In recent times a myriad of models of working have developed, further complicating the already murky issue of whether an individual is an employee, a worker, or a self-employed independent contractor (SEIC). The "gig economy", where individuals are engaged by businesses on a flexible, ad hoc basis, has presented problems for determining employment status, both for the purposes of employment rights and tax liability. Names, labels and terminology can sometimes hinder, rather than help. Is an individual a casual worker? Are they “on the bank”? Do they have a zero-hours contract? Are they a freelancer, a consultant, a contractor, on the bank, casual labourers, seasonal workers or are they genuinely self-employed? And why does it matter anyway?
In this series of three blogs we will explore the following:
1. 1 Moving in the direction of greater worker protection.
1.2 Why the wrong label matters – the hierarchy of rights.
1.3 Categories of employment status – the three degrees.
2. Getting it right – the “irreducible minimum”.
3. Other tests and the impact of Uber for employers.
Read on to learn more about the importance of calling a spade a spade… except where it’s a five-pronged implement for manual digging!
- 1 Moving in the direction of greater worker protection.
In view of the precarious nature of engaging individuals on short-term contracts rather than offering permanent jobs, and the scope for exploitation of vulnerable individuals, courts and tribunals are shifting away from what is written in the contract between the parties and focusing instead on the reality of the relationship between them in practice. The driving force behind this move away from interpreting contractual terms, towards a deeper analysis of the relationship, appears to have been a policy decision by Lord Leggatt, in the now infamous Supreme Court case of Uber BV v Aslam and others , to protect individuals who are in a position of subordination and dependency and are being denied their statutory rights as employees or workers simply because they have been ‘labelled’ (or rather mis-labelled) in their contracts as SEICs . Firms, such as Uber, who have adopted “creative contracts”, drafted to offer only SEIC status, are coming under increasing fire from the courts. In short, the clear message to employers is that you cannot hide behind a sham contract.
Following ‘hot on the heels’ of the Supreme Court decision that Uber drivers are workers, not SEICs, the Court of Appeal has recently refused permission for the taxi firm, Addison Lee, to appeal against the Employment Appeal Tribunal (EAT) decision that its drivers are workers too. Another blow for big firms operating in the gig economy but a huge victory for Addison Lee drivers and workers’ rights in general. It is fair to say that the courts are definitely moving in the direction of more worker protection.
The modern workplace has evolved rapidly, with the development of the ‘gig economy’ and new ways of working. Freelance workers, contractors working via personal service companies, and workers accessing web-based platforms are now all key players in the modern workplace. With the tax and employment rules struggling to catch up, employment status is very much in the spotlight. Failing to correctly categorise your staff can lead to problems further down the line, not least from ‘mis-labelled’ staff claiming employment rights but also from HMRC claiming unpaid tax under the IR35 regime.
There are two categories of workers enjoying differing levels of employment protection: employees and statutory workers. The third category – the self-employed independent contractors (SEICs) - do not enjoy the statutory protections available to employees or workers. But beware the labels that are applied as they may be meaningless, unless they reflect the reality of the situation. As the case law grows and develops it is becoming very clear that what matters most in categorising the status of staff, is not how you label someone but rather, what they actually do in practice. As Lord Templeman graphically put it, as long ago as 1985 in the famous case of Street v Mountford: “The manufacture of a five-pronged implement for manual digging results in a fork even if the manufacturer, unfamiliar with the English language, insists that he intended to make, and says he has made, a spade”!
And so, it goes for employees, workers and SEICs. No matter how carefully drafted the contract between the parties, no matter whether both parties are in agreement, no matter what the intentions are of each, calling workers, SEICs or employees, workers will not make them so; in much the same way as calling a fork a spade does not make it a spade!
- 2 Why the wrong label matters – the hierarchy of rights.
There is a hierarchy of employment rights with employees at the top, SEICs at the bottom and workers somewhere in the middle. The distinction between the three categories of employee, worker and SEIC is significant for a number of reasons including, but not limited to, the following:
- Employers and employees have obligations that are implied into the contract between them (for example, the duty of mutual trust and confidence).
- Most of the core legal protections, arising from the Employment Rights Act 1996 (ERA 1996), only apply to employees - most notably the rights on termination not to be unfairly dismissed and to receive a statutory redundancy payment. Workers and SEICs enjoy no such rights.
- Only employees are covered by the Acas Code of Practice on Disciplinary and Grievance Procedures. Workers and SEICs are not.
- Only employees will be automatically transferred to the purchaser, or new contractor, on a business transfer or service provision change, under the Transfer of Undertakings (Protection of Employment) Regulations (TUPE). Workers and SEICs do not transfer.
- Only employees enjoy automatic unfair dismissal protection on a TUPE transfer, where the reason for the dismissal is the transfer itself. Workers and SEICs have no such protection.
- Only employees are entitled to the information and consultation requirements provided for on a collective redundancy or TUPE transfer. There are no such requirements in relation to workers and SEICs.
- An employer is vicariously liable for acts done by an employee in the course of their employment.
- An employer is required to take out employer’s liability insurance to cover the risk of employees injuring themselves at work. Workers and SEICs may not, in every case, be covered by this insurance and may need to consider entering into appropriate insurance for their own benefit.
- But, workers, as well as employees, are also covered by some important protections including in relation to paid holidays and the minimum wage. SEICs have no such rights.
- Employers owe employees and workers statutory duties and protections relating to health and safety.
- Employers owe employees and workers statutory duties and protections relating to discrimination and whistleblowing.
- The tax treatment of an individual recognises only two categories - employees (taxed under PAYE) or a SEIC. HMRC does not recognise the category of 'worker' and must make its own decision on whether the person is either an employee or a SEIC to determine the tax regime into which they correctly fall.
There is an obvious hierarchy of rights at play and it is often for this reason that employers are keen to categorise individuals as SEICs rather than workers or (the most protected category) employees. Conversely, it may be the case, that for tax purposes, an individual is keen not to be categorised as an employee. However, that view must be balanced against the loss of employment rights. This is often the reason why individuals seek to challenge their employment status on termination of their contracts, arguing that they were, in fact, employees and entitled to protection against unfair dismissal and/or a redundancy payment. Or, where individuals seek to challenge their categorisation as SEICs to argue that they are workers and entitled to the minimum wage or holiday pay – as in the much publicised cases in the “gig economy” involving delivery drivers (see Uber, Deliveroo, Yodel), taxi drivers (see Addison Lee) and plumbers (see Pimlico Plumbers). Or, where individuals, employed via their own personal services company seek to argue that they are neither employees nor workers but rather SEICs for the purpose of avoiding higher taxation under the IR35 regime (see HMRC v Atholl House Productions Ltd, involving the journalist and broadcaster, Kaye Adams).
Given that the direction of travel in the courts and tribunals is towards protecting subordinate and dependent individuals there is an increasing risk that individuals will be incentivised to challenge their employment status in the hope of benefiting from the protection of the statutory rights associated with employee and worker status. That is borne out by the flood of cases coming through the courts and tribunals in past few years, and which continues apace, with many key cases soon to be determined on appeal. The financial consequence for employers goes far beyond the expense of lengthy litigation when successful claims can lead to significant awards for unfair dismissal, statutory redundancy payments, injury to feelings and backdated holiday pay and wages.
- 3 Categories of employment status – the three degrees.
As we know, in employment law, three categories of individuals are recognised as distinct in providing their services in the job market. To recap, these are:
- Workers; and
- Self-employed independent contractors (SEICs).
The question of whether an individual is an employee is not easy to answer. The cases regarding employment status go back many years and, to this day, it remains unhelpfully impossible to set down a clear set of defining criteria against which an individual's status can be definitively determined. In recent times, most notably in the Uber case, the courts have demonstrated an increasing willingness to move away from what the written contract says and to consider instead the degree to which the individual is dependent on, and subordinate to, their employer. As we will see, this has only added to the difficulty of determining employment status.
Having understood the importance of getting employment status right, the obvious question is: where do we start? There are statutory definitions for the first two categories of employee and worker. These are not comprehensive, and the current position has been substantially defined through case law.
To conclude part one of this three-part series, we will look briefly at the statutory definitions for an employee and a worker and offer an outline of the developing approach taken by courts and tribunals in shaping those definitions. In part two of this three-part series, we will delve deeper into some of the cases to provide some insight into how those definitions are determined in practice.
1.3.1 Employee status
ERA 1996 contains the most significant legal rights for individuals categorised as employees. ERA 1996 defines an employee as:
"an individual who has entered into or works under a contract of employment".
So far, not particularly helpful and with an obvious focus on the contract. A bit more explanation is provided in the definition of a contract of employment, although that too is brief and on its own adds very little by way of understanding how the categorisation of employment status works in practice.
A contract of employment means:
"a contract of service or apprenticeship, whether expressed or implied, whether oral or in writing".
So, all we know so far is that an employee is someone who has entered into, or works under, something called a contract of service and that this does not need to be in writing. The concept of a "contract of service" has been explored extensively in case law, where it is distinguished from a contract under which a person provides services as an SEIC, this is known as a "contract for services". The terms "contract of service" and "contract for services" have no statutory definition and the category into which a particular contract falls must be determined according to case law. In very simple terms, under a contract of service a person agrees to serve another (this is a subordinate and dependent relationship) whereas under a contract for services a person agrees to provide certain services to another (usually considered to be in business on their own account and neither subordinate nor dependent on the person to whom their services are provided).
1.3.2 Worker status
The binary divide between employees and SEICs was blurred when the hybrid status of "worker" was created by statute. "Worker" status reflects the fact that some individuals, whilst not full-blown employees entitled to the whole range of employment rights, are nevertheless not fully "independent" and are deserving of some statutory protection.
A worker is defined under ERA 1996 as:
"an individual who has entered into or works under either:
(a) a contract of employment, or
(b) any other contract, whether express or implied and whether oral or in writing, whereby the individual undertakes to do or 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 is clear from the first part of the test that all employees are workers. However, it is the second part that has been subject to extensive scrutiny by the tribunals and courts to determine what types of working arrangements fall within its scope.
Taken a face value, the second test appears to have two requirements:
- The individual agrees to carry out the work personally (personal service); and
- The party for whom the work is done is not a client or customer of the individual’s business or profession (individual not in business on their own account).
The key case of Byrne Brothers laid down guidelines for the consideration of each element of the statutory definition. The judge noted that the effect of the definition of "worker" is to lower the "pass mark" for those who fail to reach the high pass mark necessary to qualify as employees – despite this they may still qualify as workers. What the pass mark actually is for worker status and employee status was left undefined and remains a matter to be decided on a case-by-case basis. One thing is certain: this is by no means is a straight-forward exercise and demands careful scrutiny of the case law and the specific facts of each case. The tests are largely the same for both employee and worker status. The pass mark for workers being somewhat lower than for employees. There are no ‘bright lines’ to assist with this process and there will always be border-line cases falling within the blurred spaces between the three categories. Equally as frustrating for lawyers as it is for employers.
In the second blog in this three-part series, we will look in depth at the tests used by the courts and tribunals to determine employment status. Bear in mind, that Uber has not rewritten the previous case law tests but it is has shifted the emphasis onto who is in control in the relationship and away from what is written in the contract between the parties.