A Guide to Employment Status

When you bring people into your team, deciding how to do it and getting that right is crucial. Whether you take on an employee, use a self-employed person or a casual worker will depend on your requirements.

Over the past few years we’ve seen a number of employment and HMRC cases around employment status. Cases that look at the reality of the situation, not simply what title the individual and company were using. Many business owners tell me they use self-employed workers to reduce the risk and cost to them of taking on employees. The reality in most of these cases is that if it went to tribunal the individual would at the very least be deemed a worker and possibly an employee.

Whether an individual is an employee, worker or self-employed determines what statutory rights and protections they have. HMRC also have an interest in employment status for tax and minimum wage purposes. Unfortunately for employers, there is no single definition of each status and even HMRC and employment tribunals have more different approaches to establishing employment status. This article looks at status for employment law purposes.

Establishing employment status is complex as there is no single test. Status is based on the facts of each situation. Calling an individual self-employed does not always make them so. We also have the status of worker which is applied to those who do not meet the high benchmark of employed but also do not fit the definition of someone who is self-employed.

It is important to note, where there is an intention that work will be carried out personally and personal service is a dominant part of the contract, that this indicates an individual is a worker or employee.

Self-employed

When entering into an agreement with a self-employed individual, the agreement is for the provision of a service. This is different to an employment contract where an individual is entering into an agreement to personally provide their service.

This requires an unfettered right to substitute their labour. An individual will not be able to claim they have worker status if they have this unfettered right to substitute. It is important to note that this right cannot be restricted, for example defining when they can substitute or dictating or holding a veto over who they can substitute with.

The right to substitute must be genuine and the intention of the parties. Any document written to include a right to substitute where there is no intention for it to be used will be considered a sham.

Other factors indicating self-employment:

• Mutual obligation – there is no obligation to offer work or for the individual to accept work.
• Control – the individual has the ability to determine when and how they work.
• Exclusivity – the individual is free to provide their services to whomever they choose.
• Nature and length of the agreement – the individual is engaged for a finite period for the purpose of a specific task or project.
• Pay – payment is based on the delivery/completion of the service.
• Integration – the individual is not integrated into the company and does not perform services similar to or substantially the same as those performed by an employee.
• Facilities and Equipment – the individual provides their own.
• Financial risk – the individual is personally responsible for any loses from their work, including resolving unsatisfactory work in their own time and at their own expense.
• Taxation – the individual is responsible for paying their own income tax and NICs, however paying their own tax will not stand on its own as an indication of self-employment.

It is important to consider that an individual cannot be stopped from asserting they are a worker merely because they accepted their status as self-employed, even if for many years. Therefore, reaching agreement does not provide any guarantee that the individual will not bring a claim to an Employment Tribunal.

Worker

A worker is working under a contract, providing service personally for the employer. The contract may be express / in writing or implied, although from April 2020 a Statement of Particulars must be issued on day one. Key to worker status is the intention for the work to be carried out personally. There is therefore mutual obligation. However, for worker status, mutual obligation only exists during each assignment. Once an assignment (shift or other period of work) is completed there is no obligation for either party to commit to another.

There may be occasions where a self-employed individual does agree to carry out work personally, however they will still not be a worker where the other party is a customer rather than the employer.

Employee

An employee has an on-going contractual agreement between themselves and their employer.

The employment relationship is based on the traditional understandings of master and servant, where the employer holds control over what the individual does, including how and when they do it. Control may be indicated in a requirement to conform to standards, for example behaviour or dress. There may be situations of senior or skilled employees where the individual retains significant control yet they are still employees, as they are obliged to do some or a minimum amount of work personally.

The employment relationship is one of mutual obligation, where the financial risk is held by the employer. If the employer finds there is not enough work to keep the employee occupied they remain bound by the employment contract and are required to pay the individual.

An employee may be restricted from working elsewhere, whether for another employer or on a self-employed basis. This includes where they are permitted but only with express permission. It should however be noted that an employee who is not guaranteed a minimum number of hours (often referred to as zero hours) cannot be restricted from working elsewhere.

Summary

It is crucial for both tax purposes and to ensure individuals get the correct rights and entitlements that employment status is determined correctly. This is not simply the case of selecting the correct agreement for them to sign but also how you treat the individual on an on-going basis. This is particularly important if the individual is a worker or self-employed as treating them like an employee could infer that they are an employee. As an example, integration into the organisation in many cases will indicate worker or employee status depending on the degree of integration, including wearing a uniform, holding a business card, appearing on the internal telephone directory or having a company email address.

Getting the employment status wrong risks financial penalties from HMRC and an employment tribunal claim for employment rights. The starting point is to reach agreement on the intention of the relationship and put this into writing, however this must be in line with the reality. Having a written agreement to the effect that an individual is self-employed will not protect you from either HMRC or an employment tribunal claim if put to the test the reality doesn’t match what is in writing.

Article last updated: 29 December 2019