These Q&As should be read in conjunction with our Case law on employment status.
An individual doing paid work in the UK falls into one of three main categories:
- an employee
- a worker
Employment status determines which employment rights apply to the individual concerned.
The definitions of 'employee' and 'worker' differ 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.
Since 6 April 2020, both employees and workers have been entitled to a statement of written particulars from their first day in a job.
COVID-19: The Coronavirus Job Retention Scheme, whichended on 30 September 2021, covered both employees and workers provided they were paid through PAYE, but did not cover the self-employed.
See our Coronavirus (COVID-19): Post-furlough guide for further details.
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Employees and workers
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.
The definition of ‘employee’ contained in employment legislation is not comprehensive. 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.
The term ‘worker’ does have a distinct legal meaning.
A worker is someone who performs personally any work or service for an end-user who is not a client or customer, 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. This is based on section 230(3) of the Employment Rights Act 1996, but the definition of worker varies from statute to statute and normally excludes those who are self-employed.
Agency workers who are not employed by their agency are likely to be workers, as are short-term casual workers unless they are found to be self-employed. Separate legislation covers agency workers (see our Temporary workers Q&As).
Gig economy workers
The gig or ‘on demand’ economy creates many uncertainties for those working in it concerning their employment status. Simply because an individual works part time, or on separate pieces of work (gigs), does not mean they are not an employee – they may be an employee who works fewer hours.
Court and tribunal decisions indicate that most gig working arrangements will attract ‘worker’ status, but an employment tribunal could easily reach a different conclusion in cases which appear similar.
What is stated in any written contract is only one factor used to ascertain the actual relationship between the parties. There are hundreds of subtle factors to be considered, including whether an individual must accept work, whether a substitute can be sent to do the work instead, and the extent to which the work is controlled by the organisation. Each working relationship is different and unless new legislation is introduced, the law will continue to rely upon decided cases to determine employee status.
Employers with gig economy workers should review their status, making sure they are correctly classifying them. Wrongly classifying an individual as self-employed may trigger future claims and potential extra liability for tax and national insurance.
Case law demonstrates how the law is applied in this area.
In Uber B.V. v Aslam (2021),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 ran their own businesses as third-party contractors and, therefore, did not have worker rights. However, the CA and subsequently the Supreme Court decided that the Uber drivers were entitled to rights as workers.
In Dewhurst v City Sprint UK Ltd (2017), the claimant was classed by the employer as an independent contractor. City Sprint regulated the amount of work available, told its couriers 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.
In Lange v Addison Lee Ltd (2017), the EAT ruled that mini cab drivers were also workers, rather than self-employed, following the Uber employment tribunal decision. Again, they were classified by the company as self-employed. The court relied on the fact that drivers agreed to undertake jobs personally, and the company had significant control over the relationship, for example, restricting vehicle use and imposing its own branding.
In IWGB Union v Roo Foods Ltd (Deliveroo) (2017), the Independent Workers Union of Great Britain brought a case on behalf of a group of Deliveroo riders seeking union recognition and workers’ rights. The company classed its couriers as self-employed independent contractors rather than workers.
The union was seeking a decision about the riders’ employment status in order to force the organisation to engage in collective bargaining. 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.
Whether an individual is an employee, a worker, or self-employed is a complex legal question and advice should be taken before determining the status of any working individual.
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 addition to gig economy work, 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.
The government’s ‘Good work plan’ (see 'Recent legislative changes') contained numerous commitments to changing the law including possibly clarifying the employment status tests. Until more legislation emerges, case law must not be relied on as a complete statement of the law in this area because some of the examples are unusual.
Numerous court and tribunal cases reveal why there is confusion in the workplace about employment status.
In Autoclenz Ltd v Belcher (2011), for example, car valets were found to be employees while in Conroy v Scottish Football Association (2013), football referees were found to be workers because:
- they weren’t subject to disciplinary procedures
- they purchased their own equipment
- there was no right to be offered work and had the right to decline it.
In Weight Watchers (UK) Ltd v HMRC (2011), group leaders were found to be employees because of the degree of control exerted over them by the company, they could not work for competitors, they had to deliver an approved programme, and had to remain at a specific weight.
When deciding whether an individual is a worker or self-employed contractor, factors to consider include whether they:
- perform the work personally (worker)
- can appoint a substitute (self-employed)
- work under close direction (worker)
- paid on a time basis rather than by reference to work performed and not carrying on a business undertaking (worker).
Working continuously over a long period may create the ‘mutuality of obligation’ necessary to meet the definition of ‘worker.’
Employee and worker rights
Both workers and employees are entitled to protection against detrimental treatment from an employer for exercising rights in respect of:
- National Living/Minimum Wage (National Minimum Wage Act 1998)
- 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 (Working Time Regulations 1998)
- protection for whistleblowing (Public Interest Disclosure Act 1998)
- right to be accompanied at a disciplinary or grievance hearing (Employment Rights Act 1996)
- part-time worker protection (Part-time Workers Regulations 2000)
- protection against unlawful deductions from wages
- itemised pay statements
- written particulars of employment.
The right to be provided with a statement of written particulars of employment became a day 1 right on 6 April 2019 (previously, employers had two months within which to produce it) and applied to all workers from 6 April 2020 (previously this right only applied to employees).
Both employees and workers are entitled to protection against discrimination (sex, race, disability, sexual orientation, religious or philosophical belief, age, gender reassignment, marriage and civil partnership, pregnancy and maternity discrimination) but this protection only applies to workers engaged under a contract of service, or an apprenticeship, or any other contract which requires them to perform the work personally.
Only employees are entitled to:
- unfair dismissal rights
- written statement of reasons for dismissal
- statutory redundancy payments
- guarantee payments
- priority payments on insolvency of employer
- statutory maternity, paternity and adoption pay and leave
- parental leave
- suspension on maternity grounds
- time off for antenatal care
- time off for dependants
- 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
- the right to request flexible working
- remuneration following suspension on medical grounds
- statutory sick pay
- 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 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.
‘Non-employee’ employee rights
A ‘non-employee’ will be entitled to all their contractual rights, so a genuinely independent contractor will be protected by the rights which form part of the contract agreed at the outset, together with the benefits of any subsequently agreed variations.
The individual may also fall within the definition of worker.
The definition of 'employee' in discrimination legislation is wider than that contained in other employment legislation and protection extends to, for example:
- job applicants
- those employed under a contract for services (self-employed)
- those who personally execute any work or service (workers)
- publishers and advertisers
- Crown employees, for example, staff working for ministers
- Parliamentary 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.
In one case, EAD Solicitors v Abrams (2015), 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.
Employees v independent contractors
There are both advantages and disadvantages to choosing to employ someone to carry out work rather than appointing an independent contractor to undertake it.
Advantages of employees
- Control and choice over the who carries out the work
- No VAT payable
- Higher degree of loyalty and good faith by use of special terms automatically implied 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 in 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
- Increased health and safety duties.
The IR35 rules are tax provisions that initially came into force in April 2000. They are intended to stop companies paying workers as contractors for tax purposes, when in fact they should have been treated as employees and subject to PAYE deductions. The 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.
Who decides if IR35 applies?
Before April 2017, all individuals with their own PSCs could decide whether the rules applied to their own tax status. But from this date, responsibility and liability for applying the IR35 rules changed in the public sector from the PSC owner to the ‘paying agent’ – in other words, the public sector employer, agency or third party engaging the worker, not the contractor. In reality, this meant public sector contracts required more rigorous checks to ensure compliance.
The rule change was intended to be rolled out to large and medium-sized private sector employers from April 2020. However, due to the Coronavirus emergency, the extension of IR35 to the private sector did not come into force until April 2021.
Employment status check
Ultimately HMRC decides whether the relationship between an individual providing services to an end-user through a PSC is in reality an employment relationship.
There is an online HMRC tool which allows agencies, clients and contractors to ‘check employment status for tax’ 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 have argued 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.
The changes to the rules mean that both public and private sector employers must determine whether national insurance contributions and income tax should be applied to the self-employed contractors working for them. Incorrectly identifying individuals as an employee, a worker or self-employed may have financial implications.
- ensure that employment contracts accurately reflect the circumstances of an employee’s engagement; and
- take employment checks even more seriously.
The legal status of volunteers may be unclear as the position in essence depends on what was agreed at the outset. Employers who wish to provide work experience on an unpaid basis should protect themselves by having a brief volunteer agreement, and the contract should avoid words that impose binding obligations on the volunteer. It is better if the volunteer 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 have been a number of cases brought by volunteers. In Melhuish v Redbridge Citizens Advice Bureau (2005), an unpaid volunteer was not an employee as there was no obligation on him to attend work or on the employer to provide work for him. The provision of training courses did not amount to a reward or remuneration so as to produce employee status.
In Migrant Advisory Service v Chaudri (1998), an adviser worked four mornings a week. 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, a decision based largely on the payments being for the work and not really for the reimbursement of expenses.
In 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.
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.
Recent legislative changes
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 gig economy have focused political attention on the status and rights of workers in this sector. Many employers and individuals cannot be certain 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.
‘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 from 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. However, legislation on this key aspect, for example, confirming the employment status tests and aligning the employment and tax status frameworks, remains outstanding.
Good work plan
All the following regulations applied 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, in force from 6 April 2019, gave employees the right to a written statement of particulars from the start of employment as a day one right, and expanded the information given in the statement to include probationary periods and family leave.
The Employment Rights (Miscellaneous Amendments) Regulations 2019 widened the right to a written statement of particulars and associated enforcement provisions to all workers (previously this right applied only to employees).
Annual reference period
Where a worker has been employed for at least 52 weeks, the reference period for calculating annual leave has increased from 12 weeks to 52 weeks. This affects 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 (for example, seasonal workers) had to calculate their holiday pay based on the previous 12 weeks, which resulted in some workers losing out if they took holiday at certain times of year.
The regulations also increased the maximum level of penalty available from £5,000 to £20,000 for aggravated breach of a worker’s employment rights (in force from 6 April 2019, rather than 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. A 15-employee minimum threshold for a request to be valid is still required.
The Employment Rights Act 1996 (Itemised Pay Statement) (Amendment) (No. 2) Order 2018 extended the right to receive a payslip from 6 April 2019 to all workers, including casual and zero-hour workers. For part-time workers, the payslip must state the number of hours being paid. There is government guidance on payslips to help employers comply with the legislation.
The new legislation leaves one of the Taylor Report’s core recommendations unaddressed: 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 proposal 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 similar to EU proposals under the Transparent and Predictable Working Conditions Directive (which, of course, would have been followed in the UK prior to Brexit).
Does supplying services through a one-person limited company ensure self-employed status, and what are the IR35 implications?
Supplying services through a limited company is not enough to ensure self-employed status. It is still necessary to evaluate the whole relationship.
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 individual is an employee for the purposes of both:
- the unfair dismissal and other employment legislation and
- tax purposes.
Individuals may establish employee status even though they are providing services to an organisation through their own personal service company.
In Cable & Wireless plc v Muscat (2006), a telecommunications engineer 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. He 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 claim unfair dismissal. He succeeded 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’.
In MBF Design Services Ltd v HMRC (2011), the claimant was found not to be an employee for tax and NI purposes. He had a limited services company which he used for several contracts with Airbus. HMRC maintained he should be taxed as an Airbus employee on the grounds that mutuality of obligation existed between them.
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 the company’s equipment
- arranged his holidays to co-ordinate with the company’s business requirements.
The factors against employment status included:
- if he was away, the company simply used another engineer
- his work was not controlled and he had the right of substitution
- 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 the company 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.
Does labelling a worker as an ‘independent contractor’ 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, if they finish the task early).
Courts will evaluate all the factors when determining whether employee status exists although the intentions of the parties can be a relevant factor. In McGregor v Edinburgh Leisure (2007), the EAT held that if there is genuine uncertainty about the precise status of the contract, how it is described by the parties involved can be considered. In Autoclenz Ltd v Belcher (2010), the contracts of more than 20 car valets said they were self-employed sub-contractors. However, the written agreement did not really reflect the day-to-day working practices or the true agreement between the parties. The court decided this was an employment relationship, a decision upheld by the Supreme Court.
As the first point of reference, the written contract is still important, but if the description the parties give to the relationship does not reflect the working relationship in practice, employee status may be inferred.
How can employers work out whether someone is an employee?
Because there is no detailed definition of who is an ‘employee’ in the legislation, this question is decided by courts and tribunals, and some guidelines for determining employment status have been laid down in various cases over the years.
The first item to consider is control, in other words, who controls what is done, and where, how and when it is done? Does the worker have the right to delegate, send a substitute 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' – the obligation on the employer to provide work and the worker to do it – indicated by the number of times the worker works and whether they work mainly for one person or for different people. If they receive sick pay, and are guaranteed work, there is likely to be mutuality present, indicating an employment relationship.
While case law can provide guidance, a driver found to be an employee in one case does not mean a driver with similar duties in another organisation will also be an employee. In Stack v Ajar-Tec Ltd (2015), a director who was also a shareholder was held to be an employee or worker, even though there was no agreement on remuneration. In Uber B.V. v Aslam (2021), an employment tribunal decided the drivers were not employees but were workers for the purposes of the National Minimum Wage and working time legislation, a decision later upheld by the EAT, the CA and the Supreme Court.
In Knight v BCCP Ltd (2011), a driver engaged by a taxi firm for just over six weeks received wages only when he actually worked, did not receive holiday pay, sick pay or overtime, and worked under the firm’s control to an c extent. When the relationship ended, he claimed he was an employee and, therefore, entitled to statutory notice pay. Both an employment tribunal and the EAT found he was under no obligation to accept work, and no obligation to be offered it. Without mutuality of obligation, there was no employment relationship (see also, Quashie v Stringfellow Restaurants Ltd, 2012 and Weight Watchers UK Ltd v HMRC, 2011).
In Conroy v Scottish Football Association Ltd (2013), a football referee claimed unfair dismissal, age discrimination, and holiday pay. The employer maintained he was self-employed. Some factors indicated employment, such as the provision of health insurance and not being able to send a substitute. However, the predominant factors pointed away from employment, including the lack of disciplinary procedures, a right to decline matches and the employer’s right not to offer any. The EAT 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.
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 are:
- the length of the relationship
- the method of payment
- who provides the necessary equipment
- the degree of financial risk
- the degree of responsibility for investment and management
- the opportunity to profit from sound performance of the task
- the intentions of the parties
- whether the person is in business on their own account
- the degree of continuity in the relationship
- whether the person works mainly for one person or for different people
- whether the worker can send a substitute to carry out the work.
Tax treatment may also be an indication of employee status but is not conclusive.
How can employers work out whether someone is a worker?
Although there is no straightforward definition of an employee in employment law, there are several definitions of worker. The precise definition varies between rights. Under 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.
One important factors to consider is the power of substitution. 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), the EAT held that a dentist’s 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.
What is employee shareholder status?
Employee shareholder status was a form of employment status in force between 1 September 2013 and 1 December 2016 that allowed employees to give up some of their employment rights in exchange for shares in their employer’s company. The take up of the scheme was 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.
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 their own limited company, anyone can join an umbrella company either through a website or over the phone.
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 and are subject to the usual tests to ascertain if they are entitled to rights as employees or workers.
National insurance and tax
Following reforms to the IR35 regulations, confusion has arisen between contractors and umbrella companies concerning tax and employer’s NI contributions. The position is that the client or agency should normally pay employer NI contributions as it does for directly employed workers.
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 case of Blakely v On-site Recruitment Solutions Ltd and Heritage Solutions Ltd (2016), supported by the Unite trade union, 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.
Explore our related content
Commonly asked questions on the legal issues relating to fixed-term work
Commonly asked questions on the legal issues relating to temporary and agency workers
Frequently asked questions on the legal issues relating to part-time work
Selected cases reported on disputed employment status.