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Employee, worker or self-employed: Why does it matter?

Employee, worker or self-employed: Why does it matter?

Published: 16 May 2019

Under the current law, there are three categories of individuals providing their services in the job market:

  • Employee;
  • Worker; and
  • Self-employed (independent contractor, freelancer, consultant).

The so-called gig economy seems to now have connotations of employers seeking to avoid their obligations to those who work for them.

This is often not the case, especially in the tech sphere, where working practices have arisen from individuals wanting to work more flexibly, perhaps for more than one company at once to increase their knowledge base and skillsets, or tech companies who need or want to utilise particular expertise, but don't yet have the funding to take on permanent staff.

Whilst they may do near identical work, the question of employment status can be critical to the rights and entitlements of the individuals concerned and correspondingly the obligations on companies.

Whilst there are legal definitions, set out in statute (as set out below) these are not comprehensive and the Courts have therefore had to add further classification through case law - which many will be aware of, given the high profile cases on employment status involving Deliveroo, Addison Lee, Pimlico Plumbers and Uber to name but a few.

The law defines an Employee (section 230(1) Employment Rights Act 1996) is:"an individual who has entered into or works under (or, where the employment has ceased, worked under) a contract of employment".

In contrast, Self-Employment is not defined in statute and is where an individual carries on a business in their own right, under a contract for services.

Anyone who is neither an Employee nor Self-employed, is likely to be a Worker. Worker has become a kind-of intermediate class for those who are not employees, but at the same time could not be described as Self Employed.

So, what differentiates an Employee from a Self-Employed?

Assessment of status does remain somewhat of an art rather than a science, and should be based on what actually happens in practice rather that what is contained in the relevant contract, but the central determinative factors seem to be:

  1. Mutuality of Obligation; if the employer is obliged to provide regular work, and the individual is under an obligation to do it, then this indicates an employment relationship.
  2. Personal Service; where the individual is required to provide their services personally, and there is no unqualified right of substitution, this again suggests an employment scenario.
  3. Control/Exclusivity; an employee is subject to the control of the employer and is not normally free to work for other organisations without their employers' express permission, and they may be subject to restrictive covenants.
  4. Pay and Benefits; an employee will be paid a fixed amount on a regular payment date -even if there is not enough work to keep them fully occupied. Pay is taxed via PAYE, they may also be entitled to participate in an employer's benefit schemes.

Why does employment status actually matter though? Well, it's because employees tend to be better protected in law, be entitled to all statutory payments (such as SSP and holiday pay) and indeed some core legal protections only apply to employees (unfair dismissal and right to receive a statutory redundancy payment, for example), employees will have the benefit of an employer's liability insurance and an employer will be vicariously liable for the acts of employees (only) during the course of their employment.

HMRC will also have regard to employment status in determining liability to income tax or VAT.

A wrong categorisation of employment status can unfortunately cause enormous headaches for a company in terms of financial or employment claims, fines and reputational damage. Worse still if there are a number of individuals who have the same issues.

A court will look at the defacto situation of the individual, rather than relying on what their contract says; they may have a contract for services and be called a Consultant - but if they are treated like an employee by the business, then its highly likely they will be determined to be an employee, so it's worth taking legal advice to ensure that you "get it right" at the outset.

This article was first published by Computing Magazine on 16 May 2019.

Andrea London | Partner | Head of Employment

For further advice, or to discuss your case, please contact Andrea London at andrea@fletcherday.co.uk or on 020 7632 1442

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.