The Legal Implications Of Engaging Contractors, Employees And Workers

By Gaynor Beckett - 10th December 2021

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An individual may be an employee, worker or self-employed, and there are many reasons why the distinction between them is significant. Case law has developed the test for determining what employment status an individual may have, although each case will be determined on its own facts and there is a certain degree of unpredictability. Only an employment tribunal can make a final determination of employment status for employment rights purposes.

The Importance of Establishing Employment Status

Correctly identifying the employment status of an individual is crucial for the following reasons:

  • Employers and employees have obligations that are implied into the contract between them (for example, the mutual duty of trust and confidence).
  • Some core legal protections only apply to employees, most particularly the rights on termination of employment granted under the Employment Rights Act 1996 (ERA 1996) (the right not to be unfairly dismissed and the right to receive a statutory redundancy payment). However, workers are also covered by some important protections including in relation to working time and the minimum wage.
  • 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 (SI 2006/246).
  • There is no statutory test to determine employment status for tax purposes. PAYE is often incorrectly categorised as a tax. PAYE is a mechanism under which the employer is obliged to assess and deduct income tax and employee national insurance contributions (NICs) from certain payments, benefits, and notional payments that it makes (or is treated as making) to employees including former employees. The tax and employee NICs withheld represent the employee's tax and NICs liability on that payment.
  • The tax treatment of a person providing services depends on their status for tax purposes as determined by HMRC, using similar but not identical tests to the employment law tests.

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In March 2017, HMRC created an employment status tool that provides an indication of an individual's employment status. The HMRC confirms that engagers and workers can rely on the tool as evidence of an individual's status for tax and NICs purposes if the engager or worker answers the questions, and the answers accurately reflect the terms and conditions under which the individual provides their services. We have included the link here: Check employment status for tax - GOV.UK (www.gov.uk)

In July 2021, HMRC launched a dedicated phone line (to provide a full run-through of the CEST tool) and a webchat for straightforward enquiries about the CEST tool. We have included the link here: Off-payroll working (IR35) - GOV.UK (www.gov.uk)

  • Pensions - Legislation requires all UK employers to automatically enrol eligible jobholders in a pension scheme. To be eligible for auto-enrolment, a worker must qualify as a "jobholder". Jobholders include permanent and temporary employees and agency workers. In addition, the worker must be between age 22 and state pension age and must earn at least £10,000 a year (in the 2021/22 tax year).
  • An employer is vicariously liable for acts done by an employee in the course of their employment. This vicarious liability is unlikely to extend to independent contractors or self-employed individuals.
  • An employer is required to take out employer’s liability insurance to cover the risk of employees injuring themselves at work. Workers 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 organisation's common law duty of care in respect of occupier's liability.
  • Handling personal data under the retained EU law version of the General Data Protection Regulation ((EU) 2016/679) (UK GDPR) will have different implications depending on whether an individual is an employee, a worker or self-employed. Self-employed contractors may have other specific processing obligations.
  • The UK GDPR does not discuss what obligations "workers" have if they process personal data and it is not clear from ICO guidance whether they would be treated as an employee or a contractor for these purposes.

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A Checklist of Factors that Indicate Employed or Self-Employed Status

The following factors indicate that an individual may either be an employee or self-employed for employment rights purposes.

However, individuals not meeting the higher benchmark of being employees may still have worker status if they satisfy some of the employment factors listed below and their situation does not appear to be one of self-employment. While all employees are workers, not all workers are employees.

It should be noted that in determining employment status the courts, tribunals and HMRC will look at all aspects of the arrangement, including the reality of the working relationship compared to the contractual arrangements. No single test will be conclusive in all cases.

In addition, employment tribunals and HMRC apply slightly different approaches to the question of employment status and the result may be different from a tax perspective and an employment perspective. This is particularly complicated by the fact that HMRC has no equivalent of “worker” status and only differentiates between those who are employed and those who are self-employed.

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1.1       Factors indicating employment status

Mutual obligations: The employer is under an obligation to provide the individual with work and the individual is under an obligation to make themselves available to do the work.

Personal service: The individual is required to provide their services personally. Usually, there is no right for an employee to appoint a substitute. If there is a right of substitution, it would in most cases be subject to the employer’s approval and may only be invoked where the individual is unable, rather than unwilling, to work.

Control: The individual is under the control of the employer to such a degree as to make the employer their “master”. In other words, the employer controls what the individual does, how they do it and when they do it. Those holding senior, professional or skilled positions, including directors, may retain significant control over how they carry out their work but still be employees.

Employees are also expected to conform to the employer’s day-to-day direction and rules and policies governing, for example, conduct and standards at work.

Other activities: The individual may not be free to work for other employers without the express permission of the employer. The individual may also be subject to post-termination restrictive covenants in their contract. However, this can be misleading, as it is perfectly possible for a person to have more than one part-time employment.

Nature and length of the engagement: The length of the engagement is often indeterminate for an employee (except for fixed-term contracts of employment), and the period of engagement does not relate to the performance of a specific task.

Pay and benefits: The individual is paid a fixed amount on a regular payment date based on their hours worked, irrespective of performance targets or completion of a specific task (however, note that shift workers or commission workers may be employees). The individual may receive benefits such as a pension, bonus, private medical insurance, company car or other benefits and be entitled to enhanced company sick pay. They will be entitled to holiday (although note that workers are also entitled to holiday).

Integration: The individual is integrated into the employer. For example, they perform services which are similar to or substantially the same as those performed by other employees, they may have line management responsibilities, they are entitled to use the employer’s disciplinary and grievance procedures, they are subject to the employer’s appraisal procedures, their name appears on the internal telephone directory, they have a company email address, they may have to wear a uniform, they have a company business card and are invited to the employer’s internal social events.

Facilities and equipment: The employer provides the individual with the facilities and equipment required by them to carry out their job.

Financial risk: The individual is paid even if there is not sufficient work to keep them fully occupied. The individual assumes no financial risk in working for the employer.

Taxation: The individual is not responsible for payment of income tax and national insurance contributions (NICs) on their earnings and the employer operates PAYE in respect of their engagement.

Description by the parties: The individual is described as an employee. However, this is not decisive if it does not reflect the reality of the situation.

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1.2       Factors indicating self-employed status

Mutual obligations: The employer is not obliged to offer work on a regular or frequent basis and the individual has no obligation to accept any work that is offered.

Control: The individual determines when, where and how they work and is not under the direct supervision of the employer.

Personal service: The individual is not required to carry out the services personally and has an unqualified right to appoint a substitute (or the right is limited only by a requirement to show that the substitute is as qualified as the individual). The right of substitution is not only with the consent of another person who has an absolute and unqualified discretion to withhold consent.

Other activities: The individual is free to provide their services to whomever they choose without operating exclusively for one organisation.

Nature and length of the engagement: The individual is engaged for a finite period to carry out a specific task or project.

Pay and benefits: The individual is paid on completion of a specific task or project or on a commission-only basis. They are not entitled to participate in any benefit schemes and will not normally be paid overtime. They are not entitled to sick pay or holidays.

Integration: The individual is not sufficiently integrated within the employer to have a defined role and does not perform services similar to or substantially the same as those performed by an employee. They do not have line management responsibilities and are not within the scope of the disciplinary and grievance procedures or appraisal procedures. They are identified as external contractors (such as in the internal telephone directory, on ID badges and in email addresses) and are not invited to social events.

Facilities and equipment: The individual provides their own equipment and materials in order to perform the services.

Financial risk: The individual risks their own capital in the business and will be personally responsible for any losses arising from their work. The individual is responsible for procuring their own insurance. They may be required to correct any unsatisfactory work in their own time and at their own expense. Conversely, they may have the opportunity to profit from the success of the project.

Taxation: The individual is responsible for payment of their own income tax and NICs on their earnings and is responsible for registering for VAT if the level of their supplies exceeds the relevant registration limit.

Description by the parties: The individual is described as self-employed. However, this is not decisive if it does not reflect the reality of the situation.

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