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Employment Status

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Employment Status

There are essentially three categories of worker recognised by UK employment law.  These are: employee, worker and self-employed person.  The distinction between an employee, a worker and a self-employed person has great significance legally because the legal rights of each are different.  An employee is entitled to a considerable level of statutory and common law protection, much more than if that person was self-employed or a worker.  Likewise, a worker benefits from certain employment law rights that a self-employed person does not. The sliding scale of rights from most protected to least protected is: employee- worker- self-employed person.

It is also important to be aware at the outset that the tax and employment law regimes are separate.  This means that a worker could be classed in one way for tax purposes and another for employment law purposes, although this will be rare in practice.

This fact sheet addresses the distinction, in employment law terms, between employees, workers and the self-employed.

Employees

An employee is employed under a ‘contract of employment’ (which includes a contract of apprenticeship and an Employee Shareholder contract).  This definition may be quite clear where the employee has received a document from their employer entitled ‘contract of employment’.  Where there is no written contract, or the employee has been issued with a different type of contract, the position will require further examination. 

It is important to note that, legally, a contract of employment can exist without a written document.  All the terms of such a contract will be implied and will typically comprise all verbal agreements and customs and practices between the parties.  In order to avoid confusion, and to ensure that the contractual arrangement between the parties is absolutely clear, employers should make sure that accurate documentation is put in place governing the relationship with all categories of worker.

Employees (other than Employee Shareholders) benefit from the full protection of employment law, although some employment law rights do require the employee to have a period of continuous employment in order to qualify for them, for example, the right to claim ordinary unfair dismissal normally requires two years’ continuous employment and the right to a statutory redundancy payment requires two years’ continuous employment. 

The employment law rights of an employee include the right to:

  • Be issued with written particulars of employment.
  • Not be unfairly dismissed.
  • Receive statutory redundancy pay on redundancy.
  • Receive notice of termination of employment.
  • Receive guarantee payments in respect of lay-off and short-time working.
  • Receive itemised pay statements.
  • Be paid statutory sick pay.
  • Take maternity, paternity adoption, and/or shared parental leave and be paid statutory maternity, paternity, adoption, shared parental pay (as appropriate).
  • Take parental leave and time off for family emergencies.
  • Request flexible working arrangements.
  • Not receive less favourable treatment on account of working under a fixed-term contract.
  • Have protection of their employment upon the transfer of a business.

In light of the broad range of protection enjoyed by employees, employers should be very careful to examine whether or not an individual is in fact an employee at the point they are issued with contractual documentation. If an individual is issued with a contract of employment and the employer later wishes to argue that they were in reality a worker, for example, then the contract they have been issued with will be a key consideration when determining their status. Therefore, employers should be careful not to unwittingly provide individuals with documentation that suggests greater rights than those that they may otherwise be entitled to.

Employee Shareholders

Employee Shareholders are employees who, in return for a minimum of £2,000 worth of shares in the Employer's company, have given up certain employment rights such as:

  • The right to request time off for study or training;
  • The right to make a flexible working request (other than where the employee shareholder is making the request within 14 days of returning from parental leave);
  • The right to not be unfairly dismissed (except in health and safety cases, automatically unfair cases, or cases where the dismissal is discriminatory under the Equality Act 2010);
  • The right to a statutory redundancy payment;
  • The ability to give 8 weeks' notice to return early from statutory maternity, adoption or shared parental leave: the Employee Shareholder will have to give 16 weeks' notice.

For further information please see fact sheet Employee Shareholder Status [FS84].

These individuals are still employees and retain a number of employment related rights, despite giving up those outlined above.

Workers

A number of specific employment law rights are also available to a wider category of individuals who qualify as ‘workers’. These include the right to:

  • Receive paid annual leave.
  • Limit working time to a maximum number of hours per week.
  • Have rest breaks.
  • Be paid the national minimum wage.
  • Not to have unlawful deductions made from wages.
  • Not receive less favourable treatment on account of working part-time.
  • Be protected from discrimination because of age, disability, gender reassignment, marriage and civil partnership, pregnancy and maternity, race (including colour, nationality and ethnic or national origins), religion or belief, sex or sexual orientation.
  • Receive equal pay and conditions for equal work.
  • Whistle blowing protection.

However, importantly they will not be entitled to (amongst other limitations on entitlements):

  • Be issued with written particulars of employment.
  • Not be unfairly dismissed.
  • Receive statutory redundancy pay on redundancy.
  • Receive statutory right to time off.
  • Receive notice of termination of employment.
  • Receive guarantee payments in respect of lay-off and short-time working.
  • Receive itemised pay statements.
  • Take maternity, paternity adoption, and/or shared parental leave and be paid statutory maternity, paternity, adoption, shared parental pay (as appropriate).
  • Take parental leave and time off for family emergencies.
  • Request flexible working arrangements.
  • Not receive less favourable treatment on account of working under a fixed-term contract.
  • Have protection of their employment upon the transfer of a business.

A ‘worker’ includes not only an individual who works under a contract of employment (i.e. an employee) but also someone who works under a contract whereby they undertake to perform personally any work or services for the other party to the contract.  The corresponding definition in the equality legislation is very similar.  Thus, every employee will also be a worker but not every worker will also be an employee.  A worker has less obligation to an employer than an employee does. Case law has established that the definition of "worker" includes members of limited liability partnerships (LLPs).

Often it will be relatively straightforward to determine whether or not someone is an employee or a worker, but it is generally more difficult to determine whether someone is a worker or self-employed. The key areas to look at when determining whether or not someone is a worker are:

1. Personal service

A worker is required to provide personal service (like an employee) whereas a self- employed person is not.

2. Business undertaking

If the individual is carrying out a business of his own accord and carrying out work or marketing themselves to others, then they are likely to be self-employed.

3. Mutuality of obligation

This is essential for the individual to fall within the category of worker rather than self- employed person.

Self-employed persons

Self-employed contractors or consultants typically work under ‘contracts for services’ and are independent and in business of their own account.  A self- employed person will not (except in very limited circumstances) be entitled to any of the rights set out above for employees or workers, which is why accurately defining these individuals is so important. Just because you issue an individual with a document entitled ‘contract for services’, ‘self-employed contract’ or ‘consultancy agreement’ does not mean they will automatically be classed as self-employed in employment law terms.  How you label the agreement is not the decisive factor (although it is an important one).  Employment Tribunals will look beyond the label you have attached to the relationship and assess whether this reflects the realities of your relationship with the individual. Where the contractual arrangements are essentially a sham and do not reflect the reality of the relationship then the tribunal will take this into account when determining the status of the individual and in such circumstances the artificial label is likely to be set aside.

The practical definition

The Employment Tribunal will take into account a range of factors in deciding whether an individual is an Employee or self-employed (or somewhere between the two- i.e. a worker).  The starting point for the Tribunal is whether the ‘Employer’ is obliged to provide work for the ‘Employee’ (or pay him or her for work provided) and whether the ‘Employee’ is then obliged to personally perform a reasonable amount of that work.  These mutual obligations are a strong indicator that the worker is an Employee.  In very simple terms, under a contract of service a person agrees to serve another (employee), whereas under a contract for services they agree to provide certain services to the other (self- employed). Secondly, the worker must be subject to a significant degree of control of the ‘Employer’ and mutuality of obligation before the Employment Tribunal will determine that an individual is not legitimately self-employed. An individual who carries out work for a regulatory or governing body may have to comply with certain standards and rules but this will not necessarily mean they are an employee.

In addition to the contractual documentation in place, the Employment Tribunal will also take into account other important factors in determining the status of a worker as set out below. These are very important considerations that allow the Tribunal to determine the true position between the parties.  This list is not exhaustive.  The Tribunal will look at all the factors and make a balanced decision. The test is known as the ‘multiple-factor test’. 

FACTOR

 

EMPLOYEE

 

SELF-EMPLOYED

 

Is the worker contracted to provide the work personally?

Yes

No.  Can send along a substitute if unable or unwilling to do the work personally.

 

Does the worker work exclusively for the other party?

Yes

No.  Can do work under two or more contracts with different parties at the same time.

 

Does the worker work as part of the other’s business?

Yes, an integral part of his/her Employer’s business, working within the core of the business.

 

No. Works as and when required.

 

 

Does the worker provide his/ her own equipment and materials?

 

Employer provides all tools, machinery, materials and equipment required.

 

Most often provides own tools, materials and equipment.

 

Does the worker provide his/ her own support staff?

Employer provides all required support staff.

Provides own support staff as required and pays them directly at own expense.

 

Is the worker responsible for own profit and loss?

Not able to increase profits over and above wage received.

Ability to enhance profit by maximising efficiency.  Puts errors right at own cost. 

 

Income Tax, National

Insurance and VAT arrangements.

All dealt with by Employer.  Subject to PAYE rules.

 

Produces own accounts, pays own Income Tax, National Insurance and VAT. Paid on invoice.

 

Is the arrangement designed purely to achieve tax advantages and/or to avoid employment legislation?

If yes, it is likely to fail and the worker will be regarded as an Employee.

 

 

 

 

Does the worker receive paid holidays, sick pay and/or a company pension scheme and does he/she receive regular wages?

 

Yes

No - please be aware that a person can also be a worker and be eligible for these benefits even though they are not an employee.

Is the worker required to wear a company uniform/tie/badge (where appropriate)?

 

Yes

No

Is the worker required to provide his/her own indemnity insurance?

 

No

Yes

Can the worker determine their own start and finish times?

 

No

Yes

Does the worker pay his own expenses and/or training?

 

No

Yes

Is the worker subject to disciplinary action in the event of misconduct or poor work performance?

 

Yes

No

 

Where an analysis shows that an individual has both employee and self-employed traits that are evenly balanced then you should speak to your legal advisor for further advice. Where the arrangement is such that the individual falls short of employee status (but do not fall squarely into the category of self- employed person) then it may be that they are a worker. The courts have determined that the effect of the definition of worker is to "lower the pass mark" so that those who do not meet the definition of employee may still qualify as workers.

Specific relationships

Employment Tribunals have, over the years, struggled to determine whether certain categories of workers are employees or self-employed.  These categories are set out below.

Directors

In law, directors are office holders.  The rights and duties of an office are defined by that office, and it exists independently of the person who fills it.  Directors can be removed from their office by a simple majority of the votes cast at a general meeting of the company.  This contrasts with the rights and duties of an employee which are defined by a contract of employment.  Not all directors are also employees of the company.  Executive directors will usually be employees of the company, whereas non- executive directors are more likely to be self- employed. However, this is only one factor to take into account. Whether or not a director is also an employee will depend on whether they meet the definition of employee in line with the factors identified above. A key factor in these circumstances is mutuality of obligation and whether the director is obliged to carry out (and the company is obliged to offer) duties beyond those required of a director.  Normally, a director works under a contract called a ‘service contract’ or ‘service agreement’.  Such contracts will typically include many terms and conditions and, although by a different name, they are more often than not deemed by tribunals to be contracts of employment.  This is particularly so where the director is required to turn up at work at a certain time and work a set number of hours in the performance of specific tasks rather than being free to come and go as they choose and where they are paid a regular salary rather than just dividends or expenses.

Partners

Partners are not employees but are self-employed, receiving for payment a share in profits from the business.  There is a distinction however between an ‘equity partner’ and a ‘salaried partner’.  If the former owns part of the business and therefore takes a share of the profit, that person will be self-employed.  A ‘salaried partner’ does not own a distinct part of the business and receives payment by way of salary only.  Such an individual is likely to be an employee.

Where an LLP member would have been a partner under a general partnership if it had not been registered as an LLP, that member cannot be an employee or a worker.

Home workers

This group of workers work in their own home away from the premises of the other party.  In such situations, tribunals will, once more, look at the true relationship between the parties, rather than determine their employment status simply based on the fact they are home workers.

Temporary workers supplied by an agency

For agency workers there would normally exist two contracts: one between the worker and the agency and the other between the agency and the direct recipient of their services (the customer).  In many such arrangements, the agency places the worker with the customer and pays him direct. 

In most cases, unless the agency has expressly agreed to be the employer, such workers will not have a relationship of employment with either the agency or the customer with whom they are placed.  However, it is possible, depending on the individual circumstances, for either of these relationships to develop into something akin to an employment contract. 

Workers will generally not have a contract of employment with the agency where the agency is contracting on terms apt to avoid employment status. 

Tribunals will only imply a contract of employment with the customer if it is necessary to give effect to the business reality of the relationship – and it will not normally be necessary if the express terms are to the contrary.  That said, there is still some scope for agency workers to be considered the employee of the customer where the written terms do not make clear the worker’s status and lack of employment relationship with the customer and/or the customer conducts itself towards the worker in such a way as to imply a direct relationship (for example, by negotiating a change of job or terms and conditions of working, by disciplining the worker or dealing with grievances, absence or performance issues, by dealing with pay issues or by integrating the worker into the customer’s staff structure).

The agreement between the agency and the customer is regarded as a separate type of contract and quite distinct from one of employment.

Please see advice contained in Agency and Temporary Workers [FS35] for detailed advice on the rights of Agency Workers under the Agency Workers Regulations 2010.

Emergence of the gig economy

Another problem area that has developed over recent times is the emergence of the so called "gig economy". This is where individuals are engaged by businesses on a flexible, ad hoc basis and instead of salary they get paid for the "gigs" they do, such as food delivery or a taxi journey. This is a fast growing industry and is usually operated by the business on the basis that all individuals are self employed and can decide when to take jobs that present themselves. However, in particular given the growing value of this industry, this arrangement has attracted considerable attention from the perspective of employment status, not least of all due to concerns that by treating these individuals as self-employed HMRC is missing out on fairly substantial tax revenues.

There have been a number of high profile cases in the Employment Tribunal on this issue (all the way up to the Supreme Court); which have determined that individuals in these circumstances are likely to be regarded as workers, rather than being self-employed, along with the additional rights worker status entails.

However, the test for employment status remains highly fact specific and there have been instances where courts have determined that individuals within the gig economy are not workers. A key consideration in these cases has been the requirement for personal service; if this is not satisfied then any claims by individuals on the basis of worker/employee status are likely to fail. Similarly, where employers have been able to show that there is an unfettered right of substitution this has been a significant factor in defeating claims based on worker status. However, it is also the case that where substitution is used only in situations where the individual is unable to work (for example to cover sickness, holidays) this is still consistent with personal service. Therefore, in these circumstances of inability to work, is in unlikely that a right to appoint a substitute would be regarded as defeating a claim that an individual had worker status.

In addition to issues surrounding the tax treatment of individuals working in the gig economy there has also been increasing concern about their welfare, as a result of which the government commissioned an independent review of the sector. The Taylor report ("Good Work: the Taylor Review of Modern Working Practices") makes a number of recommendations designed to improve the working conditions of atypical workers and individuals working in the gig economy and is likely to result in changes to the sector in future. The report can be accessed by following the link below:

https://www.gov.uk/government/publications/good-work-the-taylor-review-of-modern-working-practices

As a result, it is likely that the issue of worker status will continue to evolve and develop to reflect the changing ways we work in modern society.

Excluded Employees

Even where employment status exists, there are circumstances in which Employees are denied the benefits of some or all of the rights listed above. The main excluded classes are set out below.

Illegal Contracts

Any worker employed under an illegal Contract is not entitled to the protection of the law. This is a matter of public policy. A wrongdoer must not be seen to benefit from their misconduct. A prime example of an illegal Contract is one which commits a fraud upon HM Revenue & Customs. For example, payment by cash-in-hand where Income Tax and National Insurance is not paid on some or all of the wages. Another illegal Contract would be where the performance of duties under the Contract of Employment involves an illegal act. For example, where an Employee is required under Contract to obtain prostitutes for the customers of his/her Employer.

It is worth noting that an applicant can claim for discriminatory treatment even if their subsequent employment would have been illegal. 

Following the EAT decision in Wijesundera v Heathrow 3PL Logistics Ltd and another, an employee who did not have a valid work permit was not prevented by the doctrine of illegality from pursuing claims regarding the sexual harassment she claimed to have suffered:

  • as a job applicant; and
  • as an employee.                             

That being said, the employee was prevented from bringing a claim that her dismissal was discriminatory as that claim was intrinsically linked to the illegality of her employment contract.  The EAT's reasoning as to why the employee in this case was permitted to bring a claim for sexual harassment in the course of her employment is scant but we expect that the Supreme Court's decision in the case of Hounga v Allen (née Aboyade-Cole) and another (which is listed for 31 March 2014) will provide useful clarification.

Diplomatic and state immunity

In short, in very restricted circumstances, Employees of Consuls and Foreign Diplomats residing in this country are excluded from the protection of employment legislation.

Crown Employees

These are Employees who work for a Government department. Most statutory rights are available to Crown Employees. The most notable exceptions are the rights to statutory redundancy pay and to a minimum period of notice.

Temporary employees or casual workers

This category of workers is usually excluded from claiming unfair dismissal or statutory redundancy pay because, in practice, they do not obtain the continuous service necessary to bring such actions.

In some circumstances temporary, casual or fixed term employees can obtain the necessary service to claim unfair dismissal if they have been employed on a series of contracts that, when joined together, amount to more than the qualifying period for unfair dismissal. An Employment Tribunal may also infer that a gap between contracts may be a "temporary cessation of work" where the employee was either promised further work or a contract was agreed prior to the existing contract ending.

Miscellaneous

Police and share fishermen are excluded from claiming unfair dismissal and from receiving a statutory redundancy payment.

Importance of getting it right

Determining employment status is often a difficult issue and employers should be mindful that simply because an individual is referred to as being a worker or self- employed does not mean that the courts will agree with this classification if tested. Allowing individuals fewer rights on the basis that they are not employees when in fact they are can create liability for employers and you should speak to your legal advisor if this is an issue for you. 

This document has been created by, or on behalf of ESP Ltd, as a general document and as a guide in relation to its subject matter and has not been bespoke drafted for you or the specific circumstances in which you are looking to use it. Prior to using this document and undertaking any HR process you must consult your organisation’s own policies and procedures to ensure that you do not do anything in conflict with your own policies and procedures.  If in any doubt as to how to use this document or, if you require any legal advice, please feel free to contact ESP Ltd on 0333 006 2929 and our legal team will be more than happy to assist.  ESP Ltd will not be liable in any way for any actions undertaken by you or your use of this document unless we have been consulted regarding your use of this document as legal advisor to your business or have bespoke drafted any documentation in response to a specific support request.