligation: A Guide for Employers

Mutuality of obligation defines the relationship between employer and employee and has implications for both legal and tax issues.

James Rowland

Commercial Director James leads Account Management, Sales and Marketing at Neathouse Partners.


15 November 2021


12 June 2024
7 min read
Mutuality of Obligation: A Guide for Employers

Mutuality of obligation is an important concept in UK employment law. It defines the relationship between employer and employee and has implications for both legal and tax issues. Mutuality of obligation is at the heart of many UK employment law cases so it is important to understand how it works and the potential consequences for breaching the regulations.

This article will explore what mutuality means, why it's relevant to IR35, how the employment status test works, what happens when an employer is suspected to have contracted an employee outside IR35 and much more.

Need to discuss a mutuality of obligation case? Fill out our contact form or call us on 01244 893776.

What Does Mutuality of Obligation Mean?

Mutuality of obligation is the principle that exists when an employer has a legal duty to provide work for their employee and, in return, the employee has a legal duty to do that work.

Both parties are obliged under contract law to act upon their promises without exception. This principle does not just apply in traditional employment contracts but also applies when companies contract workers through intermediary parties such as freelancers or self-employed contractors.

Mutuality of obligation is important because it protects employees and ensures they receive their agreed salary and other employment benefits. It also protects the employer from being sued for breach of contract if their employee fails to carry out work or does not show up for work.

Employees dismissal rights can also fall under mutuality of obligation. For example, an employer cannot dismiss someone unless certain statutory conditions are met such as legitimate reasons for dismissal and the issuing of written warnings.

What is an Employer's Legal Obligation?

An employer's legal obligation is to ensure all workers are treated fairly and within the law. This means providing a safe working environment, paying employees their salary on time each month, offering paid holidays and statutory leave entitlements as defined by UK employment laws.

It also requires employers to pay National Insurance contributions from salaries for income tax purposes which covers state benefits such as unemployment or sickness benefit schemes if people cannot work due to illness or injury. Employers must also provide written details of an employee's rights under mutuality of obligation rules before they start work including terms such as holiday entitlement and sick pay.

What is an Employee's Legal Obligation?

An employee's legal obligation is to accept work from an employer when offered and carry it out diligently during the agreed hours of employment. This means going to work on time each day, performing tasks as instructed by a manager or supervisor and abiding by all contractual obligations under their contract of employment.

Mutuality also affects employees' rights to take action against employers for unfair dismissal if they are fired without a valid reason or have been treated unfairly in some way leading up to being dismissed from their role. Employees must have worked with the same company for at least one year before taking such measures which can include resolving disputes internally through mediation first. In addition, any grievance procedure should be followed correctly along with internal disciplinary rules that might apply depending on specific circumstances.

HMRC regulations



What Are Some Examples of Employer Mutuality Obligation Breaches?

Breaching mutuality of obligation requirements means an employer is demanding more of their employees than what they are obliged to provide. For example, asking workers to do tasks outside the agreed hours set out in a contract of employment without offering additional pay or altering existing terms and conditions.

Other examples include changing job titles after an employee has already started work with no agreement first; expecting someone else who works for the company to cover up absences if one worker is unable to attend due to illness or injury; refusing time off when it's required under UK employment laws such as annual leave entitlement during school holidays; or making unreasonable deductions from wages including because the business needed the money for inventory or expenses.

Why Is Mutuality of Obligation Relevant to IR35 Legislation?

Mutuality of obligation has become increasingly important when companies engage contractors through intermediary parties such as self-employed contractors or freelancers because often these workers are not subject to the same statutory obligations employers have towards employees.

IR35 legislation was introduced in 2000 as a way for the government to stop workers from operating under false self-employment contracts. In other words, those who work as employees but declare themselves to be self-employed through an intermediary business or agency so they can avoid paying income tax and national insurance contributions on their salaries.

This means they keep more money than usual at the end of each month as their employer does not have to pay NI contributions as they would if the individual was on the official payroll. IR35 is designed to stop this and ensure that everyone pays their fair share of contributions.

These regulations are also important because they help to prevent unfair or potentially illegal treatment of employees because the employer claims they are not a genuine employee. For example, an individual who works as a contractor might be given tasks to do outside their job description and without any extra pay. This is against the mutuality of obligation rules because it's unfair for workers to take on such responsibilities with no additional remuneration or incentive other than what they already agreed upon through their contract terms.

What are Some Signs that IR35 Rules are being breached?

There are various factors that HMRC will consider when deciding whether someone is genuinely self-employed or whether they are in fact an employee. Some of the signs that may cause HMRC to scrutinise a business relationship may include if a person: receives income via PAYE; has a written contract indicating an employer/employee relationship; works set hours each day; has a manager/superior who controls the work being done; meets with clients from within an organization to discuss ongoing business or future projects.

legal troubles


What Happens If You Are Suspected of Contracting Workers Outside of IR35?

If you are suspected of using workers outside this legislation, you could be asked to submit your financial records which include details about how much money was paid out and what tax deductions were made during any specific time period. This is important because it shows whether individuals are in fact self-employed contractors rather than employees by looking at your company's payroll data. Penalties include fines up to six figures depending on severity as well as potential criminal proceedings if there is evidence of deliberate worker misclassification (i.e. contracting workers outside IR35 to avoid paying taxes).

Why Is IR35 So Controversial?

IR35 rules were originally introduced with the aim of preventing tax avoidance by individuals who work through their own intermediary business or agency rather than being contracted directly by employers. However, there has been debate about how HMRC applies them because some workers believe these penalties are unfair when contractors do essentially the same job even if it involves different responsibilities under different terms of employment.

The rules are designed to stop individuals from contracting themselves out through an intermediary company or business, which is seen as tax avoidance because it means the individual pays less in taxes than they would if they were classified as employees rather than self-employed contractors. Critics argue that some people who work outside IR35 legislation only do so because their employers want them to avoid paying NI contributions and benefits.

Many companies have been accused by their own employees who believe they should be treated the same as full-time staff or permanent members of the team. Their argument is that it is unfair if there isn't equal treatment across all parties in an employment relationship, especially when considering other issues such as holiday entitlement, sick pay and long-term job security.

In some cases, this has led to legal action from both sides with either side winning depending on how each case was handled. This means that while mutuality of obligation rules are important for protecting employee rights, not everyone agrees about what these laws mean and whether HMRC enforces them correctly.

How Does the Employment Status Test Work?

To determine whether you are in compliance with UK law, HMRC uses an employment status test to identify workers who are self-employed rather than employed. It also applies when determining whether an individual is a worker or within contracted hours of work for tax purposes.

The test looks at factors such as whether a person is required to work set hours; whether they are obliged by contract to perform the service in accordance with instructions given by another party (e.g. employer, client or intermediary agency); what type of ongoing relationship exists between both parties and how this might affect ongoing working practices if one begins terminating business relations. It also looks at whether the individual works solely for the employer rather than work for multiple entities.

Why does an Employer Need a Lawyer in IR35 Cases?

Many companies who conduct business in the UK and other countries where mutuality of obligation rules exist hire accountants to help them identify how best to comply with IR35 legislation. However, even if you believe your company is compliant, it doesn't mean that there will never be a problem later on down the line.

If you receive a letter from HMRC stating someone was mis-classified and should have been taxed differently, failing to respond within 30 days can result in additional charges to the back-taxes you are accused of owing which can range anywhere between 100%–200% of those taxes depending on the severity of the alleged breach.

It is best to contact your lawyer in the case of an IR35 investigation because they will be able to explain how these cases work and can help you through each step. An experienced business law attorney will know what information is required, who should receive it and when this must happen before any penalties are applied.

Additionally, lawyers know which arguments are likely to hold up best during negotiations with HMRC officers or when dealing with legal proceedings.

At Neathouse Partners, we have extensive experience dealing with all types of employment law so we will be able to look at the facts of your case and advise you on the best steps to take.

employment lawyer

What are Some Other Important UK Employment Laws to Understand?

In addition to the mutuality of obligation laws, UK employers need to understand other employment legislation such as the right for agency workers and temporary staff to receive equal pay after a 12-week period.

While there are many reasons why people choose self-employment over being employed by an employer or working through a recruitment/finance company, it is always best if both parties have a clear understanding of what each term means before signing any contracts. This will help to avoid disagreements later on down the line which could be expensive and time-consuming for everyone involved so it's important that these terms are understood from the start.

Employers also need to know their responsibilities under health & safety law including making employees aware of potential hazards in the workplace as well as reporting incidents immediately after they happen.

Businesses who fail to comply with UK work laws can face heavy fines and penalties which is why it's important that you know how the system works before any problems occur. If you need help, get in contact with Neathouse Partners and our experienced lawyers will ensure you have someone on your side throughout the process and make sure nothing gets overlooked or taken for granted.

Need to discuss a mutuality of obligation case? Fill out our contact form or call us on 01244 893776.


Final Thoughts

Mutuality of obligation is something that every employer needs to understand if they conduct business in the UK. If you are unsure about your company's obligations or you are facing allegations of breaching regulations, get in touch with us and we will discuss your company's situation.

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