Out-Law Guide | 12 Jan 2023 | 5:41 pm | 6 min. read
Not everyone who works is an 'employee'.
Often, workers set themselves up in business as consultants or independent contractors so that they have more control over the type of work they do and how they do it.
Employees, by comparison, normally have less control over what they do and how they do it, but they do benefit from certain legal protections that independent contractors do not. For example, only employees can bring a claim of unfair dismissal against their employer. Employees and independent contractors are also treated differently for tax purposes.
Even if a worker is not an employee for employment law purposes, they may still be an employee for tax purposes. They may also have the legal status of ‘worker’ which still gives significant employment law protections including working time rights, equality rights and whistleblowing rights.
It is therefore essential that contractors, and anyone hiring contractors or consultants, understand the distinction so that their legal rights and obligations are clear.
Courts and tribunals look at lots of different factors in order to decide whether someone is an independent contractor or an employee. Nevertheless, there are three essential requirements for a contract of employment to exist: control; mutuality of obligation; and personal service. If any of these are missing, the contract will not be a contract of employment. If all of these elements are present, there may be a contract of employment but it will necessary to look at all the other factors to decide whether they are consistent with a contract of employment.
Is the worker told what to do and when and how to do it? Can the worker be disciplined if they don’t do the work properly or turn up late? Of course, if the worker works remotely or from home, or if the worker is particularly skilled or senior, it might be harder to decide whether the worker is actually 'controlled' by anyone else. It may be that a computer programmer is so skilled in their field that in reality the person setting him work cannot really tell them how to do their job. In such a case, the employer’s theoretical right to control the worker, rather than their practical ability to do so, may suffice. So if the employer has ultimate control because, for example, they can discipline the worker, then it is likely that there will be a sufficient level of control indicating that the programmer is an employee.
Is the worker obliged to do any work they are given or can they just decide not to do it? Is there an obligation to provide work for the worker to do? If the worker does the work, is the party giving them the work obliged to pay him for it? If the worker is obliged to do the work, they are likely to be an employee. However, it is not strictly necessary for the party providing the work to provide a constant stream of work for the worker to do for an employment relationship to exist. It may be sufficient if the worker is obliged to accept and do the work they are offered and the employer is obliged to pay them for the work they do, as long as there is some form of retainer in place when there is no work to be done. A truly 'casual' worker who only works as and when required but who suffers no penalty if they refuse will not be an employee.
If it does not really matter who the worker asks to do the job as long as the work is done, then this will normally indicate that the worker is not an employee. In other words, if the worker is permitted - either historically or under the contract - to substitute another worker to do the work, then there is no requirement to do the work personally and the worker will not be an employee. However, if there is only a limited right to send a replacement, for example when the worker is sick, the worker may be an employee.
Other factors which can give a clue as to a worker's employment status include if the worker:
Other factors which point towards to the worker being an independent contractor include if the worker:
If there are any emails, letters or contracts which describe the way the relationship will work, these will be helpful in deciding whether the person is an employee or an independent contractor. However, just because someone is treated as self-employed for tax purposes, or is described as an independent contractor or consultant, does not necessarily mean this is the case – the label given to the relationship by the parties, whilst relevant, will not be decisive. The Supreme Court decision in Uber v Aslam and Others also endorsed a purposive approach of looking beyond the terms of any written agreement to the parties’ ‘true agreement’. Therefore, courts will always look at the true nature of the relationship. If the relationship has changed, perhaps over time, then it is possible that the court or tribunal might find that someone who started work as an independent contractor has become an employee.
Nonetheless, if you want to try to ensure that a contractor or consultant you engage to do a job does not bring an employment claim against you, it will be helpful if the contractual documentation expressly states that they are not your employee. Whilst this won't necessarily mean a court or tribunal will agree with you, it will help your argument.
A worker may be an employee for tax purposes even if they are not for employment law purposes (and vice versa). Some workers are automatically deemed to be employees for tax purposes. However, in most cases, HMRC applies employment status tests. Although HMRC’s approach is very similar to the tests for employment status in employment law, subtleties of approach can produce different results. The most obvious is in relation to mutuality of obligation which HMRC appears to place less weight on.
HMRC has developed guidance on when it considers an employment relationship exists. It has also developed an online tool called the ‘check employment status for tax’ tool (CEST). However, CEST has attracted criticism for being unable to produce status determinations in complex or marginal cases.
Determining whether a worker is an employee for tax purposes became even more important on 6 April 2021. IR35 rules require that employment taxes and National Insurance contributions are paid in respect of a person who provides services through a personal service company (PSC) if that person would have been regarded as an employee of the engaging business if it had engaged directly with the business. Changes to IR35 now make the end-client liable for determining the tax status of contractors who work through PSCs.
A contractor who is not an employee with employment rights could be a ‘worker’. Worker status is increasingly afforded to individuals providing personal services due to the simplicity of the statutory test. In a landmark decision the Supreme Court in Uber v Aslam and Others decided that two Uber drivers were 'workers' rather than self-employed subcontractors. It described the statutory definition of worker as having three elements:
Additional factors such as control and whether there is an obligation to accept and perform some minimum amount of work may be relevant to the assessment of this statutory definition but they are not stand-alone requirements.
06 Jan 2023