Calling a Spade a Spade: Employment Status Explained - Part Three

Part Three - Other tests and the impact of Uber for employers and individuals

You have no doubt reached the undeniable conclusion that grappling with the issue of employment status is no easy feat! Unfortunately, simply (and that is said with tongue firmly in cheek) analysing whether the factors constituting the "irreducible minimum" (personal service, mutuality of obligation and control) are present, is not the end of the story. It is also necessary to look at all the other elements of the relationship to determine its true nature. Further important tests include whether the person is performing services as a person in business on their own account and whether they are free to market themselves to the world at large or subject to some degree of exclusivity of service. Taken together, these have become known as the "economic reality" test, involving consideration of a wide range of additional factors, which may include:

• Who provides and maintains the tools, uniform or equipment used?
• Whether the person hires their own help.
• The degree of financial risk adopted by either party.
• The degree of investment in and management of the business.
• Whether the individual has the opportunity to profit from their own good performance.
• Whether the person is paid a fixed wage or salary.
• Whether the person is paid when absent due to holiday or sickness.

It is worth noting that all of these factors offer some indication as to where the control lies within the relationship. A factor which has been highlighted by the Uber case as being of vital importance.

In Hall (HM Inspector of Taxes) v Lorimer [1994], a case where the Court of Appeal was asked to determine an individual's status for tax purposes, other factors were also identified as relevant. Mr Lorimer was a vision-mixer (a skilled TV editing role) and was typically retained by approximately 20 different companies on between 120 to 150 separate assignments per year. Rejecting HMRC's argument that Mr Lorimer was an employee of each business with whom he contracted, the Court took into account:

• The short duration of each engagement.
• The number of separate engagements entered into.
• The degree of independence Mr Lorimer had from each particular paymaster.
• The substantial expenditure Mr Lorimer incurred in the course of obtaining and organising his engagements.

The Court made it clear that determining status is not a mechanical exercise of running through items on a checklist. A picture has to be painted from the accumulation of detail and not all details are of equal weight or importance to all situations. Each case will be unique. Analysing the facts behind every relationship and applying all the various tests to paint ‘an overall picture’ is the task that must be undertaken for each and every set of circumstances.

So, let’s take a look at some of the other factors to bear in mind:

Pay and financial risk

An individual who bears the financial risk of a business will often be in business on their own account. Whether and how the "employer" is obliged to pay the individual is also clearly an important factor. An individual who is paid per job or by commission only, or has the right to set their own rates, is more likely to be a SEIC (although this is not conclusive).

In Stringfellow Restaurants Ltd v Quashie [2012], the Court of Appeal agreed with an employment tribunal that a lap dancer at Stringfellows nightclub was not an employee and, therefore, could not pursue an unfair dismissal claim. The most important factor was that Stringfellows was under no obligation to pay the dancer anything at all. She negotiated her own fees with customers and risked being out of pocket on any given night if the commission she owed to Stringfellows outweighed the fees she earned from customers. In the Court's view, it would be unusual to find an employment relationship where the individual is paid exclusively by third parties and bears the economic risk. This conclusion was reinforced by the terms of the dancer's contract, under which she accepted that she was self-employed.

Paying an individual through the payroll and operating PAYE can also be a further indicator of employment status. Conversely, a failure to do so does not necessarily indicate that the individual is a SEIC for employment status purposes. While the test applied by HMRC to determine if an individual is subject to PAYE is similar to that applied by employment tribunals, the tests are not identical and HMRC's opinion is not binding on an employment tribunal or court.

In Secretary of State for Business, Innovation and Skills v Knight the EAT held that an individual could still be an employee even if they have not exercised their contractual right to be paid. Mrs Knight, the Managing Director and sole shareholder of a company, remained an employee (and so entitled to a redundancy payment from the National Insurance Fund) despite electing not to receive pay for two years in an attempt to keep the company afloat. In finding that she was an employee, the EAT accepted that notional, rather than received, pay was sufficient consideration. Similarly, in Stack v Ajar-Tec Ltd [2015], the fact that a director and shareholder had worked without pay for three years did not automatically mean that he was not an employee. The Court of Appeal found that there was an implied term that he would be paid a reasonable amount from a reasonable start date in order to give business reality to the arrangements.

Integration into business

The degree of integration into the "employer's" business can be indicative of employment status. Factors such as whether an individual carries out work substantially similar to that performed by the de facto employees; whether they have line management responsibility for employees; including them within the scope of disciplinary and grievance procedures, occupational benefit schemes and bonus schemes; giving them a company email address; including them in the internal telephone directory and inviting them to work social events may suggest that they are integrated into the business to a sufficient degree to warrant employee status.

Exclusivity and other activities

An employee may well be restricted from working for others, as employers expect exclusive service. Consequently, if the individual is free to provide services to others, and in fact does so, that may be a sign of a SEIC.

This can be a misleading factor as it is perfectly possible for a person to have more than one part-time employment. In the case of zero hours contracts, exclusivity clauses are not enforceable and individuals working under a zero hours contract must be permitted to carry out work under other contracts. However, ERA 1996 provides that the effect of the ban on exclusivity clauses must be disregarded when determining the employment status of a zero-hours worker.

Nevertheless, in Hall v Lorimer (see above) the number of businesses by whom the individual was engaged and his independence from any particular paymaster were cited by HMRC as relevant factors in determining self-employed status for tax purposes. This must be contrasted with the Supreme Court decision in the Uber case which pointed out that it may be possible to work part-time for a number of employers both consecutively and possibly simultaneously – as in the case of the Uber drivers who were available for work for a number of companies simultaneously in a fashion now known as “multi-apping”.

This obvious result would be an administrative nightmare for each “employer” but was nonetheless not ruled out by Lord Leggatt. The question may then turn on an analysis of other factors including, of course, the irreducible minimum. The multi-apping scenario poses the interesting question of whether having numerous “employers” can in fact mean that the individual is deemed to be working for no-one? Hardly a satisfactory conclusion for vulnerable workers in positions of subordination and dependency.

Description applied by the parties

The manner in which the parties describe themselves and their intentions will not be decisive if this does not reflect the reality of the situation. In Young & Woods Ltd v West [1980], an individual asked to be treated as self-employed but was in fact treated no differently than employees carrying out the same job (save that he was not given holiday entitlement or sick pay and was not subject to the organisation's disciplinary procedure). The Court of Appeal, applying the irreducible minimum, nevertheless held that he was an employee.

Requiring an individual to hold themselves out as an employee to customers of the employer is unlikely to help in a finding of SEIC status. Similarly, the fact that the parties choose to operate their relationship as one of SEIC for tax purposes (for example, invoicing for services rendered with VAT applied) does not mean that a court will find that no employment status exists.

An employer asserting SEIC status for its staff, knowing that it is not the truth of the matter, is clearly misrepresenting the facts. However, a contract of employment will only be void for illegality in these circumstances if it can be shown that the employee, knowingly and in bad faith, falsely represented the underlying facts of the relationship. Given the complexities of determining employment status and the potential for such a situation to arise where there is a relationship of subordination and dependency, it is unlikely that many employment contracts will be held to be void for illegality. As such, staff who establish employee status via the courts and tribunals will usually be able to assert their employment rights without falling foul of any argument by their employer that the contract between them was illegal.

In Uber, the Supreme Court held that since worker status was created by legislation containing provisions which prevent employers contracting out of the protections it provides, any terms purporting to classify the parties' legal relationship or limit worker protections are void and must be disregarded. This calls into question whether illegality will ever prevent an individual claiming employee or worker status even where they have colluded with the employer to be taxed as a SEIC and in bad faith, falsely represented the underlying facts of the relationship.

Nature and length of engagement

The nature of the engagement and its length may be relevant. A person engaged on a permanent basis might be more likely to be an employee than someone taken on for a specific task, where the engagement lasts only as long as the task. The former situation often brings with it greater control, through the employer's ability to reallocate the individual to other tasks.

Similarly, it is sometimes suggested that long periods working for one organisation may be more likely to signal an employment relationship. However, this may be for no better reason than that the longer the relationship continues the more likelihood there is of it being tested, especially if it exceeds two years (at which point the potential to claim unfair dismissal and a redundancy payment arise).

Benefits and insurance

Generally speaking, the inclusion of a person in benefit schemes operated by the employer, such as share option schemes, health insurance and bonus schemes, will tend to indicate employee status because it may signal greater integration and permanence. It could indeed be the case that the benefits are only open to employees (under the relevant scheme rules or the terms of the relevant insurance policies), so employment would in fact be a necessity. However, payment of statutory sick pay or statutory maternity pay to an individual will not necessarily indicate an employment relationship. Entitlement to holiday is more complex as individuals who qualify as "workers", as well as full-blown employees, have a statutory entitlement to paid holiday and this issue will not be determinative but simply another factor to be weighed in the balance.

Uber and the diminishing relevance of the written contract

And so, we come back to the most important case in recent times on worker status - Uber BV v Aslam and others [2021]. In the Supreme Court the judge, Lord Leggatt, held that worker status was a question of statutory interpretation NOT contractual interpretation. The written documentation between Uber and the drivers, whilst not irrelevant, was not the correct starting point. Before Uber the position was set out in the case of Autoclenz v Belcher: when determining an individual's employment status, employment tribunals could disregard terms included in a written agreement where they did not reflect the genuine agreement of the parties. However, the starting point was the contract and it was for the individual to produce evidence that what happened in reality was not what was written in the contract. If they could not, then the contract terms prevailed. In Uber, there was no written agreement between drivers and Uber London Limited. However, Lord Leggatt decided that it was necessary to consider the purpose of the legislation, which was to protect vulnerable individuals in a position of subordination and dependence in relation to another person who controls their work. The key question was therefore, the degree of control the employer had over the individual. The greater that control, the more likely it was that the individual was a worker.

The Uber case has effectively kicked the written contract terms into the long grass, preferring instead to focus on the various tests arising in the case law to decide whether an individual is sufficiently subordinate and dependent on their employer to fall into the category of employee or worker, as opposed to a SEIC (who is providing services as a business or profession on their own account).

In conclusion, there are four key points to note as we move in the direction of greater worker protection:

1. The emphasis, post-Uber, is on the reality of the relationship between the parties and the written contract is no longer the starting point for this assessment.
2. Each case is unique and will require a full assessment of the background facts to determine the true nature of the relationship.
3. The starting point is whether there is a relationship of dependency and subordination and not what the contract says.
4. Control is ‘king’ when it comes to assessing who is boss.

What this means in practical terms is two-fold:

1. Call a spade a spade (and not a fork) in your documentation – it will be a false economy to attempt to hide behind a sham contract:
   1. Clever contracts which falsely, or inadvertently, mis-categorise staff to avoid employment rights, which are the privilege of employees or workers, may as well be torn up.
   2. Similarly, clever contracts aimed at categorising staff to avail themselves of a beneficial tax status may equally be thrown on the fire.
2. Claims founded on re-categorisation of employment status will be longer, costlier and involve more witnesses:
   1. The written contract is no longer the starting point and may get only a ‘nod’ from the courts and tribunals after the reality of the situation has been assessed.
   2. Assessing the reality will require evidence as to the day-to-day occurrences of the situation – this may involve an increased number of witnesses, detailed and lengthy witness statements and larger trial bundles incorporating evidence as to incidences of substitution, working patterns, other job roles, and the paper-trail of how a particular category of staff has been treated generally by their employer, beyond the individual in question.

There are obviously two sides to every coin. While Uber was seen as a victory for workers the flip side is that cases to decide employment status are going to be more involved and therefore costlier. This may serve as a deterrent to all but those who have a Union-backed class action. But forewarned is forearmed and now, more than ever, is the time to call a spade a spade and recognise the true employment status that your staff may enjoy.

In forthcoming blogs, we will examine the knotty issue of holiday pay. Many of the recent employment status cases have focused on attaining worker status for those involved for the purpose of claiming back-dated holiday pay previously denied to them. Timing is everything! We will look at the potential for claims, how far back in time they can go and how long an individual has to make a claim before the limitation window closes. Watch this space…