1. Legal Framework Differentiating Employees From Independent Contractors
a. Factors that Determine Who is an Employee and Who is an Independent Contractor
In determining if an individual has employee status, the overriding consideration will be the substance of the relationship between the parties. The definition of "employee" and "worker" as set out by statute law are set out below but in short, "employees" work under a contract of employment (also known as a contract of service), whereas "workers" work under a contract to do work personally. However, there is a lack of clarity between the two.
Section 230(1) of the Employment Rights Act 1996 (ERA) defines an employee as follows:
"an individual who has entered into or works under (or, where the employment has ceased, worked under) a contract of employment".
This simple definition is not particularly helpful when it comes to the complex facts of most employer/worker relationships. There are a number of criteria, which have been
developed by the courts to determine employment status. The starting point is the test set down in Ready Mixed Concrete (South East) Ltd v the Minister of Pensions and Natio-nal Insurance [1968] 2 QB 467, which determined a four stage test:
i) Mutuality of obligations (that is, the obligation to work and to pay) – a Tribunal would consider whether the individual has the right to a minimum amount of work or pay whi-ch would indicate employment status, or whether the individual could refuse work when offered, or could be sent home if a project ended.
ii) Personal service – an unqualified right to substitute another individual would indicate independent contractor status.
iii) Sufficient control by the party for whom the work is being carried out. The tribunal would look at all the facts to determine if the employer had sufficient control over the individual for it to constitute employment status. Factors that the tribunal might consider are:
• the extent to which the individual is subordinate to the employer (for instance, are there appraisals and disciplinary procedures?);
• is the individual integrated into the business (own desk, business cards, email address)?
• does the individual provide his/her own tools and equipment?
• what training and supervision is provided to the individual? Is the individual permitted to take on other work?
• how senior is the individual? The more senior, the less control the employer would be expected to have.
iv) Consistency of the other provisions of the contract with it being a contract of employ-ment. Control will not be enough to determine employment status on its own. Other factors that will be relevant are:
• the extent of the financial risk which is adopted by the individual, such as the risk of making a loss on the contract, termination without compensation, or an obligation to make good any defective workmanship at their own expense;
• whether the individual supplies their services through a service company primarily to limit their liability;
• whether the individual supplies their own insurance cover;
• how much the individual is invested in and manages the business;
• whether the individual is able to profit from their own performance;
• whether the individual is entitled to employee type benefits, paid a salary, or is entitled to holiday or sick pay;
• whether the individual is paid by reference to an annual salary, or a fixed hourly rate or a set fee for the entire job.
The way in which the parties describe themselves will not be decisive as to the indivi-dual's employment status. Simply drawing up a consultancy agreement and describing the relationship as a self-employed independent contractor will not necessarily lead to a finding that no employment exists. Nevertheless, the parties' understanding about the nature of their relationship will not be disregarded by the courts, particularly if the si-tuation is marginal.
Worker status
As described in the introduction to this chapter, UK statute law has introduced an addi-tional category of labour, known as a "worker". A worker is defined in section 230(3) ERA as an individual who has entered into or works under (or, where the employment has ceased, worked under):
"A contract of employment; or
Any other contract, whether express or implied and (if it is express) whether oral or in wri-ting, whereby the individual undertakes to do or perform personally any work or services for another party to the contract whose status is not by virtue of the contact that of a client or customer of any profession or business undertaking carried on by the individual."
Sometimes it is clear that an individual is not an employee, but it may be less clear whether they are either a worker or an independent contractor. As with the test for employment status, the courts have developed a multiple factor test to help determine worker status.
Elements that are required to show worker status can be summarised as follows:
i) Contract – there must be a contract whether oral or in writing, express or implied, between the employer and the individual worker. Unlike employee status, there is no requirement to show an obligation on the employer to provide work and the employee to perform it (mutuality of obligation).
ii) Personal service – it is essential that the individual contracting to do the work agrees to do so themselves, and not by supplying the services of another. Therefore a genuine right to substitute another person will negate any obligation to perform work personally. However, the existence of a contractual term to this effect, which does not reflect the intentions of the parties may be disregarded by a tribunal. This is often because the tribunal will take into account the relative bargaining powers of the parties because com-panies can often dictate the written terms of any contract, which the individual is bound to accept if they want the work.
iii) Profession or business undertaking exception - the individual will not be a worker if the other party to the contract, for whom the individual is working, is a client or custo-mer of their profession or business undertaking. The tribunal will determine whether the essence of the relationship is that of a worker, or an independent contractor, in business on their own account. For this purpose, the tribunal might consider the dominant pur-pose of the contract: was it in the employment field, or was it a contract between two business undertakings? There is no test, which is universally applied although the "inte-gration" test is one that is used most commonly. This involves asking:
• does the individual market their services an independent person to the world in general? (This would indicate they are not a worker); or
• was the individual taken on by the employer to work as an integral part of the employer's operations? (this would indicate they are a worker).
In order to establish whether a person is self-employed, the tribunal will assess whether they are "in business on their own account". The factors that should be taken into ac-count include:
• whether the individual provides their own equipment;
• whether they hire helpers;
• the degree of financial risk taken;
• the degree of responsibility for investment and management;
• the opportunity for profiting from sound management.1
It is also clear that LLP members can be workers. In the leading case of Clyde & Co v Bates Winkelhof [2014] UKSC 32, the Supreme Court found that the LLP member was
an integral part of the business and the firm was in no sense her client or customer. The court also found that there does not always have to be an element of subordination in the relationship between a worker and their employer, so while the concept of subordi-nation may be helpful in distinguishing between an employee, worker or self-employed contractor, each case needs to be assessed on its facts.
The approach taken by the employment tribunal can be illustrated with the recent claim by Uber drivers that they had worker status. In the highly publicised preliminary hearing in the case of Mr Y Aslam, Mr J Farrar and Others v Uber (2015), the Tribunal found that they were indeed workers, some of the factors that the Tribunal took into account inclu-ded the fact that they found that Uber:
• interviews and recruits drivers;
• controls key passenger information and does not share this with the driver;
• requires drivers to accept trips;
• sets the default route to be taken;
• sets the fare and the driver can only decrease it; the driver is not free to increase it;
• imposes conditions on drivers regarding the type of vehicle they can use, instructs them how to do their work and controls how they perform their work;
• uses rating systems to effectively performance manage/discipline drivers.
These factors indicated that Uber had a level of control over its drivers that was consi-stent with the drivers being workers for Uber, in that they personally undertook to do or perform work for Uber. The drivers were not acting totally independently and autono-mously, as a self-employed contractor would. The tribunal found that the drivers were workers and not independent contractors for so long as the driver had turned on the app, was ready and willing to accept fares and was in the territory in which they were authorised to drive. The tribunal's decision is not binding on other Tribunals but in 2017 it is being appealed to the Employment Appeals Tribunal, which has the ability to create binding precedent.
Meaning of "employment" for discrimination purposes
So far in this section, the discussion has concerned employment status for the purposes of the ERA (which covers matters such as unfair dismissal). A similar definition of worker status is included in other legislation on working time (which includes holiday pay) and national minimum wage. Discrimination rights, however, are treated slightly differently: the Equality Act 2010 (EA 2010) affords protection against discrimination to all persons in "employment" as defined by the EA 2010. There is no distinction made in the EA 2010 between employees and workers, as there is in the Employment Rights Act 1996 (ERA) (see above). "Employment" in the context of the EA 2010 is wider than in the ERA and extends beyond employees, to some persons who would be considered workers under the ERA (as described in the paragraph above "worker status").
The EA 2010 defines "employment" as:
• "employment under a contact of employment, a contract of apprenticeship, or any other contract personally to do work";
• crown employment (including Government Ministers and Civil Servants);
• employment as a member of the House of Commons or House of Lords staff.
Unlike the ERA test for "employee", the EA 2010 test does not specifically exclude those running their own business and working for clients or customers. However, the cour-ts have introduced a similar qualification by a different route. Therefore, for practical purposes, employees and workers will all be entitled to protection from discrimination under the EA 2010. Certain independent contractors may also be protected but not under the employment provisions of the EA 2010. For example, the EA 2010 provides specific protection against discrimination for police officers, partners, barristers and office holders such as directors. For completeness, it is worth pointing out that volunteers (e.g. to a charity) are not "in employment" and so do not benefit from protection from discrimination under the EA 2010.
Meaning of employee for tax purposes
The tests for employment status are similar in both the employment tribunal and the tax tribunals but despite this, neither test is determinative of the other. This can have confusing results. For instance, the UK tax authority (HMRC) may deem the individual to be an employee for tax purposes, notwithstanding the fact that the individual is not con-sidered an employee for employment law purposes. This may occur where the individual is considered a "worker" for employment law purposes (so is entitled to holiday pay and national minimum wage). In practice, when an individual's employment status has been as determined by an employment tribunal, this might influence their tax status (which will be determined by HMRC or a tax tribunal), but this is not always the case.
b. General Differences in Tax Treatment
There are a number of tax benefits from holding independent contractor status:
• the individual will be responsible for payment of their own tax by self-assessment;
• payment for the individual's services will not be "earnings" for income tax purposes;
• there will be no liability for class 1 National Insurance Contributions (NICs);
• the individual alone is responsible for class 2 NICs and class 4 NICs;
• the individual may need to register for Value Added Tax (VAT) depending on level of turnover.
c. Differences in Benefit Entitlement
Workers are entitled to certain employment rights, including rights to:
• the National Minimum Wage and National Living Wage;
• protection against unlawful deductions from wages;
• statutory paid holiday of 5.6 weeks per year (including public holidays);
• statutory rest breaks including night breaks;
• not work more than 48 hours on average per week or to opt out of this right if they choose;
• protection against unlawful discrimination;
• protection for ‘whistleblowing’ - reporting wrongdoing in the workplace;
• not be treated less favourably if they work part-time;
• the right to be accompanied to a disciplinary or grievance hearing by a fellow worker or a trade union representative;
• the right not to be subject to a detriment, or offered inducements in relation to trade union membership;
• the right to be automatically enrolled in a pension scheme.
Some workers may also be entitled to:
• statutory sick pay (if their earnings are liable for class 1 National insurance contributions (NICs));
• statutory maternity pay (includes directors whose earnings are taxed in the same way as employees and non-employees who are "employed earners" for NIC purposes, such as agency workers other than models and home workers).
Agency workers have specific rights from the first day at work (see section below for further discussion of agency workers).
All employees are workers. But employees have extra employment rights and respon-sibilities that do not apply to workers who are not also employees. Rights available to employees include all of the rights workers have (see above) and:
• statutory leave and pay for maternity, paternity, adoption and shared parental leave (note - workers are only entitled to statutory maternity pay);
• rights on dismissal (see section below);
• right to request flexible working;
• right as a fixed term worker not to be treated less favourable than a comparable permanent employee;
• certain rights not to suffer a detriment;
• most rights to time off (including time off for emergencies);
• right not to be refused employment for trade union reasons;
• right to written particulars of employment and itemised pay statement;
• remuneration on suspension on medical grounds;
• right not to be suspended on maternity grounds;
• right of shop and betting employees to refuse Sunday working.
Some of these rights require a minimum length of continuous employment before an employee qualifies for them. For example, an employee requires two years' continuous employment before being entitled to a redundancy payment or to claim unfair dismissal.
Independent contractors who are not workers have very limited statutory rights since the relationship with their client is governed by agreed contractual terms. A self-employed woman may be entitled to claim maternity allowance but all the other benefits relating to employees and workers described above will not be relevant.
d. Differences in Protection from Termination
Employees benefit from a range of statutory protections from dismissal including, for example:
• statutory minimum periods of notice;
• written statement of reasons for dismissal;
• right not be unfairly dismissed;
• statutory redundancy payment;
• rights on employer's insolvency and to benefit from the state guarantee fund.
Workers, on the other hand, do not benefit from any of the above protections on termi-nation. However, there are some indirect protections available through statute on termi-nation of a worker's contract:
• for a discriminatory reason (such as a reason relating to sex, race, sexual orientation, religion or belief, age); or
• by reason of having made a protected disclosure (whistleblowing).
e. Local Limitations on Use of Independent Contractors
The main limitation on the use of independent contractors in the UK is the risk that they will be re-classified as employees or workers. See below for more information on this risk.
f. Other Ramifications of Classification
Implied duty of mutual trust and confidence
Under the common law, there is an implied duty of mutual trust and confidence in all employment contracts. This term was developed and reformulated but was finally confirmed in the case of Malik and another v Bank Of Credit & Commerce International SA (in compulsory liquidation) [1998] AC 20 as follows:
"The employer must not, without reasonable and proper cause, conduct itself in a man-ner calculated and likely to destroy or seriously damage the relationship of trust and confidence between employer and employee."
The obligation ensures that both parties are protected from acts that are not prohibited by statute or the contract of employment e.g. an obligation on the employer to protect the employee from being bullied by other employees. There is no implied duty of mutual trust and confidence found in contracts for services, therefore independent contractors and their clients are not subject to this duty.
Vicarious liability
Companies will generally be liable for the acts done by employees or workers in the course of employment. The general rule for independent contractors is that clients will not be liable for negligent or tortious acts committed by an independent contractor in the execution of the work for which they were engaged.
However, clients may be liable for any loss suffered as a result of a breach of a "non-dele-gable duty" by an independent contractor. These "non-delegable duties" may arise either under statute or at common law. To avoid liability the client must show that it engaged a reasonably competent individual to perform the work and ensured that the individual adhered to a reasonable standard of care.
g. Leased or Seconded Employees (including Agency Workers)
Businesses, which need staff on a short term basis, perhaps to deal with an increase in workload or for a one-off project, might consider using agency workers. The agency wor-ker will obtain work from, and is paid by an agency, known as an "employment business" (defined by the Employment Agencies Act 1973 as 'the business of supplying people in the employment of the person carrying on the business, to act for, under the control of other people in any capacity') and is not directly employed by the client. Seconded employees operate within a similar tripartite arrangement in circumstances where the employee is assigned, by their original employer, to a third party on a temporary basis. See further below.
The agency will usually have numerous agency workers on its books, and each agency worker may be registered with a number of agencies in order to have the best chance of obtaining work. The agency worker is not under an obligation to accept work when offered, but once accepted they will be bound by the terms of the particular assignment. The end user will pay the agency for the work done and the agency will, in return, pay the agency worker.
The agency will have an agreement with the client, and a separate agreement with the agency workers, but there will not usually be an agreement between the agency worker and the client. In light of this three-party arrangement, the agency worker is likely to be classed as a worker and not an employee. However, occasionally the employment status of an agency worker may not be clear, so the rights they are afforded will depend upon whether they are considered to be an employee or worker. The agency worker might therefore seek to establish that they are an employee of the agency or of the client (although they cannot be both). Sometimes the contract between the agency and the agency worker is explicitly a contract of employment and in those circumstances the chances of there being an implied contract of employment between the agency worker and the client are small.
The employment status of the agency worker will depend on the circumstances and the existence of the elements outlined above in the Ready Mixed Concrete case. The tribunal will be looking for the existence of a contract of service with either the agency or the client. This is to establish whether an agency worker is either party's employee or worker. The difficulty in defining a contract of service in these particular arrangements is mainly due to the roles exercised by both the agency and client which are normally executed by one employer.
Where an agency worker has worked for an end user for a long period of time, there is an increased risk that they will claim that there is an implied contract of employment between them and the client. The tribunal will look at the reality of the situation, to ascertain who actually exercises sufficient control over the worker. Whilst the tribunal will not assume one way or the other, a contract should only be implied where "neces-sary" to explain the work undertaken by the worker for the end user. Usually, a contract of service will not be implied since in most cases the client will not specify any preferen-ce as to which worker is supplied to them so it will be difficult to establish that there is any obligation on the client to provide work to that particular agency worker, or for that worker to accept work. However, the tribunal will consider whether the parties have changed their behaviour since the start of the relationship. Factors that will be relevant include the client's day to day control, such as whether the agency worker has been di-sciplined under the disciplinary procedures of the end user, or whether the end user has acted as though the worker was a fully integrated member of staff.
Aside from the rights granted to agency workers based on their employment status, agency workers have various additional statutory protections. A key protection (under the [Agency Workers Regulations], which are the UK implementation of the [Agency Workers Directive] is the right to the same pay and basic working conditions as perma-nent staff after a 12-week qualifying period. Other rights include:
• protection from discrimination;
• right to receive the national minimum wage;
• right to statutory sick pay if they satisfy the definition of an 'employed earner' for national insurance contributions purposes; and
• rights to statutory maternity, paternity, adoption or shared parental pay from the agency if they are considered to be an 'employed earner' for national insurance contributions purposes and if further conditions are met.
A seconded employee is an employee that is assigned to work for a different part of their organisation or for another organisation (the assignment can therefore be internal or external) and is for a temporary basis. The terms of the secondment will be set out in a secondment agreement, which will outline the relationship between the original employer and the third party host that the employee is assigned to.
The general view is that the first organisation, the employee's original employer, will remain their employer throughout the secondment. It may be said that the services provided by the employee have simply been transferred to the third party host tempo-rarily. However, occasionally an employment relationship may be established between the seconded employee and the third party host if the requisite level of control, mutual obligation and personal performance elements from the Ready Mixed Concrete case mentioned above are present.
The employment status of a seconded employee is important because it will impact upon the rights and the protections they are afforded as an employee or a worker. A finding that the secondee is the third party host's worker or employee will give rise to the se-condee having statutory rights against the third party host (see list of employee/worker rights above). An employee on secondment to the UK may in any event be able to bring UK claims against his/her non-UK employer.
h. Regulations of the Different Categories of Contracts
There are also 'casual workers' who may be engaged in a variety of ways, such as on a part time or fixed term contract, or a 'zero hour' contract under which the employer is under no obligation to provide a minimum amount of work but the individual is generally obliged to be available to work when asked. There are also 'homeworkers', who may work exclusively at home on a full-time or part-time basis.
The test to determine the employment status of these individuals is exactly the same as for any other individual. If the factors that establish an employee or worker are found in the relationship then they will be recognised as such. As explained above, one parti-cular factor, mutuality of obligation, is key in determining employment status. Casual work often involves individuals being engaged sporadically so that there is insufficient mutuality of obligation for the casual worker to be recognised as an employee or worker. However, in St Ives Plymouth Ltd v Haggerty UKEAT/0107/08, the court found that there was sufficient mutuality of obligation in the gaps when no work was performed to infer the existence of an 'umbrella contract'. If the individual can show that there is an ‘um-brella' contract of employment which continues to exist during periods when he or she is not working, then it is likely that they will be considered an employee or worker, subject to meeting the other parts of the tests.
