Employee Status
While there may be no visible distinction from an outsider's perspective between an employee, a worker, a worker provided by an agency, and an independent contractor since all of these individuals may be doing the same job. However, there is a significant difference in the names used to describe these individuals in law and in the Employment Tribunal. It is possible that employers’, consumers and clients do not have any idea about the job status of the individual they engage with, and in most situations, it is not necessary for them to have this information. However, the status of the individual who employers engage to do a certain job is significant, both from a regulatory compliance point of view.
Short Term
When employers simply need someone for the short term or for a particular project, who employers will not desire to promote or train, and who will not have management duties, it may be more appropriate to hire employees from an employment agency or those who are self-employed. Be careful, however, not to engage a self-employed individual in a manner that is more comparable to employment. This is because the Employment Tribunal (ET) and/or HMRC may make a decision that a connection is an employment one regardless of how the parties identify it.
According to the Labour Market Statistics issued by the Institute for Employment Studies (May 2021) in the United Kingdom (May 2021), the number of employment contracts with fixed terms has been growing. This tendency may be because such contracts provide workers flexibility as well as predictability, and they are especially beneficial in situations in which the requirement for the specific activity or task is only required for a short length, or in situations in which temporary cover is needed for a regular staff member who is on maternity leave.
Fixed term contract
A temporary employment agency or another worker may be replaced by employing someone on a fixed-term employment contract instead. It is important to keep in mind that the termination of a fixed-term contract may be considered a dismissal for the purposes of redundancy pay and unfair dismissal (both of which normally require two years of employment), and that fixed-term employees are entitled to the same contractual benefits and facilities as permanent staff, in accordance with the Fixed-term Employees (Prevention of Less Favourable Treatment) Regulations 2002 (although not all kinds of contracts that may be called fixed term contract.
Zero Hour contract
Other sorts of employment arrangements, such as part-time work, casual workers, zero-hours contracts, job sharing agreements, and/or job-sharing arrangements with part-time work, are all certainly viable options. It is important to keep in mind that zero-hours contracts, which may or may not be employment contracts, cannot include an exclusivity provision that requires the worker to work solely for the company. In addition, under the Part-Time Workers (Prevention of Less Favourable Treatment) Regulations 2000, employees who work part-time are safeguarded from being treated less favourably than their full-time counterparts.
Self-employed Contractors, Workers and Employees
There are three categories of individual in the employment field: self-employed contractors, workers and employees. It is vital to be able to distinguish between these three categories since the level of protection afforded by statute varies considerably between them.
Self-employed Contractors
A self-employed are people who work and contract in his/her own name or via his own limited company. They appear independent from the company or persons that are employing their service. An example would be how a law firm employs the service of an expert witness.
These individuals work under a contract for services. The end user pays for the service to be provided or the job to be undertaken. The end user is the client or customer of the individual or their company. Using the above example, the expert will provide an experts report to the firm of lawyers to be used in litigation and will invoice them as an individual or a company. Self-employed contractors are sometimes referred to as independent contractors. The phrases are usually used interchangeably and for the purposes of this essay mean the same thing.
Those who are genuinely self-employed do not benefit from any of the statutory protection this essay will discuss. They are in business on their own account so those to whom they provide their services (in our example, an expert providing a report) do not owe them any obligations from an Employment Law perspective. Conversely, flexibility is a key advantage of self-employed status. Independent contractors are able to arrange their work patterns and structure to fit in with personal commitments.
Workers
There are different statutory definitions of worker.[1] However, all of the definitions include employees (so all employees are automatically classed as “workers”). Workers also include other individuals who undertake to personally perform work or provide services, but who are not in a client or customer relationship with the end user.
The main tenets of the worker definition are therefore: Personal service: if the individual can send a substitute, he is not a worker; and the lack of a client/customer relationship: the expert witness in our example could not be the law firm’s “worker” because even if he contracts to provide a report personally (rather than sending one of his colleagues) the law firm is still his customer. Both elements of the definition must be met for an individual to be classed as a worker.
Workers are a “middle” category. They benefit from some important statutory protection, such as the right not to be discriminated against in work and the protection of the Working Time Regulations. The greatest disadvantage of being a worker instead of an employee is that workers cannot claim unfair dismissal.
Employees
An example of an employee would be a trainee solicitor for a law firm. An employee works under a contract of service. A trainee would have a contract of employment for two years and would work for the firm. Employee is defined in s.230 Employment Rights Act (“ERA”) 1996 as ‘an individual who has entered into or works under a contract of employment’. A contract of employment is then defined as a contract of service. This is not particularly helpful, and so a number of tests have developed over the years to help define the boundaries of the term “employee”.
Under employment law employees are in an extremely strong position since they benefit from all employment legislation. Employees benefit from all of the protection afforded to “workers” as well as additional protection against unfair dismissal, the entitlement to a statutory redundancy payment, protection under the TUPE Regulations on the transfer of an undertaking and the benefit of family-friendly protection such as the right to maternity leave and pay.
The Distinction
The distinction between the genuinely self-employed and employees is that in engaging a contractor the end user is paying for the end product: in our example, the law firm is paying for the expert’s opinion to help persuade the court. In engaging an employee, the end user is paying for the individual in question: in our example, the solicitors’ firm requires the skill set of the particular individual they employ to be their trainee.
It has been stated:
‘[a] ship’s master, a chauffeur and a reporter on the staff of a newspaper are all employed under a contract of service; but a ship’s pilot, a taxi-man and a newspaper contributor are employed under a contract for services’.[2]
In many cases it will be obvious, and indeed accepted by the employer, that an individual is an employee. However, difficulties can arise with certain categories of persons and in such cases, it is necessary to examine the nature of the relationship more thoroughly. The courts have devised certain tests and this paper will critically examine their usefulness.
A Consistent Approach?
A point worth noting is that the Tribunal’s decision as to whether the individual is or is not an employee boils down to instinct and taking everything into account. For example, does the individual “feel” like an employee or a contractor? Given this approach, it was acknowledged by the Privy Council that the Employment Tribunals have sometimes come to inconsistent conclusions on similar facts.[3] One judge has commented:
‘This is clearly highly undesirable, particularly where a substantial number of statutory provisions impose duties on an employer in relation to his employees, or confer benefits on employees, where they work under a contract of service, but not under a contract for services . . . To permit conflicting decisions where a tribunal or a court might be said reasonably entitled to decide the issue either way would seem most unsatisfactory’.[4]
Therefore, the best approach when considering the tests appears to be, to analyse the client’s facts against the tests and to come to a reasoned conclusion on the facts at hand.
The Tests
The basic criteria for deciding whether someone is an employee or not are set out in the leading case of Ready Mixed Concrete (South East) Ltd v Minister of Pensions and NI.[5] There it was said that a contract of service will exist if three conditions are satisfied:
The servant agrees that, in consideration of his wages or some other remuneration, he will provide his own work and skill in the performance of some service for the master.
He agrees, expressly or impliedly, that in the performance of that service he will be subject to the other’s control in a sufficient degree to make that other the master
The other provisions of the contract are consistent with its being a contract of service.[6]
O Kahn-Freund has highlighted there are problem with the control ‘test’.[7] For example it is unhelpful in situations involving skilled employees. In Whittaker v Minister of Pensions[8] it was stated:
‘persons possessed of a high degree of professional skill and expertise . . . may nevertheless be employed as servants under contracts of service, notwithstanding that their employers can, in the nature of things, exercise extremely little, if any, control over the way in which such skill is used’.
In consequence the right of control in not as helpful as one would have liked in distinguishing employment from self-employment because its presence is entirely consistent with both types of contracts. Similarly, the requirement of consideration, while being essential in any contract of service does not serve as a point of distinction since it is inherent in both a contract of employment and a contract for services. Collins asserts the distinction ‘does not derive from the terms of the contract, for both envisage an exchange of services for payment’.[9]
In conclusion even if all three of the above basic criteria are satisfied, it is still possible that the individual concerned is not an employee for employment law purposes. Other factors must be considered which will together allow a "picture to be painted" from which the question can ultimately be decided. The starting point for resolving difficult cases remains the case law on the following tests:
Mutuality of obligation
Another test is the mutuality of obligation between the company and individual. If this mutuality is not present it is unlikely that an employment relationship will exist. Traditionally it has been held that if an individual were entitled to send a substitute to perform his duties, this would usually be enough to demonstrate that the contract is not a contract of employment.
In Ready-Mixed Concrete, the Claimant drove a concrete mixing lorry for the Respondent. He had to drive the lorry exclusively for the Respondent, he wore the Respondent’s uniform and he agreed to submit to all reasonable orders ‘as if he were an employee’. Notwithstanding this, it was held that he was an independent contractor and not an employee. One of the critical features in this case was that he was not required to drive the lorry in a personal capacity. He could employ a substitute driver to do so.[10] However, a limited power to appoint substitutes or to delegate tasks is not inconsistent with the existence of a contract of employment. The main questions to ask are: is the right to delegate fettered in any way? Is the substitution clause really intended to be used? And even if the clause is intended to be used, is it ever in fact used?
In Express and Echo Publications Ltd v Tanton,[11] a driver entered into an ‘agreement for services’ which allowed the driver to send a third-party replacement to provide the services (which he had done). He was held not to be an employee as there was no requirement for personal service. In MacFarlane v Glasgow City Council,[12] a gymnastic instructor could arrange a replacement from a register maintained by the Council if unable to attend work. This did not preclude the arrangement being one of employment. The main distinguishing features here were that: the Claimant had to be unable to attend (rather than just preferring not to); and his choice of substitute was limited. MacFarlane was held to be an employee in view of the fact that the right to substitute was fettered. In Tanton the contractor had none of these restrictions, he had a general power which he could exercise whenever he wished, and in addition, the power to substitute a third party had actually been exercised. In the Tanton case, the Court of Appeal would have come to a different conclusion if the substitution clause were in existence but had never in fact been used by the individual in question. This is because the Tribunal/court will look to what actually happened in reality: the mere existence of a substitution clause without more will do nothing to assist a company arguing against employment status. Nevertheless, this test provides no conclusive outcome because a right to delegate jobs is compatible with the existence of a contract of employment.[13] Moreover, it is becoming more common for contracts for services to contain clauses forbidding delegation. [14]
The Control test
This is another extremely important test. The question to ask here is: “can the company control what the individual does, and where, how and when it is done?”. For example, a clocking-in system would demonstrate that the company has control over when work is done, and the requirement that the individual reports to the same place of work every day (with no flexibility) shows control over where the work is done. The setting of targets and the requirement to attend team meetings to discuss work output would again demonstrate control over what work is undertaken, and how.
It should be borne in mind that many skilled employees are experts in their field, so it is unlikely that the employer could tell them in terms how to do their job. It is thus useful to consider the definition of ‘control' for such individuals as meaning not the practical ability to control but the theoretical right to control the individual. For example, a firm of solicitors cannot give day to day instruction to senior associates as to how to run a case (as it is their own experience which governs this). However, the firm can in its discretion take the associate away from a particular client or case if it so chooses. The criticism with this test is that the right to control fails to distinguish employment from self-employment because its presence is entirely consistent with both type of contract.[15]
Integration test
This test asks “to what extent is the individual integrated into the employer’s organisation?” For example, the following factors will be useful (there is some cross-over with the multiple or economic reality test). The types of questions to be asked under this test are: first is the individual subject to the company’s disciplinary or grievance procedure? Second is the individual paid holiday or sick pay? Third, does the individual wear the uniform of the company and/or appear to the outside world to be an employee of the company? Forth to what extent is the individual “part and parcel” of the company (e.g., attending company social events, training sessions, team meetings)?
Multiple or economic reality test
This test provides that no one feature is conclusive and recognises that there needs to be a balancing exercise looking at a number of factors, including the items referred to under the other tests. In Hall v Lorimer[16] the Court of Appeal emphasised that the overall picture must be considered. Examples of the additional factors to be taken into account in the multiple test include (but are not limited to) the following: First does the individual take a degree of financial risk? Second, does the individual profit from sound management of tasks? Third, is the individual paid through PAYE or does he provide an invoice for services? Fourth, does the individual hire his own helpers? Fifth, who provides the materials and the equipment? Sixth, is there a prohibition on working for others? Seventh, how have the parties described their relationship?
It is worth nothing that the label placed by the parties on arrangements, and the intention of the parties, is not determinative. If the true nature of a contract is that of employer and employee, the fact that the parties set it up as a contract between principal and independent contractor will not change the fact that an employment relationship exists.
Business on Own Account Test
An approach which has been endorsed in recent cases is a multi-factor one with, the main concern being whether the individual in question can be said to be ‘in business on his own account’. It emerged from the judgment of Cooke J in Market Investigations v Minister of Social Security,[17] where he said:
‘Is the person who has engaged himself to perform these services performing them as a person in business on his own account?’ If the answer to that question is ‘yes’, then the contract is a contract for services. If the answer is ‘no’, then the contract is a contract of service... factors which may be of importance are such matters as whether the man performing the services provides his own equipment, whether he hires his own helpers, what degree of financial risk he takes, what degree of responsibility for investment and management he has, and whether and how far he has an opportunity of profiting from sound management in the performance of his task.’[18]
Some recent illustrations
The employment status of casual and agency workers (typically known as “temps”) has caused a good deal of debate through the Tribunal and appellate court system. In Carmichael v National Power plc[19] Power station guides worked on a “casual as required” basis. They were not obliged to work but if they did, the company paid tax and NI on their behalf. The company provided their uniforms and had control over what the individuals did when giving tours of the power station. They were not entitled to the company’s sick pay and there were no notice provisions applicable to them. It was held that these individuals were not employees as there was no mutuality of obligation: they were not obliged to accept work when offered.
In Brook Street Bureau (UK) Ltd v Dacas [20] Ms Dacas was a cleaner. She had a contract with Brook Street (an employment agency) and worked at a local council. The contract stated that no contract of employment existed with either Brook Street or the Council. The Court of Appeal stated obiter that Ms Dacas could be an employee of the council although the council was not a party to the appeal and no such finding could be made. The Court was of the view that Ms Dacas had to “belong to” somebody and could not be left without an employer.
In James v Greenwich London Borough Council [21] Ms James' work arrangements were set out in two written agreements: one (describing her as self-employed) between herself and an employment agency, the other between the agency and the council. The Court of Appeal in this case ruled that the correct approach for an Employment Tribunal to take is to decide, as a question of fact, whether it is necessary to give the arrangements business efficacy, rather than simply desirable, to imply a contractual relationship between agency worker and end user (in this case, the council).
In Ms James’ case it would not be necessary to imply a contract with the end user since the contractual arrangements in place between Ms James and the agency on the one hand and the agency and end user on the other hand clearly spelled out what the contractual position was i.e. that she did not belong to either Respondent. This is a much more cautious approach than the approach taken in Dacas and this ruling caused a huge sigh of relief for many companies who use agency temps. The message seems to be that unless the paperwork governing the relationship is unclear as to the individual’s status, the Tribunal should not seek to find an employment relationship. This should be a purely legal, not “moral” exercise.
Conclusion
Little assistance is provided by the legislation: the Employment Rights Act 1996 tells us that ‘employee’ means an individual who has entered into or works under a contract of employment.[22] Therefore, it is important to examine the tests laid down by the court to help
Determine the question of employee status. However, the usefulness of these tests is still doubtful. Therefore, the Tribunal’s decision as to whether the individual is or is not an employee boils down to instinct and taking everything into account. For example, does the individual “feel” like an employee or a contractor? Therefore, the best approach when considering the tests appears to be, to analyse the client’s facts against the tests and to come to a reasoned conclusion on the facts at hand.
If you want to discuss how these tests relate to your situation and if you are an employee or a worker. If you have any other query regarding your employee status, then I can coach you or check it for you and help determine where you stand with your employer. If you want to discuss how these tests apply to your situation and if you are an employee or a worker, then click here.
Footnotes
[1] For example, see s.2 Working Time Regulations 1998 and s.1 Part-time Workers Regulations 2000
[2] Stevenson Jordan & Harrison v MacDonald [1952] 1 TLR 101 at 111
[3] Lee v Chung [1990] IRLR 236, 239
[4] O’Kelly v Trusthouse Forte [1983] IRLR 369 at 378–9, per Ackner LJ
[5] [1968] 1 All ER 433
[6] Ibid. 515
[7] O Kahn-Freund, ‘Servants and Independent Contractors’ (1951)14 MLR 504
[8] [1966] 3 All ER 531, at 537
[9] H Collins, ‘Market Power, Bureaucratic Power and the Contract of Employment’ (1986) 15 ILJ 1, 9
[10] This lack of personal service would also mean that he would not be held to be a worker under the worker definition.
[11] [1999] IRLR 367 CA
[12] [2001] IRLR 7
[13] In Global Plant v Secretary of State for Social Services [1972] 1 QB 139 at 152 if the employee ‘could not work himself it was open to him to send another substitute driver if he was qualified to do the work’.
[14] Herbert v Harold Shaw [1959] 2 QB 138
[15] Ready Mixed Concrete (South East) Ltd v Minister of Pensions and NI [1968] 2 QB 497
[16] (1994) ICR 218
[17] [1969] 2 QB 173
[18] [1969] 2 QB 173, 183
[19] [1999] ICR 1226
[20] [2004] EWCA Civ 217
[21] [2008] EWCA Civ 35
[22] Employment Rights Act 1996, s 230(2)
