It is very important to determine whether someone is an employee, an independent contractor or a worker for employment law purposes. The answer will essentially determine who qualifies for certain employment rights and who does not.
On a very simple level, independent contractors are individuals who set up business on their own account and provide services to others under a contract for services. This could be, for example, an individual who has set up his own contract cleaning business. He will normally provide cleaning services to a number of different customers when needed and invoice the customer on a weekly or monthly basis. He will incur his own expenses in running the business and sort out his own tax affairs with HMRC directly. Independent contractors are therefore regarded as self-employed and have no employment relationship with those for whom they perform services.
Employees on the other hand are usually required to work regular hours, on tasks set by the employer, at a set location and for a fixed salary. They will generally receive the usual employee benefits including a fixed salary and paid holiday leave.
Who is an employee?
The definition of an employee
Section 230(1) ERA 1996 provides that an employee is an individual who has entered into, or works under (or where the employment has ceased, worked under) a contract of employment.
This definition is fairly unhelpful because (as with most contracts) the courts will look at the substance and not the form of the contract. The label the parties choose to put on a contract in terms of whether they call it a contract of employment (sometimes also called a contract of service) or label it a contract for services is of very little significance. This label will only be one of the many factors which the courts will look at before deciding whether an individual is an employee or falls into some other category.
The answer to the question of whether an individual is an employee rests instead on a number of common law tests. These are:
- the personal service test;
- the control test;
- mutuality of obligation test; and
- other factors – economic reality and integration tests.
The personal service test
This test considers whether the individual must perform work personally. If the
individual has a right to send a substitute to perform the work in his/her place
this may negate employment status. However the Tribunal will consider if the
right to substitute is fettered in any way (e.g. does the substitute have to be
selected from a list that the employer has pre-approved?). The Tribunal will
also look at whether the right to send a substitute has actually been exercised
in practice.
The control test
The control test explores the level of control an employer has over the individual’s work pattern. The control test involves applying a number of questions to the circumstances of the case to determine what level of control the employer has. For example:
- To what extent does the employer control who does the work?
- Does the employer control what work is done e.g. does he control the order in which jobs or tasks are undertaken?
- What control does the employer have over where the work is done?
- Does the employer have control over when the work is done and the number of hours worked?
- Can the employer control how the work is to be performed?
If, after asking these questions, you arrive at the conclusion that the employer has very little control, this will tend to point away from an employment relationship existing.
The mutuality of obligation test
Under this test the employer should be under a duty to provide work and the individual under a duty to accept and then perform the work when given it. The expression ‘employer’ is used in this context as meaning the person to whom the services are being provided and not the ‘employer’ in the legal sense of an employer/employee relationship.
Other factors – economic reality and integration tests
The courts recognise that the question of whether an individual is an employee comes down to a combination of features taking into account all aspects of a person’s work activities.
The tests mentioned above are relevant and examples of additional factors taken into account under this test include:
- whether the individual is integrated into the workforce;
- whether the individual bears a degree of financial risk;
- how the individual is paid (is it via a regular wage slip or does he/she submit an invoice for work done?);
- whether the individual is able to work for others;
- how have the parties described their relationship?
- is the individual subject to the company’s disciplinary or grievance procedure?
- is the individual paid holiday or sick pay?
- does the individual wear the uniform of the company and/or appear to the outside world to be an employee of the company? and
- how his/her earnings are taxed (is tax deducted at source via PAYE or does he/she account to HMRC for his/her own taxes?).
Once you have applied these tests, you should be able to paint an overall picture from which to decipher who is likely to be considered an employee and who is not. If the individual is not an employee then he will not be able to benefit from some of the very important and more traditional employment rights, including the right not to be unfairly dismissed and the right to receive a redundancy payment in the event of a redundancy situation arising.
Who is a worker?
Why do we need to know?
As the scope of employment protection broadens, workers have acquired new rights in the workplace. The following are some of the legislative measures that contain provisions covering workers and not just employees:
- Public Interest Disclosure Act 1998
- Working Time Regulations 1998
- National Minimum Wage Act 1998
- Equality Act 2010
The definition of a worker
All employees are also workers, but not all workers are employees. Therefore, the category of ‘worker’ is wider and extends certain employment law protection to others who are not employees.
Section 230(3) ERA 1996 defines a worker as an individual who has entered into or works under (or where the employment has ceased, worked under):
- a contract of employment; or
- any other contract, whether express or implied, and (if it is express) whether oral or in writing, whereby the individual undertakes to do or perform personally any work or services for another party to the contract whose status is not by virtue of the contract that of a client or customer of any profession or business undertaking carried on by the individual.
The requirement to perform the services personally and not to be doing so as part of a business venture or profession where there is a client/customer relationship is the key to whether or not the person will be regarded as a worker. Workers may fall into any of the following categories: temporary workers; casual workers; locums; sub-contractors; and consultants.
Who is an independent contractor?
An independent contractor is someone who works under a contract for services rather than a contract of service. They are sometimes referred to as freelance workers or self employed.
Independent contractors are commonly found in certain industries such as construction, catering, shipping and the IT industry. Very often the individual concerned will enter into a contract through which his services will be provided to the relevant business.
The contract between the individual and the business will be drafted to provide for maximum flexibility, to ensure that the individual is not required to perform the services personally, is not subject to overt control and can be seen to bear a degree of financial risk. Again the courts will look at the substance and not just the form of the contract. Provided the arrangement is genuine, the independent contractor should not be an employee or a worker.