Employment Status - Key Indicators

 ... as an employee, as a worker or on a self-employed basis. 

What status an individual holds matters in terms of the rights they have (for example, whether they can bring claims for unfair dismissal) and the way that their income is taxed.

In many instances it is clear which category an individual falls into. However, as the workplace becomes increasingly diverse, the rise of atypical working patterns has pushed and stretched the margins of the traditional three tier system. Employers have come unstuck trying to obtain the financial benefits of self-employed status when, in fact, they also want personal service and a relatively high level of control.

This article sets out some of the key indicators of status applied by the courts and tribunals, looking at each category individually.

Employment Law and HMRC

Whilst the tests used for determining employment status and tax status are similar, they are not entirely the same. For example, if using the HMRC employment online status checker, bear in mind that it will not differentiate between workers and employees, a difference that might be very important when determining what employment law rights an individual may have.

Who Benefits from Key Employment Rights? 

 
Employee

Employee status is the gold standard in terms of rights for the individual, in particular an employee with more than two years' continuous service has the right not to be unfairly dismissed and the right to receive a statutory redundancy payment. The employer must also deduct tax and NIC at source.

The definition of employment status varies depending on the type of claim an individual may wish to make. In most cases the definition set out in the Employment Rights Act 1996 is the key. Using that definition, an employee is an individual who has entered into or works under a contract of employment. A contract of employment is "a contract of service or apprenticeship, whether express or implied, and (if it is express) whether oral or in writing".

When deciding whether a contract is a contract of employment, all relevant factors need to be taken into account. However, the three key indicators are: 

Personal Service

• If an individual is contractually required to provide personal service this is consistent with there being a contract of employment.
  
  
• Where there is a contractual right to provide a substitute this may be inconsistent with employment status. However, much depends on the type of right.

Control 

There may be many factors which influence the degree of control an organisation has over individuals. The more control, the more likely it is that an individual will be employed.

The following indicators are often seen as key to an individual being employed:

• There is a contractual right to control their activities.
  
  
• They are subject to day to day direction and supervision, as well as the policies in the employee handbook.
  
  
• The organisation controls their place of work and the days and hours when they work.

Mutuality of Obligation

This is generally seen as the obligation on the organisation to provide work and the obligation on the individual to accept that work. If the contract between the parties does no more than provide a framework for what will happen if work is provided, and there is no obligation on the individual to accept that work, it is unlikely to be a contract of employment.

Worker

'Worker' status exists to provide some statutory protections to individuals who may not satisfy the test for being employees, but who nevertheless are not genuinely in business for themselves. Often these individuals, like fully blown employees, are in an unequal bargaining position with the organisation to whom they provide services.

Whether someone is a worker or self-employed is often of vital importance to the overall cost of their services. Workers are entitled to be paid the minimum wage and to accrue paid annual leave. Recent high profile cases involving employers in the gig economy show how crucial these issues can be.

An individual will be a worker if:

• They work under a contract of employment; or

• any other contract to perform work personally (see "personal service" above) so long as there is not a genuine client / customer relationship between the parties.

Some key indicators for determining whether there is a client / customer relationship include:

• Whether there is a sufficiently arm's-length and independent relationship (as opposed to the type of dependence that might characterise employee and worker status)

• Whether the individual has other clients (if they do, this points towards self-employment)

• The duration of the arrangement (short duration points towards self-employment)

• The method of payment (for example rendering invoices points towards self-employment)

• Which party supplies the equipment used (if it is the individual, this points towards self-employment)

• The level of risk undertaken by the individual (if an individual shares in the financial risk of a business venture, this points towards self-employment)

• The extent to which the individual is integrated into the wider organisation (if an individual remains outside the management structure this points to self-employment)

Self-Employed

Those who are not employees or workers will fall into the self-employed category. Sometimes it will be easy to identify who these people are, for example the IT contractor installing software on your system or a management consultant hired to carry out a particular task.

However, others may not be so easily pigeon holed. Whilst it may be tempting to try and shoe-horn someone into self-employed status, and save on accrued holiday and the need to deduct PAYE and NIC, there are risks involved in having contracts in place that do not reflect the reality of the situation on the ground. See for example the recent case involving Uber and its drivers, or Citysprint and its couriers.

Top Tips 

• Look at the relationship as a whole before deciding what status an individual has - it is often a question of weighing up competing factors. Every case is dependent on its own facts.
  
  
• Make sure that any written contract reflects the reality of the relationship - if a court or employment tribunal suspects that a contract is a sham, it will look behind the written terms.
  
  
• Make it clear in any written agreement what the intention of the parties is - if the contract is not intended to be a contract of employment make sure that is set down in writing.
  
  
• If you are building a right of substitution into a contract, think clearly about how that will work in practice and how it should be expressed. For example, is it an absolute right to send a substitute, or a conditional right?
  
  
• If an individual is to be a worker or self-employed, consider including an indemnity for any losses incurred in the event that they later allege they are an employee.
  
  
• Consider using the HMRC online tool as an indicator of employment status, but remember that HMRC does not differentiate between employees and workers.
  
  
• Remember that the definition of employee varies depending on the legal right an individual is attempting to enforce. There is a much wider definition of employee under the Equality Act 2010 than there is in the Employment Rights Act 1996.

For more information, please contact Michael Halsey in our Employment Law team, on 020 7665 0842.

This article was originally published in Charity Finance.