Employment status - the elephant in the workplace

Emma Wilkinson focuses on the basic principles of this common query

This article was originally published in the November/December 2017 issue of Adviser magazine and was correct at the date of publishing.

Why status is important

Broadly speaking, there are 3 main categories of employment status:

• employee
• worker
• self employed

Arguably, there are 5 categories if you include:

• the different and wider definition of ‘employee’ found in the Equality Act 2010(1) for the purposes of discrimination law, and
• ‘employee shareholders(2)’.

In employment law, a person’s employment status determines their statutory rights. All statutory rights are dependent on establishing the existence of a relevant contract to which those rights apply. There are no statutory employment rights that attach to a person who is not an employee or a worker.

Determining status

The issue of determining employment status is approached objectively by the courts and tribunals, regardless of the labels placed on the relationship by either or both parties. Where all of the terms of the contract between the parties are contained in contractual documents, then the issue of status is a matter of law. However, most employment relationships are living and evolving creatures whose terms are to be found across a mixture of contractual documents, verbal agreements and the way in which the parties have conducted the relationship in reality; determining the real terms of these contracts, and employment status, then becomes a matter of fact for the court or tribunal(3).

Why it’s difficult and why it’s easy

It’s easy because:

• In some cases the answer to the status question is obvious. There are obvious ‘employees’. A salaried, full time worker with a ‘permanent’ contract is not going to struggle to establish that they are an employee.
• There are obvious ‘workers’ too. Agency workers are, in other than the most unusual circumstances, never ‘employees’ of the agency or of the end user who buys their labour from the agency, but they are ‘workers’.

But ‘atypical’ workers are increasingly the norm. The labour market is changing, and workers that we used to call ‘atypical workers’ are becoming the norm in an increasingly casualised workforce, heavily reliant on casual or agency workers.

It’s difficult because:

• There is no statutory definition of ‘employee’ in UK employment law. The Employment Rights Act 1996 defines an employee as a person who works under a contract of service, which is another term for a contract of employment — so the definition is circular.

So the test for determining status is based on case law. As there is no statutory definition, the test for ascertaining whether or not someone is an employee is a common law (case law) test, with its roots in 19th century ‘master and servant’ law. As social conventions and working relationships have changed over the years, the courts and tribunals have had to revisit and adapt the common law test to reflect modern realities but many of the cases that contribute to the law in this area refer to ‘the elephant test’ because, when determining the existence of a contract of employment, the courts have made statements such as “you know it when you see it” or “it is almost impossible to give a precise definition…It is often easy to recognise a contract of [employment] when you see it, but difficult to say wherein the difference lies.”

Establishing employment status - the tests

Step 1 is to establish the existence of a contract (of some sort).

In order for a contract of any sort to be created there must be:

• offer by one party
• acceptance by the other party
• consideration (something of value passes between the parties — in a commercial contract for example, goods are exchanged for cash. In the arena of employment law, labour is exchanged for pay)
• certainty
• an intention to create legal relations

There are some common situations where no contract of any kind exists:

• Volunteers - volunteers receive no pay other than, occasionally, expenses which are not ‘pay’. This would include genuine unpaid internship arrangements. There is no ‘consideration’. In discrimination law, the Supreme Court has held that volunteers are outside the much wider definition of ‘employment’
• Between agency workers and end users - dealt with in more detail below

Step 2 is to determine what kind of contract it is

Once it has been established that a contract exists, status is determined by deciding what sort of contract it is.

What is an ‘employee’ contract?

A contract of employment is defined in the Employment Rights Act 1996 as a ‘contract of service or apprenticeship’.

In the modern world, the courts and tribunals apply a common law test to determine employee status. Following the established case of Ready mixed concrete (South East) Ltd v Minister of Pensions and National Insurance (1968) 1 All ER 433 it was held that there are essential characteristics (the ‘irreducible minimum’) that must be present in order for a contract to be one of service or employment.

Broadly speaking these are:

• personal performance
• control
• mutuality of obligation
• that all of the other characteristics of the agreement are not inconsistent with its being a contract of service

Personal performance

The worker must undertake to do the work personally. They cannot send another worker to perform the work for them because they are ill, or on holiday, on a whim or because they can make a profit by taking the hourly rate they are paid, and paying someone else to do the work for less.

Alive to this element of the test, employers have sought to place a ‘substitution clause’ into the contract, which appears to allow the worker to do just that.

The courts have dealt with this in two ways:

• Finding on the facts that the clause is a ‘sham’ clause, inserted to deceive and not representing the true agreement between the parties (but just because a worker has never had occasion to invoke the substitution clause does not necessarily mean it is sham).
• Finding on the facts that the substitution clause was genuine, but there was not an ‘unfettered’ right to send a substitute i.e. the contract dictates the circumstances in which a substitute can be sent and the substitute must meet the approval of the employer

Control

There are many forms of control in working relationships - practical and legal, direct and indirect. The test is that the employer can control what the worker does, not necessarily how the worker does it, although that is often also the case (for example a senior professional manager or expert may have complete autonomy in performing their role but their employer controls what role they are expected to meet). Ultimate authority rests with the employer even where day-to-day operational decisions have been delegated to the worker. There is an element of control between a customer/client and a genuinely self-employed person, but the client is buying the outcome of that person’s labour, a product or services, rather than their labour itself.

Mutuality of obligation

“There must . . . be an irreducible minimum of obligation on each side to create a contract of service”.

Mutuality of obligation has come to be seen as the third essential component of a contract of employment. It arises out of the consideration that creates the contract - the exchange of labour for pay. Within that, in order for the contract to be one of employment, there must be an obligation on the employer to guarantee a certain amount of work, and an obligation on the employee to do that work. Casual and zero hours workers sometimes have difficulties in this area. Remember that it must be the contract, whether verbal or written, that contains the obligation on both sides, for example: ‘Your normal hours of work are 16 hours per week.’ Where the contract is for zero hours, or on a casual ‘as and when needed’ basis, the fact that the worker happens to work regular hours week-in and week-out does not mean that there is a contractual guarantee of those hours, and therefore mutuality of obligation is called into question.

Nothing inconsistent with a contract of service

These are secondary factors which, in a borderline case, may sway a tribunal one way or another. They are not a substitute for the main tests, and none of them is on its own determinative of employment status; the tribunal is trying to build a true picture of the nature of the relationship by looking at it in detail and from different angles.

The following non-exhaustive list of factors may be considered by a tribunal:

• a regular wage or salary points towards employment, profit sharing or submission of invoices towards self-employment
• who provides capital and who stands to make a profit or loss depending on the success or failure of the undertaking
• who provided tools or equipment
• was the worker free to work for other, even rival, businesses
• was the worker obliged to perform work under the contract
• what is the convention about ways of working in that industry sector
• what were the arrangements for payment of tax and national insurance (however bear in mind the comments made by Smith LJ in the Court of Appeal in Autoclenz v Belcher [2009] EWCA Civ 1046; ‘the argument of the employee is rather less attractive where, for many years, he accepts that he is a self- employed contractor and benefits from the rather more favourable taxation arrangements which are available to people running their own businesses. However, it seems to me that, even where the arrangement has been allowed to continue for many years without question on either side, once the courts are asked to determine the question of status, they must do so on the basis of the true legal position, regardless of what the parties had been content to accept over the years’)
• was there a right for the employer to terminate the arrangement
• were sick pay, holiday pay or pension contributions payable
• how did the parties see their relationship

Apprentices

Apprentices are, quite simply, employees as defined in the Employment Rights Act 1996.

What is a ‘worker’ contract?

A worker is defined, in s230 of the Employment Rights Act 1996, and in other legislation in similar terms, as a person who works under:

• a contract of employment (therefore all ‘employees’ are also ‘workers’); 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 to another party to the contract whose status [i.e. the employer’s 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.

So there are 2 key requirements:

• that the work is performed personally (so there is not a genuine right of substitution); and
• that the relationship is not one between a client or customer and a genuinely self-employed person.

Who is genuinely self-employed?

Again, it’s often a matter of ‘You know it when you see it’. A team of builders who spend four weeks building an extension on your house are not your employees for those four weeks. You are buying the result of their labour and their labour is secondary; they are free to deliver the work as they see fit provided you are happy with the outcome. They may allocate different workers or subcontractors as they see fit.

What about freelancers such as a web designer or a management consultant? They may be embedded in a company for months or years working alongside employees. They might even be managing other employees of the company. Again, it is about the outcome of their labour not their labour itself. As long as they deliver, they can deliver as they see fit. There might be elements of personal service, control and mutuality of obligation in the arrangement so why are they not ‘employees’ or ‘workers’. It depends on the facts; perhaps the less autonomy they have, the more they might be ‘employees’ or ‘workers’ in disguise. The greater the inequality of bargaining power, or the lower down the hierarchical structure of the company, the more they might be workers.

Think about a theatre company. The set designer is clearly self-employed. She works from her own studio, uses her own resources, charges for the completed job not by the hour, pays her own tax and national insurance contributions, delivers proposals for acceptance or rejection and works for other clients at the same time. But what about the wardrobe manager? He works under the control of the company. His job is to fit costumes, turn up for work every day and leave at set times for a period of three months, and maintain the costumes for the period of the run. He performs the work himself under the direction of the stage manager. He is obliged to turn up and is guaranteed the work. Why shouldn’t he argue that he is a worker or an employee? He might be, but the tribunal will look at the relationship in the round; industry conventions, the intentions of the parties, the equality of bargaining power, the fact that he negotiated and invoiced for a lump sum payment gross of tax and national insurance before agreeing to do the job.

Conclusion

It is important to understand the principles you are dealing with, but sometimes there is no ‘right’ answer. You could even say in some cases that employment status exists in an unknown state until that point where a judicial decision ‘fixes’ it.

It is essential to apply the above tests in every circumstance and be able to explain your reasoning to an employer, judge or other relevant body such as the DWP or HMRC.

In the next in the series of articles, we will focus on the grey areas and more tricky applications of employment status determinations such as the increasingly used umbrella contracts, zero hours contracts and agency worker contracts. We will also take the opportunity to consider how employment status applies to other areas of law including Housing, Benefits and Debt.

Emma Wilkinson is the Senior Employment Expert from the Expert Advice Team at Citizens Advice.

Endnotes

(1) The Equality Act 2010 operates in a wider sphere of employment relationships to protect against discrimination. S83’s definition of ‘employment’ takes in employees, apprentices, and workers. It includes people who have ‘entered into a contract to personally do work’ without ruling out the genuinely self-employed who are carrying on a profession or business undertaking on their own behalf, provided that they have contracted personally to do the work. So, for example, a genuinely self-employed freelancer or consultant who is undertaking to perform the work themselves is protected against discrimination.

(2) In 2013 the government introduced a new concept, that of ‘employee shareholder’, defined in s205A of the Employment Rights Act 1996. Such an individual is essentially an employee, but gives up key rights in return for shares in the employer’s business worth between £2000 and £50000 along with tax breaks in respect of those shares. The rights given up are to claim unfair dismissal (except for an automatically unfair dismissal), entitlement to a redundancy payment, and entitlement to request flexible working or a redundancy payment. The idea was a flop and to this writer’s knowledge scarcely anyone was remotely interested in offering or doing work on this basis!

(3) Carmichael v National Power [2000] IRLR 43