Employment status and IR35 often come up together, but they answer different questions. Employment status determines an employee’s rights at work; IR35 determines how a contractor working through their own company is taxed. The Government’s latest employment status consultation does not directly change IR35, but it could still reshape how contractors, recruiters and umbrella companies manage flexible workforce compliance.

What is employment status?

Employment status is the legal classification of a working relationship. In broad terms, it determines whether someone is an employee, a worker, or self-employed, and therefore which statutory employment rights and employer responsibilities apply.

The three broad categories are:

• Employees, who generally have the widest set of employment rights.
• Workers, who have protections such as the National Minimum Wage, paid holiday and protection from unlawful deductions.
• Self-employed people, who run their own business and generally have fewer statutory employment rights.

Status is not decided simply by what a contract says. Courts and tribunals look at the reality of the relationship, including how the person is engaged and how the work is actually carried out.

What is the employment status consultation?

The Government launched Make Work Pay: employment status reform and protections for the self-employed on 14 October 2026. It is an open consultation, with responses due by 11:55 pm on 8 January 2027.

The consultation is focused on employment rights, not tax. The Government has explicitly stated that it is concerned with the employment status framework for employment rights, rather than the separate tax framework.

Its main proposals include:

• Less emphasis on personal service: The Government proposes giving greater weight to control when deciding whether someone is a worker, so that a substitution clause alone should not prevent worker status.
• A presumption of worker status: In certain tribunal cases, the starting position could be that the individual is a worker unless the engager can demonstrate otherwise.
• Stronger enforcement: The consultation considers the future role of the Fair Work Agency and making repeated misclassification an aggravating factor when assessing breaches.
• More support for self-employed people: Proposals include a possible right to a written statement covering key engagement terms, as well as consideration of blacklisting and health and safety protections.

Employment status and IR35: how they differ

IR35 (formally, the off-payroll working rules) is a tax framework. It applies where a worker provides services to a client through their own intermediary, most commonly a personal service company (PSC), and would have been an employee if engaged directly.

If the rules apply, the worker pays broadly similar Income Tax and National Insurance to an employee. For medium and large private-sector clients, and public-sector bodies, the client is usually responsible for assessing status and issuing a Status Determination Statement (SDS).

What the consultation means for contractors

For contractors operating through a PSC, the consultation does not change IR35 today. If you work through your own limited company, you will still need a status determination for each engagement, and clients cannot apply blanket inside or outside decisions without considering the actual terms and working practices.

However, the proposed shift away from personal service could affect how future employment rights cases are argued. If control becomes more important and substitution less decisive, some contractors may find it harder to show they are genuinely in business on their own account.

For contractors who are inside IR35, the consultation does not resolve the difference between tax treatment and employment rights. Being a “deemed employee” for tax does not automatically give someone the full rights of an employee.

For sole traders, the proposed written statement and stronger protections could improve clarity. At the same time, a presumption of worker status and greater enforcement may make hirers more cautious about engaging individuals as self-employed where the working relationship looks more like employment.

What the consultation means for recruiters

Recruiters sit at the centre of the supply chain, so they need to understand both frameworks: IR35 for PSC contractors, and employment status for sole traders, agency workers and umbrella employees.

For PSC contractors, recruiters should continue to ensure that:

• The end client provides a reasonable, contract-specific status determination.
• The SDS is passed down the supply chain.
• The fee-payer understands its responsibility to operate PAYE and NICs where the role is inside IR35.

For sole traders, the proposals could lead to more scrutiny. Recruiters should ensure that engagements reflect independent business operation, rather than relying on paperwork alone.

For umbrella engagements, recruiters should expect greater focus on transparency, worker choice and fair pay. A separate consultation on modernising the agency work regulatory framework proposed bringing umbrella companies within the employment business framework, improving pay transparency and preventing agencies from making work conditional on using a particular umbrella.

What the consultation means for umbrella companies

Umbrella companies employ workers and pay them through PAYE. That means IR35 is generally not relevant to workers engaged through an umbrella company, because they are already employees rather than contractors operating through their own intermediary.

The employment status consultation does not directly reclassify umbrella workers. However, it matters to the umbrella sector in three ways:

Greater demand for compliant PAYE routes. If hirers become more cautious about self-employment and worker-status risk, umbrella employment may become a more attractive, compliant option.

Stronger transparency expectations. The Government has already introduced PAYE rules for labour supply chains involving umbrella companies from 6 April 2026 and is working to bring umbrella companies within the legal definition of an employment business.

More focus on worker choice. The agency framework consultation proposed preventing employment businesses from requiring workers to use a particular umbrella and stopping umbrella companies from opting out of Conduct Regulations on a worker’s behalf.

For contractors, this makes it more important to review payslips, understand the difference between the assignment rate and gross pay, and check that tax, National Insurance and pension deductions are being handled correctly.

What happens next?

Nothing in the employment status consultation is law yet. The Government will review responses before setting out its next steps, and any eventual changes would need to be implemented through legislation and guidance.

For now, contractors and recruiters should treat this as a signal to strengthen compliance processes rather than a reason to change established IR35 practices overnight. Clear contracts, accurate status assessments, transparent pay information and evidence of genuine working practices remain the best protection for everyone in the supply chain.

If you have questions about how employment status and IR35 apply to your situation, get in touch with the SmartWork team.

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