We have noticed an increasing number of claims challenging the employment status allocated to an individual at work. This usually occurs where the relationship has broken down and the engagement of an individual as a worker or ‘self-employed’ contractor has been brought to an end. How do you assess an individual’s employment status?
The most important point to note when assessing employment status is that how you describe someone, whether in written documentation or verbally, does not necessarily dictate their true employment status. It is necessary to look behind the 'label'.
The Employment Tribunals use a number of factors when determining employment status. This assessment may be similar to, but is not the same as that undertaken by HMRC for tax purposes. The Employment Tribunals recognise three different types of employment status:
- Employee. Those who are employees enjoy the full protection of employment law
- Worker. Those who are employees have certain rights, such as to holiday pay and the national minimum wage
- Self-employed. Those who are genuinely self-employed are considered commercial contractors and are not protected in the same way by employment law. However, if the self-employed contractor is required to perform their work personally, they may have protection under the Equality Act
In order to bring a claim of unfair dismissal, an individual must be an employee.
There is no single test to be applied by the Tribunal to determine whether a person is an employee or not. The Tribunal will consider the true legal relationship between the parties, taking all of the relevant factors into account.
Under section 230(1) of the Employment Rights Act 1996 (the ERA), an “employee” is defined as an individual who has entered into or works under a contract of employment. Contract of employment means a “contract of service” or apprenticeship, whether express or implied, and (if it is express) whether oral or in writing.
Unfortunately, the terms “contract of service” (employment) and “contract for services” (meaning self-employed) carry no statutory definition. Case law has generally held that under a “contract of service” a person agrees to serve another, whereas in a “contract for services” they agree to provide certain services to the other.
When considering whether an individual was employed, the Tribunal will usually start by considering the following factors:
- Personal Service: Employees are usually required to provide personal service whereas it would be consistent with self-employed or independent contractor status to be able to provide a substitute or to be able to sub-contract the service they are engaged to carry out.
- Mutuality of Obligation: This involves looking at whether there is an obligation on a party to provide work and if so whether there is an obligation on the individual to then accept the work offered.
- Control An employee would commonly be told their place of work, their working days, hours of work and be subject to the employer’s day to day direction, rules and policies relating to employees, particularly in relation to standards at work.
A self-employed individual will have a greater degree of freedom in their method of working, for example, they would work more independently from the ‘employer’ and be less likely to submit to the same controls or supervision that would be exercised over an employee. They would also typically be able to determine their own working days and hours.
Control is not sufficient to determine the question of employment status as many employees, particularly professionals because of their skill and expertise, will be subject to very little control. Other factors may be taken into account such as:
- Who provides and maintains the tools or equipment used;
- Whether the person hires their own help;
- The degree of financial risk adopted;
- The degree of investment in and management of the business;
- Whether the individual has the opportunity to profit from their own good performance;
- Whether the person is paid a fixed wage or salary;
- Whether the person is paid gross or whether tax and national insurance is deducted at source;
- Whether the person is paid when absent due to holiday or sickness;
- Whether they are fully integrated into the organisation, for example do they have an email address or business cards and are they included within staff structures.
If an individual acts like an employee and is treated as such, they will usually be one even if they are described as self-employed!
The concept of worker status was introduced by statute. There is a lower hurdle to overcome in order to obtain worker status as opposed to employee status and the law recognises that workers are also entitled to a degree of legal protection at work.
A worker is defined under section 230(3) of the ERA 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.
Where there is no contract of employment, to satisfy the second part of the above test, an individual will have to show:
1. Personal service
Under the contract the worker must undertake to perform the work or services personally. If they were able to appoint a substitute this would be more consistent with their being self-employed. A limited power to appoint substitutes is not necessarily inconsistent with an obligation of personal service but an unfettered right to substitute is inconsistent.
2. Not carrying on a business undertaking
The statutory definition of worker requires the party receiving the services to not be a client or a customer of a business undertaking carried on by the individual. Relevant factors in determining whether the individual was carrying on a business undertaking and whether the “employer” was a “customer” of that business could include: the degree of control exercised by the “customer”, the exclusivity of the arrangement (a self-employed person may work for several different clients or customers); its typical duration; the method of payment (workers are more likely to receive a regular payment); which party supplied the equipment used and the level of risk undertaken by the individual (those in business on their own account assume the risk of the business failing).
The fact that HMRC might regard an individual as self-employed is relevant but not conclusive.
3. Mutuality of obligation
If the “employer” has no obligation to provide work and the individual has no obligation to accept that work then this tends to indicate that they are self-employed.
An individual will be self-employed if they are not an employee or a worker. Someone who is genuinely self-employed is either not obliged to provide personal service and/or there is no mutuality of obligation; or obliged to provide personal service and mutuality of obligation exists but the individual is carrying on a business and the other party is their client or customer.