Tricky Issues: How do you determine a person’s employment status?

In the latest article for our Tricky Issues series, we explore the complex matter of determining employment status, the relevant legal tests and key considerations businesses should bear in mind when determining employment status, and why it matters.

In day to day speech the terms “employee” and “worker” are often seen as interchangeable. However, when it comes to the legal meaning attached to these terms, and the legal rights which follow, they are anything but. The advent of different working models and technology, such as the gig economy, have highlighted this fact. As a result, recent years have seen several high-profile status claims heard by the Supreme Court, many of which – such as Uber and Pimlico Plumbers – have made the national headlines. The implications for not correctly identifying status can be significant, as these cases have demonstrated.

Why does status matter?

In the UK a person may be an employee, a worker or a self-employed contractor. Employees enjoy the most comprehensive rights available under the law, while workers are limited to a subset of those rights. For instance, workers have the right to sick pay (in certain circumstances), to be automatically enrolled into a pension scheme, to the National Minimum Wage and to holiday, rest breaks and other protections afforded by the Working Time Regulations (WTR). Genuinely self-employed contractors, however, have limited statutory protections and simply rely on the terms of the contract in place between themselves and the hirer.

Incorrectly identifying the status of an individual can result in claims for back pay, such as in respect of holiday pay, sick pay etc as well as increasing employment costs going forwards and can therefore have a significant impact on businesses.

While statutory definitions of “employee” and “worker” exist, they are notoriously unhelpful. As such, the current legal position has been defined by caselaw over many years and there is still no definitive list of criteria which make a person an employee or a worker as opposed to genuinely self-employed. It can therefore still be very difficult for an employer to correctly label an individual’s employment status.

The Employment Test

However, what caselaw has established is that there are three key elements in the test for determining employed over self-employed status which employers should bear in mind when making any status assessment. These are: 

1. Personal service: Personal service is a core element in determining both employee and worker status. Neither an employee nor a worker will have an unfettered right to substitution and must perform the work themselves. Where personal service is not required and the individual is free to send a substitute in their place, this is consistent with the individual being self-employed.

2. Control: The case law often speaks of control in terms of a “master” and “servant” relationship and is seen within employment and worker relationships. One of the leading judgments on control defined it as “the power of deciding the thing to be done, the way in which it shall be done, the means to be employed in doing it, the time when and the place where it shall be done".  Ultimately employers will exert most control over their employees and less control over individuals who are genuinely self-employed who are usually free to chose when, where and how they perform the services they are engaged to provide.

3. Mutuality of obligation: Mutuality of obligation is the obligation on an employer to provide work and the obligation on an individual to accept and perform that work and again is seen within employment and worker relationships.

Distinguishing between employment and worker status is more nuanced as the two are not mutually exclusive, all employees being workers. Key to worker status in most instances is that they are required to perform work personally but are not subject to the same degree of control and mutuality as an employee would be.

Any business engaging staff should therefore look closely at the relationship it is trying to create taking into account these factors.

What about the contract?

Contracts are an important indicator of the relationship the parties intended to create, but case law has consistently demonstrated that a Tribunal will look behind the written terms of the engagement and scrutinise the day-to-day working reality of the relationship to determine the status of the individual concerned. Masking an employment relationship with a worker contract or a consultancy agreement can prove costly both in terms of backpay for statutory entitlements and tax liabilities.  

What should businesses look out for?

Some businesses looking to take on staff may be nervous about labelling them as employees due to perceived legal or financial risks associated with employment status. However, getting a person’s status right from the beginning is likely to pose the far lesser risk.

Businesses must look at the day-to-day reality of the relationship, bearing in mind the key tests of personal service, control and mutuality of obligation. In particular:

• Is personal service required? Whilst personal service is a feature of both an employment and worker relationship, as mentioned above independent contractors will normally have the ability to appoint a substitute. An unfettered right of substitution is a compelling indicator of independent contractor status, but, equally, is not determinative. There is always a need to look at all of the circumstances of the relationship. Those who are genuinely self-employed may also have the ability to set their own fees, work elsewhere, determine their own work and provide their own equipment.
• How much control is needed? The control test for employment and worker status is likely to be satisfied if the employer determines the work to be done, directs the way that work should be carried out, actively manages staff in the performance of their duties, requires staff to comply with internal procedures and generally treats staff as an integrated part of its business in day to day operations. Other factors such as the provision of a uniform or the equipment the member of staff is required to use, may also indicate control.
• Is the intention that work will always be offered and where offered must be carried out by the individual? When it comes to mutuality of obligation, a worker (and an independent contractor) must have the discretion to accept or reject offers of work. Whether this discretion exists is not always clear and can become particularly murky where relationships continue over a number of months or years. Where discretion may once have existed, over a period of time in which offers of work are routinely made and accepted, discretion may give way to obligation and create an employment relationship.

Summary

What is clear is that this is a complex area and one which employers need to take time to consider carefully at the start of any new working relationship.