Overview

An individual doing paid work in the UK falls into one of three main categories:

  • an employee
  • a worker
  • self-employed.

Some employers are understandably uncertain about the differences between ‘workers’ and ‘employees’ and the different rights which apply to them. These differences are determined by what are known as ‘common law tests.

Employment status is significant because employers will be liable for the majority of employment rights if those working for them are employees rather than self-employed.

The definition of 'employee' and 'worker' differs slightly from one area of legislation to another, but generally workers have fewer rights than employees. However, if rights apply to a worker they usually also apply to an employee. The basic employment rights for employees and workers are listed below.

Employees

People are classed as employees if they work under a contract of employment. A binding contract can be created in writing, or verbally, or be a mixture of both, but certain terms do then have to be put into writing within two months of the employee starting work.

The definition of ‘employee’ contained in employment legislation is unhelpful. For example, the Employment Rights Act 1996 (section 230:1) defines an employee as ‘an individual who has entered into or works under (or, where employment has ceased, worked under) a contract of employment.’ The issue of employee status therefore has to be established on a case-by-case basis in accordance with the various legal tests which have evolved over the years – the case involving Uber drivers and subsequent case law on this issue illustrate how important court and tribunal judgments are in this area (see below and also QHow do employers determine if an individual who already works for them is an employee?).

The majority of people in work are employees. For example, a digital marketing manager who has worked exclusively for a company for five years between 9am and 6pm at the company’s offices is likely to be an employee, even if she only works part-time for three days a week.

Employee rights include:

  • protection against unfair dismissal
  • statutory redundancy payment
  • maternity and paternity leave and pay
  • parental leave
  • the right to request flexible working
  • rights under TUPE
  • rights to preferred payments in the event of an employer's insolvency.

(For a full list of employees’ and workers’ rights, go to Q Is there a complete list comparing employee and worker rights?)

Workers

The term ‘worker’ has a distinct legal meaning.

A worker is any individual who undertakes to do or perform personally any work or service for another party, whether under a contract of employment or any other contract. It does not matter if the contract is express or implied, verbal or in writing, provided the individual undertakes to perform the work or services personally, for an end-user who is not a client or customer. This normally excludes those who are self-employed. (This is based on section 230(3) of the Employment Rights Act 1996, but the definition of worker varies from statute to statute.)

Agency workers and short-term casual workers are likely to be workers, unless they are found to be self-employed.

For example, a carpenter working for a building company on several occasions over the course of a year was required to perform the work personally under the direction of the company, and was paid on a ‘time worked’ basis, rather than by reference to the work she performed. She was, therefore, more likely to be a worker than an employee (see Q How do employers determine if an individual who already works for them is a ‘worker’?).

Workers are entitled to some rights and protections, including the national minimum wage, paid annual leave, rest breaks and protections for part time workers.

For example, a carpenter worked for a building company on several occasions over the course of a year. She was required to perform the work personally under the direction of the company, and was paid on a time basis rather than by reference to work performed. She is therefore likely to be a worker, but not an employee (see Q How do employers determine if an individual who already works for them is a ‘worker’?).

Other rights

A wide range of individuals who suffer discrimination may be protected by equality laws even if they are self-employed or a job applicant.

Separate legislation covers ‘temporary workers’, in particular the Agency Workers Regulations 2010 (SI 2010/93). For more information see our Temporary workers Q&As.

The gig economy is a product of the digital age. It is a separate way of working with people undertaking temporary jobs or doing separate pieces of work, rather than working full time for one employer. Organisations may enter into short-term contracts with individuals who may be categorised as workers, employees or self-employed.

The arrangements for those working in the ‘gig’, or ‘on demand’ economy (for example, couriers at Deliveroo, or drivers for Uber) creates many uncertainties concerning their employment status.

The categorisation difficulties for those working in the gig economy are similar to issues surrounding part-time or casual workers. Simply because an individual works part time or works in the gig economy does not mean that they are not an employee – they may be an employee who works fewer hours.

Each working relationship is different and unless any new legislation is introduced, the law will continue to rely upon decided cases to determine employee status. When determining employment status what is stated in any written contract is only one factor to ascertain the actual relationship between the parties. There are hundreds of subtle factors that will be considered, including whether an individual must accept work, if a substitute can be sent to work instead and the general control by the organisation. 

Case law

Case: Uber B.V. v Aslam (2018)
Type of work: Uber drivers 
Status: workers

This test case for the tens of thousands of drivers working for Uber involved a careful analysis of the employment status of drivers working for the smartphone app. Passengers use the app to locate a nearby driver to take them to their destination.

The drivers did not claim they were employees, but workers and, therefore, entitled to a minimum wage under the National Minimum Wage Act 1998 and to paid leave under the Working Time Regulations 1998.

Uber maintained the drivers run their own businesses as third-party contractors and, therefore, do not have worker rights. However, the CA decided that the Uber drivers were entitled to rights as workers.

The decision that the estimated 46,000 Uber drivers are considered workers has significant repercussions including entitling the drivers to a number of employment rights such as:

  • 5.6 weeks of paid annual leave each year
  • 48-hour maximum working week
  • protection from unlawful deduction from wages
  • national minimum/living wage.

Uber’s appeal to the Supreme Court will follow some time in 2019.

Case: Dewhurst v CitySprint UK Ltd (2017)
Type of work: bicycle courier
Status: worker

Maggie Dewhurst worked as a courier for two years, being classed by City Sprint as an independent contractor. City Sprint regulated the amount of work available, and told its couriers told what to do, when to do it and how to do it, suggesting a significant degree of control. The tribunal found that the couriers should be classed as workers and were, therefore, eligible for basic employment rights including holiday pay, sick pay and the national living wage. The judge commented that the courier company’s contractual arrangements were contorted and indecipherable and that this was not a commercial venture between two corporate entities.

Case: Lange v Addison Lee Ltd (2017)
Type of work: minicab driver
Status: worker

This case was brought by three drivers, classified by the company as self-employed, who claimed they earned around £5 an hour. Following the Uber employment tribunal decision, the EAT ruled that the Addison Lee mini cab drivers were also workers, rather than self-employed, and entitled to workers' rights including the national minimum wage and paid holiday. The court relied on the fact that drivers agreed to undertake jobs personally. Addison Lee also had significant control over the relationship, for example restricting vehicle use and imposing the company’s branding.

Case: IWGB Union v Roo Foods Limited (Deliveroo)  (2017)
Type of work: courier
Status: self employed

The Independent Workers Union of Great Britain brought a case on behalf of a group of Deliveroo riders seeking union recognition and workers’ rights including sick pay, national minimum wage and paid holiday.

Deliveroo classes its couriers as self-employed independent contractors rather than workers. 

The union is seeking a decision about this employment status to force the organisation to engage in collective bargaining with the union, which is available only to workers and employees.

For full details see our case report. In summary the union’s statutory recognition claim was rejected by the Central Arbitration Committee. Deliveroo was able to show that the couriers could use substitutes to perform their work and so were not ‘workers’ - one of the key conditions for statutory union recognition. After this decision the union got permission from the High Court for a full judicial review of the ruling. However, in the meantime Deliveroo decided to settle many of the claims including those by 50 of the couriers for a minimum wage and paid holiday. 

Other cases

So far, decisions involving individuals in the gig economy indicate that most working arrangements will attract ‘worker’ status. Businesses operating within this sector have differing models and the area of law remains confusing; an employment tribunal could easily reach a different conclusion in similar cases. Other on-going cases involve courier companies such as City Sprint, eCourier, Hermes  and Excel. Other important cases include Pimlico Plumbers. The gig economy has grown massively and organisations using such workers need clarity about the contractual and legal basis of their arrangements.

Employers with gig economy workers should review their status make sure they are correctly classifying their workforce. Wrongly classifying an individual as self-employed may trigger future claims and potential extra liability for tax and national insurance. 

(See Future developments below and ‘Case law on employment status for further information on the case law, including the Taylor review into modern working practices, leading to the ‘Good Work plan’ which aims to address the rights of employees and workers including those working in the gig economy and ‘worker’ status generally.)

 

Whether an individual is an employee, a worker, or self-employed is a complex legal question. Numerous court and tribunal cases reveal the uncertainty in the law and why there is confusion in the workplace about employment status.

Those working in the ‘gig economy,’ or who obtain work through employment agencies, are particularly hard to categorise. In the world of more flexible working, many cases challenge where the line between workers and contractors should be drawn. Some ‘self-employed contractors’ may be ‘workers’ for employment law purposes, even if they have self-employed status for tax purposes.

In the Uber drivers’ case, the Court of Appeal decided that two drivers were workers, as was the plumber in the Supreme Court decision in the Pimlico Plumbers case. In other key decisions, bike couriers (CitySprint, Excel and Addison Lee cases) and Addison Lee drivers were found to be workers rather than self-employed contractors. Other examples often arise on a construction site where three individuals doing similar labouring work may all have different employment statuses and different rights because of the arrangements regarding their respective contracts.

Following Matthew Taylor's 2017 review of modern working practices, the government has produced the ‘Good work plan’ which contains numerous commitments to changing the law including possibly clarifying the employment status tests. The key issue is employment status in the gig economy (which dominates case law) but any change in the law on this seems to be on hold pending yet more independent research.

Until legislation emerges, case law such as the following examples give a feel for the employment status of certain individuals. However, the cases must not be relied on as a complete statement of the law in this area because some of the examples are unusual. Careful analysis and advice should be taken before determining the status of any working individual.

Case law

Case:  Uber B.V. v Aslam (2018) 
Type of work: Uber drivers 
Status: workers

Relevant factors:

The EAT and the CA decided that the drivers were workers because:

  • The drivers provided their services under a contractual relationship with a high degree of control over the way the driver must perform the work which gave weight to the argument that they were workers.
  • The drivers could not develop their own businesses. For example, fare calculations were done by the company, and deductions made to the drivers’ payments if passengers complained about overcharging.

(For further details of this case and the further appeal see our case report and Q. What has employment status got to do with the gig economy?)

Case:  Jivraj v Hashwani (2011)
Type of work: arbitrators 
Status: not employees

Relevant factors:

  • The arbitrators were found to be ‘independent providers of services’
  • They were not in a position of subordination to the parties receiving the arbitration services and, therefore, could not be said to be employed by them.

In this Supreme Court case, there was a great deal of discussion about the distinction between employees, workers and the self-employed, highlighting the difficulties encountered when determining employment status.

Case: Byrne Brothers (Formwork) Ltd v Baird (2002)
Type of work: construction industry labourers 
Status: workers

Relevant factors:

  • The carpenters and other labourers in this case had to perform work personally.
  • They had a limited power to appoint a substitute but this did not prevent them from being ‘workers'.
  • They worked under close direction and were paid on a time basis, rather than by reference to work performed – therefore they were not carrying on a business undertaking. 
  • The claimants worked continuously over the entire period, creating the mutuality of obligation necessary to meet the definition of ‘worker.’

Case: Conroy v Scottish Football Association (2013)
Type of work: football referee 
Status: worker

Relevant factors:

  • There was a lack of disciplinary procedures for the referees
  • The onus was on the referees to purchase their own equipment
  • The referees had no right to be offered work and had the right to decline it.

(For more details on this case, see Q How do employers determine if an individual who already works for them is an employee?)

Case: Autoclenz Ltd v Belcher (2011)
Type of work: car valets 
Status: employees

Relevant factors:

  • The written contracts describing the valets as ‘self-employed’ did not necessarily determine their employment status.
  • Despite the contracts and a substitution clause, they were employees.

Case: Weight Watchers (UK) Ltd v HMRC (2011)
Type of work: Weight Watchers group leaders 
Status: employees

Relevant factors:

  • There was a sufficient degree of control exerted over the leaders by Weight Watchers, demonstrated by restrictions on working for competitors, an obligation to deliver an approved programme, and an obligation to remain at a specific weight.
  • Some discretion as to how leaders conducted meetings and some power of substitution was not fatal to the existence of an employment contract between them and Weight Watchers.

(For more details on this case, see Q How do employers determine if an individual who already works for them is an employee?)

Case: Smith v Pimlico Plumbers (2018)
Type of work: plumber 
Status: worker

Relevant factors:

  • The plumber wore a branded uniform and had to work to company standards
  • Customers made payments to the company rather than to individual plumbers
  • There was no right of substitution.

In this case, a plumber requested reduced hours following a heart attack. The refusal of this request led to unfair dismissal, disability discrimination and holiday pay claims. For the unfair dismissal claim, he had to show he was an employee. For the remaining claims, he had to show he was a worker.

The Supreme Court decided he was a worker but did not need to address whether he was an employee, as the plumber did not appeal against the employment tribunal’s previous finding that he was not. A key factor was that there was no right of substitution. This suggested a contract to work personally, rather than pure self-employment.

An unlimited right to substitute another worker suggests there may be genuine self-employment. However, a limited right to substitute a worker, for example, in cases of illness, can be consistent with a contract to work personally and can still lead to a finding of worker status.

It is increasingly common to find the term ‘worker’ being used to describe a variety of employment relationships, but the terms ‘worker’ and ‘employee’ have a distinct meaning, and carry different entitlements, in employment law. The list below summarises the main rights workers qualify for and those rights which still require employee status.

Shared rights

Both workers and employees are entitled to the following rights:

Both workers and employees are entitled to protection against detrimental treatment from an employer for exercising rights in respect of:

  • National Minimum Wage Act 1998
  • Part-time Workers Regulations 2000
  • Working Time Regulations 1998
  • Public Interest Disclosure Act 1998
  • Employment Rights Act 1996 (the right to be accompanied at a disciplinary or grievance hearing)

Both workers and employees are entitled to protection against the following forms of discrimination:

  • sex
  • race
  • disability
  • sexual orientation
  • religious or philosophical belief
  • age
  • gender reassignment
  • marriage and civil partnership
  • pregnancy and maternity.

Note that discrimination protection only applies to workers engaged under a contract of service, or apprenticeship, or any other contract which requires them to perform the work personally.

Employee-only rights

Only employees are entitled to the following:

  • unfair dismissal rights
  • statutory redundancy payments
  • written particulars of employment (see below for changes from April 2020)
  • written statement of reasons for dismissal
  • statutory maternity, paternity and adoption pay and leave
  • time off for antenatal care
  • time off for dependants
  • the right to request flexible working
  • parental leave
  • suspension on maternity grounds
  • guarantee payments
  • priority payments on insolvency of employer
  • remuneration following suspension on medical grounds
  • statement of written particulars of employment
  • itemised pay statement
  • statutory sick pay
  • time off for public duties
  • time off to look for work in the event of redundancy
  • time off for pension scheme trustees
  • time off for employee representatives
  • time off for young people study or training
  • time off for membership of a European Works Council
  • time off for trade union officials and activities
  • right to refuse to work on a Sunday (shop and betting workers)
  • consultation about collective redundancies
  • fixed-term employee protection
  • protection under TUPE (on the transfer of an undertaking).

Written particulars of employment 

An extension of the right to be provided with a statement of written particulars of employment applies to all workers from 6 April 2020 – currently this right applies only to employees. From that date regulations make the right to written particulars applicable from the day of starting employment (a day one right rather than within two months as at present). Other detailed proposals resulting from the government’s ‘Good work plan’ including clarity about worker status will be published in due course. 

Only employees are entitled to the following protection against detrimental treatment for exercising their rights in relation to:

  • maternity or paternity leave and pay
  • health and safety
  • refusing to work on a Sunday
  • pension scheme trusteeships
  • employee representatives
  • time off for young people studying and training
  • trade union membership
  • family and dependants’ leave
  • membership of European Works Councils
  • Fixed-term Employees Regulations 2002

The definition of 'employee' in discrimination legislation is wider than that contained in other employment legislation and protection extends to, for example:

  • job applicants
  • persons employed under a contract for services (self-employed)
  • those who personally execute any work or labour
  • apprentices
  • publishers and advertisers of discriminatory advertisements
  • trainees
  • Crown employees, for example staff working for ministers
  • House of Commons and House of Lords staff
  • members of the armed forces (although they may have to pursue internal procedures first when on active service)
  • police officers
  • members of partnerships (limited companies and limited liability partnerships may also be able to bring a direct discrimination claim for detrimental treatment because of the protected characteristic of an associated person). 

There is no qualifying period of employment for any discrimination claim.

Case law

Case: EAD Solicitors v Abrams (2015) 

Here the Employment Appeal Tribunal held that a limited company could bring a direct age discrimination claim. The claimant was the principal shareholder and director of a limited company, which in turn was a member of the solicitors’ limited liability partnership. When he turned 62, he was required to retire in line with the partnership agreement. He could claim discrimination under the Equality Act 2010 even though the legal person suffering the alleged detrimental treatment was his limited company.

The decision in the Abrams case may appear to contradict a previous case, Halawi v WDFG UK Ltd (t/a World Duty Free) (2013) where it was held that individuals who provide services to an end user through a limited company are not protected by the Equality Act 2010. However, in the Abrams case there was an obligation to undertake the work personally, while in the Halawi case the individual concerned had the right to substitute other workers, which she had done occasionally.

If individuals are unable to establish their employee status to be ‘employee,’ they will still be entitled to some rights, though not as many.

A ‘non-employee’ will be entitled to all their contractual rights. For example, a genuinely independent contractor will be protected by the rights which form part of the contract agreed to at the outset, together with the benefits of any subsequently agreed variations.

The individual may also fall within the definition of worker. For example, all workers have a right to the national minimum wage, 5.6 weeks’ paid annual leave, and a maximum 48-hour average working week.

(For further details of the rights of workers see Q Is there a complete list comparing employee and worker rights?)

Successive governments have undertaken consultations considering whether more statutory employment rights should be extended to workers rather than just employees. Previous consultations on this issue have been inconclusive. In December 2018, the government released the ‘Good work plan’ following the Taylor review into modern working practices. The proposed legislative changes will extend some rights to individuals who are not employees. The changes include:

  • Legislation to improve the employment status tests and align the employment and tax tests (which currently differ).
  • A right for workers to request more predictable and stable contracts after 26 weeks' service on a non-fixed pattern.
  • An extended right for all workers (not just employees) to be provided with a statement of written particulars.

(For further information on these changes, see Future developments).

No, supplying services through a limited company is not enough to ensure self-employed status. It is still necessary to evaluate the whole relationship (for the relevant factors, see Q How do employers determine if an individual who already works for them is an employee?)

This issue has been a problem for some time. If an individual forms a wholly-owned one-person limited company, and then contracts with an ‘employer’ for provision of their services, it is still necessary to decide if he the individual is an ‘employee’ for the purposes of both:

  • the unfair dismissal and other employment legislation and
  • tax purposes.

(For further information about the tax implications of using contractors with their own personal service companies, see also Q What are the IR35 regulations and do all employers have to apply them IR35?)

Individuals may establish employee status even though they are providing services to an organisation through their own personal service company.

Case law

Case: Cable & Wireless plc v Muscat (2006)

Here Muscat, a telecommunications expert, was found to be an employee for employment law purposes. He was originally employed by a company which was later taken over by Cable & Wireless. Before the takeover, he had agreed to supply his services through a service company, which in turn supplied services through an employment agency.

Muscat paid his own income tax and National Insurance contributions, and the contract between the company and the agency expressly stated that he was not to be regarded as an employee of the end-user.

He continued this arrangement with Cable & Wireless after the takeover, which supplied him with a laptop, mobile phone and other equipment. When the company terminated the agreement, Muscat claimed he was an employee, in order to pursue a claim of unfair dismissal.

He succeeded for employment law purposes in establishing that he was an employee of Cable & Wireless, even though the arrangement was set up through an independent employment agency and the contract expressly stated that he was ‘self-employed’. The Court of Appeal confirmed that the principles contained in Brook Street Bureau (UK) Ltd v Dacas (2004) should be applied (see Q If an employer uses agency workers, do they accrue rights as employees against the employer or the agency?)

Case: MBF Design Services Ltd v HMRC (2011)

In this case the claimant, Fitzpatrick, was found not to be an employee for tax and NI purposes. He had a limited service company which he used to enter into several contracts with Airbus. HMRC maintained he should be taxed as an employee of Airbus, on the grounds that mutuality of obligation existed between the two.

The factors in favour of employment status included that the claimant:

  • always had work available to him, and was always paid for it
  • was paid hourly
  • had to complete time records
  • had to have his work approved
  • worked on-site
  • used Airbus’ equipment
  • arranged his holidays to co-ordinate with Airbus’ business requirements.

The factors against employment status included:

  • if he was away, Airbus simply used another engineer
  • written and oral evidence confirmed he was not controlled and had the right of substitution, which could have been exercised
  • he paid for his own training, apart from one occasion
  • if the computers went down, employees were required to remain at their desks but he went home along with other contractors
  • he refused offers of work from Airbus when the rates did not meet his requirements
  • he had refused the opportunity to take on a project lead role
  • no disciplinary or grievance procedure applied to him, and he rectified errors at his own expense
  • he was not invited to participate in workplace social events, nor did he receive any of the 25 benefits available to staff.

Despite the claims by HMRC, the tribunal found Fitzpatrick was not an ‘employee’ for tax and National Insurance purposes under IR35.

Advantages

  • Control and choice over the employees
  • No VAT payable
  • Higher degree of loyalty and good faith by use of special terms automatically employed into the contract
  • Use of disciplinary procedures and sanctions
  • Stable workforce
  • Unfair dismissal actions may be cheaper than ending a commercial contract.

Disadvantages

  • Administrative burden of tax and national insurance
  • Vicarious liability for actions of employees
  • Duty to deal with unions with respect to collective bargaining, redundancy consultation etc.
  • Liability for whole range of potential payments including unfair dismissal, statutory redundancy pay, maternity and paternity leave and pay
  • Management burden of dealing with employee issues, for example the right to request flexible working
  • Indemnifying employees for expenses occasioned in course of employment
  • Health and safety duties.

The IR35 rules are legislative provisions that came into force in April 2000 to stop companies paying workers as contractors, when in fact they should have been treated as employees and subject to PAYE deductions. The rules therefore affect contractors who supply services through their own personal service companies (PSCs) but who do not meet HMRC's definition of self-employment. Historically contractors supplying services in this way have been difficult for HMRC to tax, and some have viewed it as a way of avoiding being taxed as an employee.

The main point of IR35 ensure certain workers are either set up and paid as employees in the future, or they make the necessary PAYE level tax and NI payments. The IR35 regulations therefore increase tax and NI liabilities for those individuals who fall under the rules, because they are deemed to be employees for tax purposes, rather than genuine freelancers or contractors. This means they are liable for income tax (under the PAYE system) and NI following deductions for expenses. HMRC has tightened the IR35 legislation because it wants contractors providing services in this way to pay full tax and National Insurance contributions.

Note that HMRC may decide that the relationship between an individual providing services to an end-user through a PSC is in reality an employment relationship. Although the IR35 rules will apply to many contractors those who are working through an Umbrella Company or recruitment agency should be probably be paying PAYE deductions anyway.

Who decides if IR35 applies?

Prior to April 2017, all individuals with their own PSCs were able to decide for themselves whether the rules applied to their own tax status. But from this date, responsibility and liability for applying the IR35 rules has changed:

In the public sector responsibility has already moved from the working person or the PSC to the ‘paying agent’. This means that the decision on whether those operating in the public sector through a PSC should be taxed under the IR35 rules now rests with the public sector employer, agency or third party engaging the worker, not the contractor. In reality this means public sector contracts will entail more rigorous checks to ensure compliance.

In the private sector, the Chancellor of the Exchequer confirmed in the 2018 Budget that from April 2020 large and medium-sized employers will also have responsibility for applying the IR35 rules to PSC contractors.

Employment status check

There is an online HMRC tool which allows agencies, public sector clients and contractors to ‘check employment status for tax’. The tool is accompanied by guidance on applying the IR35 rules to off-payroll working. The tool is designed to establish the three main factors used to determine IR35 status:

  • substitution
  • financial risk
  • control.

Critics argue that the rules around employment status and IR35 are so complex that the tool cannot be accurate, and that neither the agency nor the end user will have a detailed enough understanding of the contractor to supply the relevant information.

Agency workers

Some agency workers have their own company and agencies must assess an individual’s contract to decide whether it falls inside IR35. This must take place before the contract is finalised.

Temporary agency workers who put their earnings through a limited company can still be protected by the Agency Workers Regulations 2010.

Implications

The changes to the rules mean that public-sector employers (and shortly private sector ones) must determine whether national insurance contributions and income tax applied to the self-employed contractors working for them.

From 2020 onwards organisations will have to:

  • ensure that employment contracts accurately reflect the circumstances of an employee’s engagement; and
  • take employment checks even more seriously.

Incorrectly identifying individuals as an employee, a worker or self-employed may have financial implications.

The labels or intentions of the parties to a contract is only one factor to take into account when determining employment status, even if both parties are in complete agreement. Employment status depends on the reality of the relationship, not what the parties say they want it to be. If the aim is to avoid an employment relationship, then the overall relationship has to be structured so that the elements of a true independent contractor situation are present.

Some examples would include arranging the relationship so the worker can:

  • decide where and when they work
  • work for other companies
  • engage other workers to help them
  • use their own equipment
  • profit (for example, they finish the task early).

When courts have to determine whether employee status exists, they will evaluate all the factors (see Q How do employers determine if an individual who already works for them is a 'worker'?)

The following two cases illustrate when the understanding or intentions of the parties can be a relevant factor.

Case:McGregor v Edinburgh Leisure (2007)

Here the Employment Appeal Tribunal held that if there is genuine uncertainty about the precise status of the contract, then how it is described by the parties involved can be considered.

Case: Autoclenz Ltd v Belcher (2010)

In this case, there were more than 20 car valets who were apparently treated as self-employed contractors by their employer. The contracts for each worker repeatedly used the word ‘sub-contractor’ and contained numerous terms inconsistent with employment, such as the ability to substitute others to carry out the work. However, the written agreement did not really reflect the day-to-day working practices or the true agreement between the parties. The court decided that this was in truth an employment relationship, and the decision was upheld by the Supreme Court.

Therefore, if the working practices conflict with the description the parties give to the relationship, employee status may be inferred.

The written contract is still important, as it is the first point of reference, but if it does not reflect the working relationship, there will be further investigation.

This question is crucial, yet is difficult to answer because there is no detailed definition of who is an ‘employee’ in the legislation. Accordingly, this question is decided by courts and tribunals on a case-by-case basis, and some guidelines for determining employment status have been laid down in various cases over the years.

To decide if a particular worker is an employee the first item to consider is ‘control,’ in other words:

  • who controls what work is done
  • who controls where the work is done
  • what control is exercised over how the work is done
  • who controls when the work is done
  • who controls who does the work, particularly with respect to the right to delegate, send a replacement or hire staff to help.

The higher the degree of control, the more likely it is that an employment relationship exists.

The next key factor to look for is what is known as ‘mutuality of obligation', which is the obligation of the employer to provide work and the worker to do it. This will be indicated by:

  • how many engagements the worker performs and whether they are performed mainly for one person or for a number of different people
  • commitment as evidenced by sick pay, holiday arrangements and so on
  • commitment as evidenced by guarantee of work and guarantee of service.

Where mutuality is present, there is likely to be an employment relationship.

Case law

Employers should note that each case depends on its own facts. Just because a driver is found to be an employee in one case does not mean a driver with similar duties in another organisation will also be an employee

Case:Stack v Ajar-Tec Ltd (2015)

In this long-running case, a director who was also a shareholder was held to be entitled to employee or worker status. Directors and shareholders can be employees or workers, but often they are not. Here there was employment status, even though there was no agreement on remuneration.

Case:Aslam v Uber B.V (2016) and Uber B.V. v Aslam (2017)

In a case concerning Uber drivers, an employment tribunal did not consider if they were employees, but decided that they were ‘workers’ for the purposes of the minimum wage and working time legislation, a decision later upheld by the EAT (for further details, see Q What has employment status got to do with the gig economy?)

Case:Knight v BCCP Ltd (2011)

This case is an example of the importance of the mutual obligations to accept and offer work. A taxi driver engaged by a taxi firm for just over six weeks received wages only for the occasions he actually worked and did not receive holiday pay, sick pay or overtime. He did work under the taxi firm’s control to a certain extent. When the relationship ended, he claimed he was an employee and, therefore, entitled to statutory notice pay under section 86 of the Employment Rights Act1996.

The tribunal said that he was not an employee because he was under no obligation to accept work, and the taxi firm was under no obligation to offer work to him. The Employment Appeal Tribunal upheld this decision. There must be mutuality of obligation for there to be an employment relationship.

Case:Stringfellow Restaurants Ltd v Quashie (2012)

The Court of Appeal held that a dancer at the club Stringfellows was not an employee, but was self-employed.

She was dismissed for alleged drug use and brought a claim for unfair dismissal. The case centred on whether there was mutuality of obligation between the employer and the employee. The CA decided Quashie could not pursue her claim of unfair dismissal because she was not an employee. The club was under no obligation to pay her, and she took the risk as to whether or not she might be out of pocket on any particular night, although she had to attend the club according to the rota, and notify it if she intended to go on holiday.

The CA confirmed that it was the actual legal obligations which dictated employment status, regardless of the label attached to someone. In this case Quashie took the financial risk and this was a clear indication that the contract was not a contract of employment.

Case:Weight Watchers UK Ltd v HMRC (2011)

Weight Watchers lost its case because the individuals who organised and led its meetings were found to be its employees. The leaders ran meetings, arranged venue hire, recruited helpers and ‘weighers’, received commission based on the number of attendees at meetings, and were reimbursed for some expenses.

The company tried to rely on:

  • contracts that stated the leaders were independent contractors
  • the substitution clause in all contracts that enabled leaders to provide alternative cover at meetings, and
  • the leaders' individual responsibility for tax and national insurance contributions.

The tribunal found that there was a sufficient degree of control by the employer because there were restrictions on running meetings for competitors, obligations to deliver an approved Weight Watchers’ programme, and an obligation to remain at a specific weight.

Although there was a term that allowed leaders an element of discretion as to how they ran meetings, and a clause allowing the workers to arrange for someone else to cover tasks under a direct contract with the employer, this was not fatal to the existence of an employment contract. It was necessary to examine whether the overall terms of the contract were consistent with an employment relationship. Here, the leaders were employees of the company.

Case:Conroy v Scottish Football Association Ltd (2013)

In this case, a football referee claimed unfair dismissal, age discrimination, and for holiday pay. A preliminary issue was whether Conroy was employed within the meaning of the Employment Rights Act 1996 (ERA) or self-employed, as the employer claimed.

The Employment Appeal Tribunal held that he was:

  • not an employee for the purposes of the ERA
  • an employee for the purposes of the Equality Act 2010, and
  • a worker for the purposes of the Working Time Regulations 1998.

There were some factors which could indicate employment, such as the provision of health insurance and the fact that referees cannot send a substitute for any match. However, the predominant factors pointed away from a contract of employment, including the lack of disciplinary procedures, the purchase of equipment such as flags, whistles and notebooks, a right to decline matches and the employer’s right to refrain from offering him any matches at all.

Case:Secretary of State for Justice v Windle and Arada (2016)

Here the issue was whether a number of interpreters were ‘employees’ within the meaning of the Equality Act 2010 and, in particular, if they were ‘personally’ employed under a contract to do work. The interpreters had been engaged on a significant number of short-term contracts and it was established in the employment tribunal that there was no obligation on them to accept any assignment. There was, therefore, no mutuality of obligation.

The Court of Appeal held that the interpreters were not employees because they were unable to establish that there was mutuality of obligation between them and the employer.

In most cases, a combination of the control and mutuality factors will clearly indicate if an employment relationship exists.

Other factors to consider when deciding whether an existing staff member is an employee, organisations should also consider:

  • the length of the relationship
  • the method of payment agreed by the parties
  • who provides the equipment needed to get the job done
  • the degree of financial risk
  • the degree of responsibility for investment and management
  • the opportunity to profit from sound management in the performance of the task
  • the labels or intentions of the parties
  • whether the person performing the services has set up in business on their own account
  • the degree of continuity in the relationship
  • whether the worker works mainly for one person or for a number of different people
  • whether the worker is ‘part and parcel’ of the organisation
  • tax treatment may also be an indication, but not a conclusive one
  • whether the worker can send a substitute to carry out the work.

Although there is no straightforward definition of ‘employee,’ there are several definitions of ‘worker.’ The precise definition used varies slightly between the different rights. Under section 230 of the Employment Rights Act 1996, the main definition used is that workers are individuals who have entered into work, or worked, under:

  • a contract of employment or any other contract, whether express or implied and (if it is express) whether verbal or in writing, whereby
  • the individual undertakes to do or perform personally any work or services for another party to the contract
  • and that party's status is not that of a client or customer of any business carried on by the individual.

For example, in the case Canada Life Ltd v Gray (2004), a self-employed commission agents working for the Canada Life insurance company did not satisfy the definition of employee, but the EAT decided the agents were ‘workers’ for the purposes of the working time regulations and were therefore entitled to holiday pay.

In the case AD Bly Construction Ltd v Cochrane (2005), a labourer engaged on a self-employed basis was held not to be a ‘worker’ for the purposes of the working time regulations because there was no ‘mutuality of obligation'. The contract, and the way it operated in practice, ensured that there was no obligation on AD Bly Construction to provide any work and no obligation on the worker to do work when offered.

In Bacica v Muir (2006), a painter and decorator working in the construction industry was found to be self-employed, and the Scottish EAT said that the statutory definition of ‘worker’ normally excludes those who are self-employed.

Substitution

If an employer wishes to ensure that a worker does not attract some of the employment law protection available, one of the important factors to address in the contract is the power of substitution. There has been a range of cases on this issue.

The courts and tribunals will often examine the relationship to see if a genuine right of substitution exists. If it does, then it is unlikely there will be employee or worker status. The power to substitute must be genuine (see Byrne Brothers (Formwork) Ltd v Baird (2001) and Redrow Homes (Yorkshire) Ltd v Buckborough (2009)).

In Community Dental Centres Ltd v Sultan-Darmon (2010) a dentist claimed against his practice for unlawful deductions from wages and therefore needed to show he was a ‘worker’ within the meaning of the legislation. The Employment Appeal Tribunal held that his right of substitution meant that he could not be a worker because he was not obliged to ‘perform personally any work or services’ within the meaning of section 230(3) of the Employment Rights Act 1996. Where a genuine right of substitution exists, there cannot be ‘worker’ or ‘employee’ status.

Yes, a worker can be an employee even if the employer has not agreed a salary with them. Employment status depends upon the guidelines laid down in various cases over the years.

The legal status of volunteers may be unclear as the position in essence depends upon what was agreed at the outset. Employers who wish to give voluntary work experience on an unpaid basis should protect themselves by having a brief volunteer agreement, the contract should avoid words that impose binding obligations on the volunteer. It is better if they can refuse tasks and choose when they work.

Volunteers should obviously not be paid and if expenses are reimbursed they should match the expenditure.

There has been a number of cases brought by volunteers including:

  • Melhuish v Redbridge Citizens Advice Bureau (2005) – an unpaid volunteer was not an employee as there was neither an obligation on him to attend work nor any mutuality of obligation. The provision of training courses did not amount to a reward or remuneration so as to produce employee status.

  • Migrant Advisory Service v Chaudri (1998) – Mrs Chaudri, an adviser, worked four mornings a week for the Migrant Advisory Service. She was unpaid, but did receive volunteer’s expenses – however, she had not actually incurred expenses. She was paid these sums when she was sick or on holiday. The Employment Appeal Tribunal held that she could pursue her unfair dismissal and sex discrimination claims because she was actually an employee: This decision was based largely on the payments being for the work and not really for the reimbursement of expenses.

  • Murray v Newham Citizens Advice Bureau (2000) – the claimant was an employee because the volunteering agreement included expenses and basic training. In addition, the claimant agreed to work at specific times and for a minimum period of time.

The existence of an employment relationship always depends on the facts of the case and the various legal tests mentioned above. Even where the employer is not directly paying the ‘employee,’ if there are sufficient mutual benefits flowing between them and a sufficient degree of control and mutuality, there can still be an employment relationship.

Employee shareholder status was a form of employment status in force between 1 September 2013 and 1 December 2016. It allowed employees to give up some of their employment rights in exchange for shares in their employer’s company.

As predicted by many critics, the take up of the scheme was very low and it was abolished. This means any tax advantages linked to shares awarded under it don’t apply to arrangements entered into from 1 December 2016 onwards.

As the removal of this legislation has been piecemeal, it is technically possible to agree a new employee shareholder scheme removing an employee’s employment rights in return for shares, but with no tax advantages. It seems unlikely that any employer or employee would do this, and the employee would need to receive independent legal advice and have a seven-day cooling-off period before any agreement became binding.

The government estimates that 430,000 workers are employed via umbrella companies, especially in the construction industry, the NHS, teaching, warehousing and logistics, and pharmaceutical industries.

Umbrella companies

An umbrella company is a limited company which acts as an employer on behalf of a contractor. Instead of setting up his or her own limited company, any person can join an umbrella company either through a website or over the telephone. 

Using an umbrella company can be a legitimate alternative to individuals setting up their own limited company. The umbrella company acts as an intermediary between the worker and the client or agency. Individuals are normally an employee of the umbrella company and subject to PAYE and National Insurance contributions; the company deals with all the administration for them.

Individuals may complete a timesheet countersigned by a client, which is forwarded to the umbrella company often using an on-line portal, which then invoices the client. Once the client has paid, the umbrella company deducts its fees and any tax or NI due, then pays the worker and sends a payslip. The client may often be a recruitment agency and there is a contract between the umbrella company and the recruitment agency on behalf of the contractor. 

Employment status

Workers supplied by an umbrella company are not more likely to be self-employed. Workers being paid through umbrella or payroll companies can be an employee or worker of the agency, or of the umbrella company, or both. Workers engaged or paid through umbrella companies are subject to the usual tests to ascertain if they are entitled to rights as employees or workers.

In fact, there have been allegations that in the NHS, and in the construction industry, that attempts have been to use umbrella companies to avoid basic employment rights and minimise tax by falsely classifying workers or employees as self-employed. 

Difficulties can arise if the umbrella company is used as a means of avoiding employee status, or NI and tax which would otherwise be payable. Either the umbrella company or the agency may also seek to avoid holiday pay and pension contributions.

National insurance and tax 

Following reforms to the IR35 regulations confusion has arisen between contractors and umbrella companies concerning the deduction of tax obligations and employer’s national insurance (NI) contributions. The position is that the client or agency should normally pay employer NI contributions as it does for directly employed workers. 

HMRC have introduced rules surrounding expenses that could be claimed by contractors using umbrella companies. Contractors that are subject to ‘supervision, direction and control’ can no longer claim expenses. Other rules were designed to ensure more public-sector agency workers are paid within the PAYE system. As a result more agencies (for example, some of those supplying staff to the NHS) use umbrella companies to pay workers. 

In practice if an agency engages a contractor via an umbrella company, the total costs should include all of the employers’ tax obligations and costs, holiday pay, pension contributions and employer’s NI plus the contractor’s earnings (which are then subject to income tax and employee’s NI).

When advertising for contractors, companies should quote the correct rate after the employer’s deductions have been made.

The Unite union has challenged employers and agencies who use umbrella companies incorrectly and has, for example, asked the NHS to stop any misuse of umbrella companies. The case of Blakely v On-site Recruitment Solutions Ltd and Heritage Solutions Ltd (2016) supported by Unite provides a good example of how the use of an umbrella company does not stop contractors being entitled to rights as workers or employees. It also clarifies issues associated with the use of umbrella or payroll companies.

Future world of work 

Some 4.79 million people are thought to be currently self-employed and 1.66 million employed on a temporary basis. Technology has changed the world of work and the law needs to adapt to help balance the benefits of flexibility and the risk of exploitation. Several high-profile tribunal cases involving those working in the digital or ‘gig’ economy have focused political attention on the status and rights of workers in this sector.  Many employers and individuals cannot be certain of which employment status and rights apply.

There have been government select committees considering the gig economy and workers’ rights, and a major review (the Taylor ‘Good work’ review) into modern employment practices. 

Select committees

The Business, Energy and Industrial Strategy Committee inquiry in October 2016 into The future world of work focused on the status and rights of agency workers, casual workers, zero hours workers  and the self-employed for the purposes of tax, benefits and employment law.

The resulting Employment status review (dated December 2015 but published in February 2017) set out the existing system of employment status, considered the position of atypical workers, and then examined possible reforms without making any concrete recommendations. This report concluded that the options were highly complicated and would take years to deliver.

Another report, ‘Self-employment and the gig economy’, published in April 2017, following an enquiry by the Work and Pensions Committee, concluded that the existing ways of categorising workers were “creaking under the weight of the changing economy” and recommended making worker status the default position so that employers would have to prove a worker did not have basic workers’ rights.

Taylor review

Good work: the Taylor review of modern working practices', published July 2017, made 53 detailed recommendations, including replacing worker status with the term ‘dependent contractor’, to create a greater distinction between them and the genuinely self-employed or employees. 

The Government responded to the Taylor review in February 2018, stating that all of the recommendations (except one) would be accepted. 

Four consultations followed from spring 2018 onwards, dealing with: employment status; increasing transparency in the labour market; agency workers; and enforcement of employment rights. 

This was followed by the plan (summarised below) and draft legislation. The core issue behind all these changes is to adapt the law’s approach to employment status to cope with new forms of work arising out of the digital economy, as illustrated by companies such as Sports Direct, Asos, Hermes, Uber and Deliveroo. However, legislation on this key aspect remains outstanding. 

Good work plan

In late 2018, the government published its 'Good work plan' draft legislation on some of the Taylor proposals, but key legislation is still awaited on some issues, for example, confirming the employment status tests, and aligning the employment and tax status frameworks. 

The following regulations will apply from 6 April 2020 (unless otherwise stated) and cover England, Wales and Scotland, but exclude Northern Ireland.

The Employment Rights (Employment Particulars and Paid Annual Leave) (Amendment) Regulations 2018 

These regulations give workers the right to a written statement of particulars from the start of employment as a day 1 right, and the information given in the statement is to be expanded to include probationary periods and family leave. 

Annual reference period

Where a worker has been employed for at least 52 weeks, the reference period for calculating annual leave is increased from 12 weeks to 52 weeks. This will affect those workers with variable hours and pay. Where a worker has been employed by their employer for fewer than 52 weeks, the reference period is the number of weeks for which the worker has been employed. Until 2020, the employers of workers without normal working hours (e.g. seasonal workers) must calculate their holiday pay based on the previous 12 weeks which can result in workers losing out if they take holiday at certain times of year. 

Holiday pay

In addition, there will be a new state enforcement system for holiday pay and a new enforcement body will be announced in due course.

The Employment Rights (Miscellaneous Amendments) Regulations 2019 

These regulations will widen the right to a written statement of particulars and associated enforcement provisions to all workers (currently this right applies only to employees).

Penalties

The regulations also increase the maximum level of penalty available from £5,000 to £20,000 for aggravated breach of a worker’s employment rights (this applies from 6 April 2019, not 2020).

Information and consultation

The regulations lower the percentage threshold required for a valid employee request for the employer to negotiate an agreement on informing and consulting its employees from 10% to 2% of the total number of employees. There is still a 15-employee minimum threshold. 

The Employment Rights Act 1996 (Itemised Pay Statement) (Amendment) (No. 2) Order 2018

These regulations extend the right to receive a payslip (from 6 April 2019, not 2020) to all workers, including casual and zero-hour workers. For part-time workers, the payslip must state the number of hours the worker is being paid for. There is Government guidance on payslips to help employers comply with the legislation.

Tribunal claims

Generally, there will be stronger sanctions for employers who lose tribunal cases if they have previously lost similar cases and greater use of penalties and costs orders for breaches of statutory rights. 

For employers who fail to pay employment tribunal awards the Department for Business, Energy and Industrial Strategy (BEIS) has published details of a new ‘naming and shaming’ scheme linked to the existing BEIS penalty scheme. The names of defaulting employers and the amount of the unpaid award will be published once a quarter. Employees or workers can already ask for enforcement of unpaid awards by seeking an additional penalty (which goes to the Government rather than the claimant).

Claimants who register under the penalty system in the future can also register with the naming scheme. If employers are not being pursued under the penalty scheme they will not be named and shamed. Very few penalties have been imposed previously, so it is not clear how much of a difference the changes will make. For repeated breaches by the same employer, employment judges must consider the use of sanctions, and there is to be a further consultation on this.

There will also be a review of enforcement guidance and an ‘end-to-end’ digital system for the entire duration of an employment tribunal claim.

Agency workers

The Agency Workers (Amendment) Regulations 2019 abolish the use of the so-called ‘Swedish derogation’ in the Agency Workers Regulations 2010 from 6 April 2020. 

This legal exemption currently allows employment businesses to avoid giving agency workers’ pay equality with comparable direct staff if these workers have an employment contract which gives them a right to pay between assignments.

From 6 April 2020, agencies that have previously used the opt-out must provide a written statement to all affected agency workers explaining the change. There will also be protection from unfair dismissal or detrimental treatment for agency workers enforcing these new rights.

Agency workers will also gain the right to be provided with a ‘Key facts page’, to include information on the type of contract they have, their rate of pay, which employer is responsible for paying it and any deductions or fees that will be taken.

Outstanding matters

The draft legislation addresses many aspects of the Taylor review but one of the core recommendations remains unaddressed: to amend legislation in order to provide minimum rights such as the National Minimum Wage for “dependent contractors”. This is a key aspect of gig economy work.

Other outstanding areas include employment status clarification, although the Government has committed to bringing forward detailed proposals to improve the clarity of the employment status tests. There has been much consideration of how to address this difficult issue over the last 20 years, and detailed proposals may prove challenging.

There has also been a promise to align employment rights and tax status, which currently can be approached differently. 

Another outstanding proposals is a new right allowing workers who work variable hours to ask for a fixed working pattern after 26 weeks of service, for example, minimum hours or fixed days of work. The right would be simply to make the request, rather like a request for flexible working. It is unlikely there will be any obligation on employers to agree. Interestingly these provisions are very similar to EU proposals under the Transparent and Predictable Working Conditions Directive (which, of course, would have been followed in the UK prior to the decision to relinquish EU membership).

The Government will also be extending the qualifying period for a break in service in the calculation of continuous service from one week to four weeks. This protects individuals who work intermittently for the same employer and struggle to accumulate employment rights.

A ban on employers making deductions from staff tips has also been promised to ensure workers receive all the tips customers leave for them. Presumably this will be done by amending the rules on unauthorised deductions from wages.

Next steps for employers

Employers should bear in mind they will need to issue written particulars to all employees and workers within one day of starting a new job after April 2020. Apart from this, it is too early to take many steps to prepare. More legislation is needed for the most important changes in relation to employment status and the right to request a more predictable contract. 

Case law

Other future developments in the area of employment status are expected to result from the many cases involving those working in the gig economy, especially as it appears that any legislation in this area is likely to be delayed.

Brexit

For information on what the UK’s exit from the EU may mean for employment law, visit our Brexit hub.

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