Employment Status

A business may have individuals carrying out work in different capacities, eg employees, workers and – sometimes – contractors. The distinction between the categories is important- since there are key differences regarding the legal rights and obligations between the parties as well as some practical implications to note. For example, there are differences in the ways and the extent to which you can restrain contractors from competing with your business compared with an employee. In addition, you need to be clear about an individual’s status in order to deduct income tax (ITIP) and National Insurance contributions, where applicable.

In general terms, an employee has a higher level of protection and more rights than a worker or someone who is self-employed. A contractor, on the other hand, usually has greater flexibility in how they work and freedom to negotiate their rate. They may also have the ability to appoint a substitute to undertake the work in question.

It is always a good idea to consider carefully the circumstances of an arrangement you are contemplating to ensure that it aligns with your overall objectives and can be operated consistently with the concept of engaging an employee, worker or contractor.

Employee – personal service, mutuality of obligations and employer control

An “employee” is an individual who works under a contract of employment[1]. This can be an oral or written contract, though note that legislation requires most employees and workers to be provided with a written statement of their terms and conditions. (Whether a contract is formed is a separate question to that of ensuring compliance with the requirements relating to written particulars.)

The essential characteristics of “employment” are that:

• the services have to be performed personally (no right of substitution);
• there are mutual obligations on the employer to provide, and on the employee to accept, work (within the bounds of contract hours);
• the employee is under the direction of the employer who is able to tell them what tasks to do, when, and how to do them

Worker – intermediate status, not fully independent, degree of subordination & control

A number of statutory employment protections and rights apply not only to employees but a wider class of “workers”. A worker is defined[2] as:

“an individual who has entered into or works under…

• a contract of employment, or
• any other contract…whereby the individual undertakes to perform personally any work or services for another party to the contract whose status is not… that of a client or customer of any profession or business undertaking carried on by the individual”.

It follows that all employees will be “workers” under limb (a) above, but not all workers will be “employees”. A “worker” is an intermediate status between employee and self-employed contractor. As noted above, the requirement is to perform work personally, however a limited power to appoint a substitute does not necessarily defeat worker status. Whilst the relationship is generally more flexible than in the case of employer and employee, “workers” are not fully in business for themselves. Consequently, they are often thought of as “dependent contractors”.

Self-employed Contractor – in business for themself, bears risk and cost, negotiates terms with clients

Someone who is self-employed is in business on their own account and generally enters into terms with their clients or customers under a contract for services. In contrast to an employee or worker, a self-employed contractor is not usually bound to do work personally. They can choose how and when they do work, even whether or not they accept work in the first place. Additionally, a self-employed contractor is not typically integrated into a company (eg by having a defined role or managing other staff) and can provide services to whomever they choose rather than being bound to operate exclusively for the one organisation. An independent contractor is responsible for paying their own tax and is not entitled to paid holiday or redundancy on termination of an engagement.

It’s a matter of interpretation…

Where the parties to an arrangement have decided that it is one of self-employment or employment and documented this, that is not necessarily the end of the matter. If the words in a contract do not reflect the genuine intention of the parties, or the reality of the situation, the tribunal can disregard the “label” the parties apply to their situation and look to the true nature of the agreement[3].

In addition, the leading case of Uber[4] confirmed that the starting point for determining worker status is to consider the legal definition – ie first and foremost it is a matter of statutory interpretation rather than contractual interpretation. That is not to say that the written evidence of the parties’ intentions is irrelevant, however the legislation exists to protect vulnerable individuals where someone else controls their work and they are in a relationship of dependence and subordination.

A well drafted contract/written terms of engagement are always a good idea and can help clarify and support the intended arrangements between parties.

You can ask us to prepare contracts and offer letters, review and comment on documentation, draft consultancy agreements and provide advice related to employment status.

Comparison – employment status

References:

[1] Section 173 Employment Act 2006.

[2] Section 173 Employment Act 2006. See also section 46 of the Minimum Wage Act 2001.

[3] Autoclenz Ltd v Belcher [2011] UKSC 41

[4] Uber BV and others v Aslam and others [2021] UKSC 5