EMPLOYMENT STATUS

EMPLOYMENT STATUS

Further resources:

Contracts of employment

Contract for services (coming soon)

People who work for an employer may be classed as employees, workers or self employed. The difference is important since employees and workers will benefit from certain statutory rights (paid holidays, right to a redundancy payment, statutory notice periods, the right to claim unfair dismissal etc), whereas the self employed will not.

It is very important then that proper contractual arrangements are in place between the employer and the people working for them which clearly and correctly define the nature of the relationship. Where such paperwork is in place the courts are generally reluctant to argue with what it says, but they will do so if they suspect the contract was established in order to deceive, for example if the employer was trying to unlawfully avoid paying employer’s national insurance contributions.

Problems can arise if the parties to the contract dispute the real meaning of the relationship, normally where a disgruntled contractor claims that really they were employed and attempts to pursue an unfair dismissal claim. HMRC may also seek to challenge employment status under ‘IR35’ regulations. This is outside of the scope of myhrdept.co.uk (as it has more to do with taxation law than employment law), but we should be aware that if HMRC regards a self employed person as really being an employee or worker, then it is likely that employment tribunal might regard the same to be true.

Employees & workers are said to have a contract OF service, self employed people work under a contract FOR services. The distinction is very important.

A genuinely self employed person (and the contract for service) could be expected to comply with all or some of the following:

  • Provides own tools/equipment
  • Free to accept work or not
  • Free to work elsewhere
  • Works for a number of different businesses
  • Free to send in a substitute person to do the work
  • Invoices the employer for work done
  • Pays own taxes and NICs

HMRC provides an employment status check tool on their website. HMRC advise employers to use the tool each time they seek to engage a self employed person under a contract for services and to keep a record of the case number the tool generates. As this record can help provide a defence in the event of a later challenge by HMRC (which could result in the employer having to pay back tax and NICs) this appears to be a worthwhile piece of advice. The tool can be found on: http://www.hmrc.gov.uk/calcs/esi.htm.

Typical employment law pitfalls

An absence of an appropriate and well worded contract defining employment status carries a high risk of trouble in this area. Without a contract in place, the courts will carry out their own analysis and are more likely to find an employment relationship. With a contract in place they will normally accept the contract at face value, unless it has been set up to deceive.

Over time the relationship between the employer and the self employed person may become blurred, particularly if the contractor becomes increasing dependent on one employer. This leads to a risk of tax and NIC back pay and penalties. If employment status is established the employer will also become vulnerable to claims for unpaid holiday pay (going back years), minimum wage, redundancy payments etc. Normally from an employment law point of view this risk arises if the employer and the self employed person enter into dispute, but from a tax point of view HMRC also employ enforcement officers to check on the true status of 'self employed' workers.

Help and support

We can help prepare appropriate contracts for self employed people and we can help to determine the employment status of others if there are any concerns. Employment status is a notoriously difficult area of employment law, but by applying a range of tests we are normally able to provide an assessment of the risk of a self employed person being regarded as an employee or worker.

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