Commonly asked questions on the legal issues relating to fixed-term work
An individual doing paid work in the UK falls into one of three main categories:
- an employee
- a worker
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.
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 againstunfair 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?)
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’?).
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.
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What has employment status got to do with the ‘gig economy’?
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: Aslam v Uber B.V (2016) and Uber B.V. v Aslam (2017)
Type of work: Uber drivers
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 EAT 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 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 Court of Appeal is at the beginning of November 2018 with a decision to follow some time later.
Case: Dewhurst v CitySprint UK Ltd (2017)
Type of work: bicycle courier
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
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.
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 and case law for further information on the further case law, including the Taylor review into modern working practices, which has considered the rights of those working in the gig economy and ‘worker’ status generally.)
Is there a list of who are employees, who are workers and who are neither?
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. For example, on a construction site, three individuals doing similar labouring work on a construction site may all have different employment statuses and different rights because of the arrangements regarding their respective contracts.
The following case law 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: Aslam v Uber B.V (2016) and Uber B.V. v Aslam (2017)
Type of work: Uber drivers
The employment tribunal and the EAT decided that the drivers were workers because:
- The drivers provided their work under a contractual relationship and made themselves available to carry passengers to their destinations for payment
- Drivers could not develop their own businesses. For example, fare calculations were done by Uber, 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
- 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
- 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
- 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
- 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
- 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: Sharpe v The Bishop of Worcester (2015)
Type of work: parish priest
Status: neither an employee nor a worker
The position of church rector was a statutory appointment, and clergy appointed had the freedom to go about ‘the cure of souls’ in accordance with their own consciences, and that did not fit with the existence of an employment relationship.
In this case the Court of Appeal confirmed that there was no necessity to imply a contract between a bishop and a rector.
The rector could not be an employee for the purposes of unfair dismissal, nor a worker for whistleblowing purposes.
Case: Smith v Pimlico Plumbers (2018)
Type of work: plumber
- 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.
Is there a complete list comparing employee and worker rights?
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 which rights workers qualify for and which rights still require employee status.
Both workers and employees are entitled to the following rights:
- national minimum wage and national living wage
- 5.6 week’s paid annual leave a year (28 days’ leave)
- a maximum 48-hour average working week
- statutory minimum daily and weekly rest breaks
- nightshift limits and health assessments
- protection for whistleblowing
- right to be accompanied at a disciplinary or grievance hearing
- part-time worker protection
- protection against unlawful deductions from wages
- protection for making a public interest disclosure (that is, whistleblowing).
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:
- sexual orientation
- religious or philosophical belief
- 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.
Only employees are entitled to the following:
- unfair dismissal rights
- statutory redundancy payments
- 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).
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
Which type of employee qualifies for discrimination protection?
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
- publishers and advertisers of discriminatory advertisements
- 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: 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.
What rights do individuals who are not employees have?
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. The current government has launched further inquiries focusing on the changing nature of work, the status and rights of agency workers, the self-employed, and those working in the 'gig economy'.
(For further information on this, see Future developments)
Does supplying services through a one-person limited company ensure self-employed status, and what are the tax implications?
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: 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.
What are the main advantages and disadvantages of hiring employees compared to independent contractors?
- 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.
- 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.
What are the IR35 regulations and do all employers have to apply them?
The IR35 rules 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 IR35 regulations 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.
Who decides if IR 35 applies?
Prior to April 2017, 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 in the public sector moved from PSCs 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 agency or end user, not the contractor.
While at the moment, these changes are only being targeted at contractors in teaching, social care, NHS work and so on, it is possible that this will subsequently be rolled out to all PSC contractors caught by IR35, and then private sector employers will also have to apply the rules.
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:
- financial risk
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.
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.
Do agency workers accrue rights as employees against the employer or the agency?
Workers engaged through an agency or employment business can accrue rights against the employer, the agency, or both, depending on the facts of each case and the tests below.
At the heart of the issue is whether an implied contract has arisen between the worker and the end user, giving the agency worker employee status and all the rights which flow from that.
Employers should also remember the following:
- The Agency Workers Regulations 2010 give some rights once 12 weeks have gone by, but do not affect the ability of agency workers to claim rights as employees and to lodge unfair dismissal claims.
- Workers do not automatically accrue some employment rights after a set period of time.
- Some employment rights apply to workers, regardless of whether or not they can show an implied employment contract.
Workers engaged through an agency may be able to claim unfair dismissal if they can establish that they were an employee at the time they were dismissed. Most would have to show either one or two years’ continuous employment (depending on whether they started work on or after 6 April, when the length of the qualifying period for unfair dismissal changed) which may be a bar to claims. But some types of unfair dismissal do not require a qualifying period.
The Agency Workers Regulations 2010 provide certain rights but expressly exclude those in business on their own account. Some workers with limited companies will meet the definition of being in business on their own account and some will not.
Agency workers who are supplied to an employer by an agency or employment business may be:
- employed by the employer, or
- employed by the agency, or
A series of high-level cases have provided guidance concerning whether agency workers are employees or not and, if they are, whose employees they are. In some of the cases, the judges have commented that new legislation is needed to address this complex issue.
The lessons from the cases summarised below are that:
- As long as proper arrangements are in place for agency workers, and there is a clear contractual relationship and behaviour consistent with that relationship, it will not be necessary to imply a contract of employment with the employer or the agency.
- Sometimes agency workers will be employees, but not always.
- In some rare situations an agency worker will be found to have employment rights against the organisation where they have been working.
This case confirmed that where there is a valid three-way contractual relationship between an agency, a worker and an end-user, the courts will rarely imply a contract between the worker and end-user the contractual terms are clear, using an analysis of the elements of control, personal performance and mutuality of obligation, there is no need to imply a contract of employment.
The leading case is James v Greenwich Council (2008). In this case and in Craigie v London Borough of Haringey (2007) the EAT indicated that the passage of time alone is not enough to mean that a contract of employment should be implied between the worker and the end user, even if the arrangement continues for longer than originally expected – in these cases, for more than a year.
If the original agency arrangements are genuine, an implied contract will arise only where it essential to imply a contract between the worker and the end user – for example, if mutual obligations have arisen which are incompatible with the agency arrangements.
To decide if agency workers are employees, numerous cases have now followed the James decision and in many a three-stage approach is used:
- Do the express contractual arrangements adequately explain the actual relationship of the three parties involved at the outset?
- Have any subsequent words or conduct of the parties changed matters?
- Is it necessary to imply a contract of employment?
(See also East Living Ltd v Sridhar and TSG Services Ltd, 2008.)
Here the Court of Appeal decided that it was not necessary to imply a contract for a blacklisted agency worker who had had management jobs in the construction industry.
When his agreement was terminated, Smith claimed he had been unfairly dismissed because of his trade union activities. The CA followed the decision in James and would not imply a contract between him and the end-user. It said that a contract cannot be implied merely because a court disapproves of the employer’s attempts to avoid its legal obligations.
Case:Tilson v Alstom Transport (2010)
The Court of Appeal also followed the James decision in this case and confirmed the principle that an employment relationship should be implied only if it is necessary to do so. The mere fact that the worker is significantly integrated into the organisation is not inconsistent with the existence of an agency relationship
Tilson was a technical engineer employed through an agency to work for Alstom, a train company. He claimed he had an implied employment contract because he was highly integrated into the business (for example, he was a manager who was authorised to hire and fire employees).
Although there was a clause in his contract which said that the end-user (that is, Alstom) would not exercise control over the way in which he carried out his duties, in fact the company did have control over him. Despite the elements of ‘integration’ and ‘control,’ Tilson was held not to be an employee.
The court emphasised that it is an error to think that because someone looks and acts like an employee, it follows that he or she is an employee in law.
Where individuals are unable to claim unfair dismissal against the end-user, they may claim that the umbrella agreement which covers the relationship generally between themselves and the agency gives rise to employee status with the agency. This argument is unlikely to succeed unless there is:
- control by the agency, and/or
- mutuality of obligation with the agency.
The Conduct of Employment Agencies and Employment Businesses Regulations 2003 (SI 2003/3319) ensure that the precise contractual position between agency, end-user client, and worker must be agreed and set out in a single document before the hiring starts.
For further details of some of the above cases and other examples, see our Temporary workers Q&As on the legal status of temporary agency workers supplied by an employment business to an end user.
If an employer engages a new worker but labels them an ‘independent contractor,’ does that minimise or avoid employment rights?
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.
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.
How can employers work out whether someone who works for them is an employee?
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.
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.
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.
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.
How do employers determine if an individual who already works for them is a worker?
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.
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.
Can an unpaid worker (volunteer) be an employee?
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.
What is employee shareholder status?
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.
Are workers supplied through an umbrella company more likely to be self-employed?
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.
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.
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 and rights of workers inquiry
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 there is a need to 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 individuals cannot be certain what their employment status is until they are dismissed.
Two government select committees launched separate inquiries into the gig economy and workers’ rights, and Theresa May commissioned a third, the Taylor Review, into modern employment practices followed by four further consultations. The core issue behind all these inquiries is whether the law’s approach to employment status can 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.
The October 2016 Business, Energy and Industrial Strategy Committee inquiry 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 (pdf) (published in 2017) sets out the current system of employment status, considers the position of atypical workers, and then examines possible reforms without making any concrete recommendations. This report concludes that the options are highly complicated and would take years to deliver.
A Work and Pensions Committee report (pdf) concluded that the current ways of categorising workers “are creaking under the weight of the changing economy”. This committee recommended that workers should be given worker status as the default position so that employers would have to prove that a worker did not have basic workers’ rights.
In November, the two committees produced a joint report, A framework for modern employment, which included draft legislation. Among the suggestions is closing a loophole allowing organisations to avoid the agency workers’ rules, and a new requirement for organisations to prove those working for them are genuinely self-employed, thereby shifting the onus on employment status from workers to employers.
The Taylor review
‘Good work: the Taylor review of modern working practices', published July 2017, made 53 detailed recommendations including a call for worker status to be replaced with ‘dependent contractor’ status. This would create a greater distinction between such workers and those who are genuinely self-employed or employed.
Government response to the Taylor review
In February 2018 the Government responded to the Taylor review. The response stated that all of the recommendations (except one) would be accepted. The Government is making four further consultations on the recommendations and no concrete plans have emerged as yet. The consultations are:
- Employment status:
This consultation is of most interest to employers including those in the gig economy.
The Taylor report suggested renaming those eligible for worker rights (but who are not employees) as ‘dependent contractors’. This category would have additional employment protections, including the right to a written statement of particulars, some minimum pay rights, and the ability to receive rolled-up holiday pay but would not benefit from all employee entitlements. The Taylor recommendations also included improving self-employed rights including pension provision and parental leave.
The Government has conceded there is a compelling case for greater clarity and again seeks further views on a range of options including legislation assessing employment status. (This would replace to replace existing case law guidance.) It also invites views on aligning the tests for employment status and tax purposes. This consultation runs until 1 June 2018.
- Increasing transparency in the labour market:
The Government agrees with the Taylor Review that greater certainty is needed regarding employment rights and responsibilities. The Government has undertaken an impact assessment on whether employers should provide written statements of employment particulars to all workers, not just employees, and if there should be additional information in the statement. Other aspects to the consultation include changing the rules about breaks in continuous service. This would mean that employment rights (such as redundancy payments or unfair dismissal compensation) are easier for casual workers to claim.
The Taylor report suggested not banning zero hours contracts but giving individuals the right to request a guaranteed hours contract after 12 months. This consultation covers extending the holiday pay reference period for such workers with variable working hours from 12 to 52 weeks and exploring other ways that atypical workers might receive their holiday pay more flexibly.
The Information and Consultation of Employees Regulations 2004 are currently not widely used, and their modification or removal also forms part of the review.
This consultation closed on 23 May 2018 and a response is awaited.
- Agency workers:
The Taylor review suggested providing transparent information to agency workers, including rates of pay. Other potential reforms included a right to request a direct contract of employment for agency workers placed with the same hirer for 12 months and improving monitoring of umbrella companies.
The Government is considering a number of these changes to agency workers’ rights, including requiring agencies to provide workers with a key facts page when they register so that workers know who they are actually employed by, who is responsible for paying them and how much they will be paid. Another possibility is enabling the Employment Agency Standards inspectorate to monitor umbrella companies and intermediaries in the supply chain. The current exemption that allows UK agency workers to opt out of entitlements to equal pay with permanent staff (known as the ‘Swedish Derogation’) is also being revisited.
This consultation closed on 9 May 2018 and the results are being analysed.
- The enforcement of employment rights:
The Taylor Review made a number of recommendations surrounding enforcement of rights. The recommendations included Statutory Sick Pay (SSP) becoming a basic employment right, like the National Minimum Wage. All workers would be eligible regardless of income from day one. SSP would be payable by employers and be linked to length of service.
The proposals in the further consultation include:
- HMRC would take over enforcement of rights such as the National Minimum Wage, sick pay and holiday pay for the lowest paid workers.
- A ‘name and shame’ scheme for employers who fail to pay employment tribunal compensation.
- Increasing the penalties of up to £5,000 per worker where there has been an aggravated breach of employment law to at least £20,000. Very few aggravated breach financial penalties have been imposed on employers anyway, so this is unlikely to be a cause for concern.
This consultation closed 16 May 2018 and the results are being analysed.
Other wide-ranging aspects originally covered in the Taylor review include further measures to prevent pregnancy and maternity discrimination. Taylor suggested reintroducing the National Insurance (NI) reforms abandoned after the 2017 spring budget. This would reduce the difference between the NI contributions of employees and the self-employed, but this has been rejected by the government.
The Taylor recommendations encompass many aspects of the working relationship, not just for those working in the gig economy. If the proposals are eventually implemented with the correct guidance, this may go some way to addressing the many issues surrounding employment status and rights in the modern workplace.
Other future developments in the area of employment status are expected to result from the many cases involving those working in the ‘gig’ economy.
For information on what the UK’s exit from the EU may mean for employment law, visit our Brexit hub.
Explore our related content
Commonly asked questions on the legal issues relating to temporary workers
Frequently asked questions on the legal issues relating to part-time work
Selected cases reported on disputed employment status.