Solicitor Natalie Ruane from Burnetts explains why the employment status of an individual is important.
The employment status of an individual is important because certain legal rights only apply to employees – they do not apply to workers or those who are self-employed.
Unfortunately, the question of what makes someone an employee as opposed to a worker is not that easy to answer. There have been lots of cases on this topic but it is still difficult to “pin down” a clear and definitive test.
The Employment Rights Act 1996 states that an employee is an individual who has entered into, or is working under, a contract of employment. A contract of employment is then defined as "a contract of service or apprenticeship".
The key element, as far as the definitions are concerned, is that an individual must agree to serve another, as opposed to merely offering to provide certain services, if there is to be an employment relationship.
Not many people would recognise themselves as having agreed to “serve” but the Employment Tribunals have deemed that the relationship is one of service when there is an agreement which includes obligations of personal service, mutuality of obligation and control.
Personal service means that the individual must be obliged to do the work him or herself. If the individual can send someone else to do the work for them (a substitute), he or she is more likely to be self-employed. Having said that, the inclusion of a substitution clause in a contract is normally not enough. To validly create a worker or self employed relationship, the individual must be able to use that power of substitution to decide not to do the work him or herself on any given occasion. Including a substitution clause when the individual cannot, in reality, do anything but turn up him or herself, will leave a risk that the individual will be deemed to be an employee despite what the contract says.
Mutuality of obligation is the obligation on the employer to provide work, coupled with the obligation on the individual to accept that work. For employers, this usually means agreeing to provide specified work for an individual or business. On the employee’s side, the individual usually agrees to complete any work offered in exchange for pay.
The most important element though is often control. This is generally described as the power to decide 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. The less autonomy an individual has over these matters, the more likely it is that he or she will be an employee. However, if the individual has the freedom to determine what, when and where for his or herself then he or she may not be an employee.
It is important to establish whether an individual is an employee or not because some of the most important legal protections only apply to employees. In particular, the right not to be unfairly dismissed and the right to receive a statutory redundancy payment.
Having said that, just because an individual is not an employee does not mean that he or she has no protection. It is just that the protections are far less.
The idea of “worker” status, where an individual has some protection, is a legal construct. Under statute, workers have been granted: protection against unlawful deduction from wages; the right to receive the National Minimum Wage; rights to annual leave and adequate rest breaks; protection when making a protected disclosure (whistleblowing); and, amongst other things, the right to pension contributions from the business under the pension auto-enrolment scheme.
Other differences include:
• Only employees are covered by the Acas Code of Practice on Disciplinary and Grievance Procedures.
• Only employees will be automatically transferred to any purchaser of their employer's business under the Transfer of Undertakings (Protection of Employment) Regulations 2006.
• An employer is required to take out employer’s liability insurance to cover the risk of employees injuring themselves at work. Self-employed individuals or independent contractors may not, in every case, be covered by this insurance and may want to consider entering into appropriate insurance for their own benefit.
• Employers owe employees statutory duties relating to health and safety. Independent contractors may not be covered under these duties although they will be covered under the employer's common law duty of care in respect of occupier's liability.
As you will see, establishing employment status isn’t just about whether a company needs to follow the Acas Code when dismissing someone or the type of tax that needs to be paid. Employment status determines what the obligations are on each side as well as the level of protection enjoyed by each party.
If you have any questions about employment status, contact Natalie Ruane on 01228 552222.
About the author
Natalie is a Partner and leads the Employment Law & HR team and specialises in education.