Understanding Employment Status, The Risks of Getting it Wrong and What You Can Do To Avoid Them

UK employment laws are extremely complex and with the government introducing regular changes, many UK employers often struggle to keep up to date and keep their business compliant.

The thought of complying with these complex UK employment laws often leaves business owners concerned and unsure about employing staff directly and so many choose instead to use self employed workers, thinking this means they won’t need to worry about typical employment related matters… but it’s not that simple!

An increase of atypical contracts has effectively blurred the lines between self-employed and employed status and so employers should be very careful when entering into any sort of working relationships. A basic explanaiton of each status/category is as follows:

Employee:  Under section 230(1) of the Employment Rights Act 1996 (ERA 1996) an employee is defined as “an individual who has entered into or works under (or, where the employment has ceased, worked under) a contract of employment”. Under section 230(2) of ERA 1996, a contract of employment means “a contract of service or apprenticeship, whether express or implied, and (if it is express) whether oral or in writing”.

Worker:  A worker is defined under section 230(3) of ERA 1996 as an individual who has entered into or works under (or, where the employment has ceased, worked under) a contract of employment; or any other contract, whether express or implied and (if it is express) whether oral or in writing, whereby the individual undertakes to do or perform personally any work or services for another party to the contract whose status is not by virtue of the contract that of a client or customer of any profession or business undertaking carried on by the individual.

Self-Employed:  A person is self-employed if they run their business for themselves and take responsibility for its success or failure and they aren’t paid through PAYE.

Significance of the distinction

The distinction between the three categories is significant for a number of different reasons, including the following:

1) Employers and employees have obligations that are implied into the contract between them (for example, the mutual duty of trust and confidence). Some core legal protections only apply to employees, most particularly the rights on termination of employment granted under ERA 1996 (the right not to be unfairly dismissed and the right to receive a statutory redundancy payment). As mentioned above (see Worker status), workers enjoy limited protection under employment law.

2) Only employees are covered by the Acas Code of Practice on Disciplinary and Grievance Procedures

3) Only employees will be automatically transferred to any purchaser of their employer’s business under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (SI 2006/246).

4) The tax and social security treatment of a person providing services depends on their status.

5) An employer is vicariously liable for acts done by an employee in the course of their employment. This vicarious liability is unlikely to extend to independent contractors or self-employed individuals.

6) An employer is required to take out employer’s liability insurance to cover the risk of employees injuring themselves at work. Self-employed individuals or independent contractors may not, in every case, be covered by this insurance and may want to consider entering into appropriate insurance for their own benefit.

7) Employers owe employees statutory duties relating to health and safety. Independent contractors may not be covered under these duties although they will be covered under the employer’s common law duty of care in respect of occupier’s liability.

Increasingly, disputes over the definition of working relationships between individuals and Employers are being referred to Employment Tribunals where preliminary hearings are being used to determine the legal definition and, in many cases, businesses who thought they were contracting self-employed individuals have found they are actually employing them and so immediately find themselves subject to the full range of UK employment law.

Employee who accepted £200 to become labour-only subcontractor was a worker entitled to holiday pay

In a recent case at the Employment Appeal Tribunal, the EAT upheld an employment judge’s decision that a general labourer, who was employed for four years before accepting £200 in exchange for becoming a labour-only subcontractor for the same company, was a worker for the purposes of the Employment Rights Act 1996 and the Working Time Regulations 1998 (SI 1998/1833). The tribunal therefore had jurisdiction to hear his claims for unlawful deductions in respect of unpaid holiday pay.

The employment judge had been entitled to find that the necessary mutuality of obligation existed during each assignment or period of work undertaken. There had been no express provision about substitutes being permitted and, on the evidence, the employment judge had found that this did not occur. Accordingly the requirement for the personal performance of work had been met. The labourer did not actively market his services to the world in general and had been recruited by his former employer to work as a member of its workforce under a supervisor at particular sites or to transfer goods between sites. The requirements of integration and control had therefore also been met. (Plastering Contractors Stanmore Ltd v Holden UKEAT/0074/14.)

Lack of mutuality of obligation between assignments irrelevant to whether court interpreters were “in employment” for discrimination purposes

In another recent case heard by the Employment Appeal Tribunal, the EAT overturned a tribunal’s decision that two interpreters, who performed regular assignments for HM Courts and Tribunals service (HMCTS), were not “in employment” under the Equality Act 2010 and were therefore unable to pursue race discrimination claims. The tribunal had misdirected itself in taking into account an irrelevant factor; the absence of mutuality of obligation between the interpreters and HMCTS between assignments. The key question for discrimination purposes was whether the interpreters, when engaged, were employed “under a contract personally to do work”.

The EAT remitted the case to the same tribunal to consider afresh whether the interpreters provided their services to HMCTS “in a position of subordination”. If they did, their discrimination claims could proceed. On the other hand, if they were truly independent providers of services to the world at large and HMCTS was merely one of their professional clients, they would not be protected. (Windle v Arada and another UKEAT/0339/13.)

So how can employers work out whether the working relationships they have with individuals are that of employer/employee or employer/self-employed?

Over the years, various different tests have been used to determine the nature of working relationships between individuals and Employers including the ‘Control Test’, the ‘Integration Test’ and the ‘Economic Reality Test’ but these days, preliminary hearings held by Employment Tribunals use the ‘Multiple Factor Test’.

The ‘Multiple Factor Test’ looks at a number of different factors opposed to just one or two. The factors normally taken into consideration include but are not limited to the following:

1) Does the worker receive a regular wage or a one off payment or fee?

2) Can the employer dictate the place of work and the way it is to be carried out, in other words what is the employer’s degree of control in the relationship?

3) Does the employer have the right of exclusive service?

4) Does the employer have the right discipline and the power to dismiss the worker?

5) Who owns the tools or other means of production?

6) To what extent is the employer obliged to provide work for the worker to perform and to what extent is the worker obliged to accept such offers of work? Commonly known as ‘mutual obligations’.

Recent case law suggests that the minimum criteria to establish a contract of employment is mutuality of obligations and control but this is no guarantee that the presence of these two criteria means there is definitely an employer/employee relationship. However, if either of these is missing then there won’t be an employee/employer relationship.

The Importance of Having a Contract

It is critical that employers correctly determine the nature of the working relationship they have with their workers and then review their contracts to ensure they are compliant with current legislation and are what they actually were intended to be.

The concept of a contract of service is one explored extensively in case law, where it is distinguished from a contract under which a person gives service as an independent contractor under a contract for services.

The terms “contract of service” and “contract for services” carry no statutory definition and the category into which a particular contract falls is determined according to case law. In very simple terms, under a contract of service a person agrees to serve another, whereas under a contract for services they agree to provide certain services to the other. However, that simple formulation is the start, not the conclusion, of the legal analysis.

Key Points Employers Should Consider

1) The nature of the duties that can, and cannot, be delegated – both in terms of the proportion of those duties to the rest of the duties and whether they are the “dominant purpose” of the agreement. If the duties that can be delegated are the dominant purpose of the agreement, it is unlikely to be a contract of service.

2) When the right to delegate will arise, whenever the individual chooses or just when they are unable to do the work.

3) Who organises and pays the substitute.

4) Whether the right to delegate is subject to any limitations, in particular as to who can be used as a substitute.

5) Whether the individual would be able to profit from delegating the duties (that is, whether they could pay any substitute less than they receive themselves).

6) The absence of mutual obligations (that is, to provide work and to do it) is also likely to be fatal to a finding of a contract of employment. While this would appear to rule out any contract of employment existing between parties who have not contracted with each other at all, where the individual is supplied to work for an organisation by an intermediary such as an employment business, which sits in the middle of the contractual chain, the possibility of an implied contract between an individual and the organisation to which they actually give their services is now a possibility and will be considered by employment tribunals.

7) Where a person works under a series of short-term contracts, it is possible that each of those could be a contract of service, even if it is short and temporary. Similarly, it may be necessary to assess the overall nature of the relationship to determine whether an over-arching employment contract exists due to sufficient mutuality of obligation in the period between periods of work.

8) The degree of control exercised by the organisation over the worker will always be a relevant factor. However, control is unlikely to be the only relevant factor. The tribunals or courts are likely to create a picture from which it is necessary to step back in order to form an overall view.

How Can You Avoid Getting Caught Out?

  • Contact Us – we will undertake full review of your current arrangements and provide you with our findings and recommendations
  • Ensure you have approproraie contracts should be drafted and issued to ensure the nature of the working relationship is clearly determined.
  • Give us a call on 0800 612 4772 and we’ll help you to prevent problems and protect your business.