In a nutshell
When running your business, you may need to use the services of people in many different ways. Such individuals may work as contractors, consultants, casuals, agency workers, zero-hours contractors, temps or interns.
The question that can become an issue is 'Who is the employer of such an individual?'
The reason it becomes an issue is that, having used the services of someone for a period of time, they may want to claim maternity rights or statutory sick pay or you may decide to terminate their employment and need to know whether they are entitled to redundancy payment. Legally, only an employee can claim those particular employment rights and so it’s vital that you are able to clearly determine their employment status, ie what type of employee they are.
Tied in to this issue of clarifying employment status are the legal requirements surrounding contracts of employment and the risks that can arise from issuing, varying and changing a contract of employment.
What are the risks?
If an individual can establish that they are an employee, they can claim rights such as redundancy payments, holiday, sick pay or flexible working (amongst others). If there is a question over their employment status or errors in their contract of employment you could open yourself up to consequences from a tax perspective, having to pay compensation for successful tribunal claims (which could be considerable), or could cause a ‘breach of contract’. To allow your business to function effectively, and to avoid claims against you, you need to be clear on the employment status of your staff and provide the right contract.
Key steps to manage this issue
1. Understand the differences and implications of employment status
There are three main types of employments status (ie the arrangement under which someone works for you).
The first type is an employee. This person works to the terms stipulated in a contract of employment or contract of service, which details hours, salary, holidays etc. Employees have a number of employment rights, and that translates into a great deal of protection in the workplace.
The employment rights that only employees qualify for include:
- employment protection rights:
- guaranteed pay
- protection from unfair dismissal
- redundancy payments
- the right to notice and time off
- protection under the Transfer of Undertakings (Protection of Employment) Regulations 2006
- indemnity from their employers on the basis of vicarious liability (protects third parties who suffer damage or injury as a result of an act carried out by the employee in the course of their employment)
- protection of wages in the event of the insolvency of the employer.
This is in addition to the rights that apply to workers (see below).
The second type of employment status is a self-employed person. Consultants, project managers and freelancers can work on such a basis. This person runs their own business and is their own boss albeit they are the only person in that business. They usually work under a contract for services. Self-employed individuals have very limited employment rights.
The third type of employment status relates to a worker. Workers can work under a contract of employment or have the ability to delegate work to another individual. Consequently, the legal definition of a worker covers employees as well as certain self-employed individuals.
Workers have fewer employment rights than employees, but are likely to have more employment rights than a self-employed person.
Workers are entitled to the following rights at work:
- protection of earnings, in other words, no unlawful deductions (Employment Rights Act 1996)
- the right to be accompanied at a grievance or disciplinary hearing and not to suffer a detriment for exercising that right
- the right to breaks at work on a daily and weekly basis and paid holidays (Working Time Regulations 1998)
- the right to be paid no less than the National Minimum Wage
- key protections under health and safety legislation
- protection under equality law
- whistleblowing protection (Public Interest Disclosure Act 1998)
- Part-time workers are entitled to comparable treatment with a similar full-time worker regarding their terms and conditions of employment (Part-time Workers (Prevention of Less Favourable Treatment) Regulations 2000)
Remember that these rights are also available to employees.
Download our employment rights comparison table (available in the Tools and resources section) for an overview of the different rights according to different employment status.
Why does this matter?
Imagine that you provide Oliver with casual work ie no set hours of work per week, and so you consider Oliver to be self-employed. He has been working for you for several years, and one day due to business reasons you decide that you must reduce your headcount and dispense with his services. Oliver feels he has been unfairly dismissed and takes the matter to an Employment Tribunal (ET).
Only an employee can claim unfair dismissal, and Oliver is convinced he is an employee.
In deciding whether or not Oliver is an employee, any contract you have issued to Oliver will be closely scrutinised (see below for more on contracts). The ET will also want to explore your working relationship with Oliver. If Oliver has been working for you and no-one else, has been happy to the work for you on a fairly regular basis and you have been providing that work – this is known as mutuality of obligation. For an ET, this is a very significant factor and would point to Oliver being an employee.
Other factors an ET can consider are the ability to delegate all tasks (self-employed), method of payment (your payroll – employee; by invoice – self-employed), tax and NI (pay their own – self-employed) and a set notice period (employee).
The consequence of this, is that someone you may have considered to have minimal employment protection may have more than you thought. Understanding the differences in employment status and following the steps below will help you to treat your staff according to the employment status you want them to work under.
If you're at all unsure about determining employment status it’s worth seeking professional advice.
2. Provide the right contract
It is essential that anyone working for you has the correct contract of employment and that they have received all of the information that you are legally obliged to provide.
Employees must have a contract of service, which must be provided within eight weeks of starting work for you. Sometimes known as a 'written statement of particulars', there are some essential elements that must be detailed in this written statement. The statement can be divided into two parts – the first part must be included in one document, the other information can be delivered in instalments. Download our written statement of particulars checklist for more information on what needs to be delivered when.
Those individuals you consider to be self-employed must have a well-defined and clearly drafted contract for services. This is always a good starting point in establishing that the person is genuinely self-employed. A contract for services would make it clear that there is no guarantee of regular work; the individual in question is autonomous and works as they deem necessary; can provide a substitute if they are unavailable; are paid via an invoice and arrange their own insurance cover. This type of contract would also apply to interns and work experience staff.
Workers, should be provided with a contract for services type document. Agency workers are unique, because whilst they work for you there is no contract between you and that person, since the contractual relationship is between you and the agency that supplies the agency worker.
3. Thoughtful approach to management
Once you have provided the right type of contract and established the employment status of your member of staff it’s useful to take a considered approach, especially when managing someone you do not consider to be an employee.
Such an individual should not:
- receive benefits such as sick pay
- attend staff meetings
- go on skills-based training paid by you
- appear on your payroll
- appear on a departmental structure chart
Many an employer has misguidedly provided or demonstrated one of the above, with the expensive consequence of effectively turning that person into an employee, granting them the employment rights that come with that status. Although it can be easy to slip into the habit of treating everyone in the same way, it’s vital that you make a clear distinction in these areas depending on the employment status of your staff members.
4. Training for managers
It is worthwhile ensuring that your managers understand the different types of employment status that exist, and the implications of mismanaging a self-employed/worker type individual as they are the ones dealing with such people on a daily basis.
By educating your managers, you will be reducing the possibility of someone proving that they are an employee (as opposed to a self-employed individual or worker). The training can also be used to keep managers of aware of the body of case law that is established in this area of employment law, as well as potential legislation (see below for more on this).
5. Keep up with the changes in this area of law
This is not a static area of law and is ever-changing politically and legally. Make sure you keep up to date (for example by referring to the further information sources listed below) and are able to deal with the consequences of such changes.
The Taylor Review has examined the issue of employment status and concluded that:
- There has been a lot of confusion amongst employers of this area for some time.
- The tests developed by the courts (such as mutuality of obligation) should be incorporated into legislation.
- Workers should be called 'dependant contractors'.
- HMRC’s tests for self-employment should be aligned with the tests used by employment tribunals.
- There should be a fast-track ET process for dealing with employment status.
- The burden of proof should be on an employer to show that a person is not an employee or worker.
The Government is mulling over these recommendations and some changes outlined in the Good Work Plan are starting to be introduced (for example increased penalties for employers that repeatedly breach their employment law obligations). You can keep up to date with the introduction of further changes from the Good Work Plan with the CIPD's Recent and Forthcoming legislation timetable.
Meanwhile, cases involving Uber and Pimlico Plumbers have gone to the highest courts in the land and have provided guidance on this area of employment law; as more of these cases are brought it is clear that this is an evolving area and one which you need to be mindful of.
Tools and resources
Download the employment rights comparison table for an overview of how employment rights differ according to employment status and use the written statement of particulars checklist to keep track of the information you're obliged to provide to your employees.
Access more information on employment status and contracts of employment:
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