Employment Status – what the law says

Legal definition

Whether or not an individual is an “employee” is generally determined by reference to the contract under which he or she works.  The Employment Rights Act 1996 Section 230(1) defines an employee as:-

“an individual who has entered into or works under (or where the employment has ceased, worked under) a Contract of Employment”.

The 1996 Act Section 230(2) goes on to define a Contract of Employment as:-

“Contract of Service or Apprenticeship whether express or implied and if it is express, whether oral or in writing.”

Under section 230(3) of the Employment Rights Act 1996 defines a “worker” as:-

“an individual who has entered into or works under, or worked under a (a) contract of employment; or (b) any other contract…whereby the individual undertakes to do or perform personally any work or services for any other party to the contract whose status is not by virtue of the contract that of a client or customer of any professional or business undertaking carried on by the individual”.

It is the second part of the definition which differentiates a “worker” from an “employee. There is no specific definition of a self-employed contractor.

Contract

A key element that a Tribunal will consider when determining the relationship of the parties will be to consider the written contract between the parties. Unscrupulous employers have tried to hide behind these agreements in order to reduce their obligations to those working for them by drafting one-sided written contracts providing for arms-length employer/self-employed relationships.

In previous years, it was difficult to have these agreements set aside. Courts were reluctant to treat transactions as “shams” due to the narrow definition of a “sham”. A “sham” was when acts or documents were presented to workers to sign with the deliberate intention of “creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create.” Snook v London and West Riding Investments Ltd[1967] 2 QB 786, CA

However, Courts and Tribunals helpfully have in recent years moved away from requiring deliberate intention to deceive and instead will look at the reality of the agreement. In Protecta Firthglow Limited v Szilagi [2009] EWCA Civ 98, the Court of Appeal held that there was a “sham” agreement when it “did not describe or represent the true intentions and expectations of the parties.” (i.e. no deliberate intention to deceive was needed to have the agreement set aside.)

This approach was supported in the Supreme Court case of Autoclenz Ltd v Belcher and others [2011] UKSC 41. The claimants were 20 individual valeters who all worked under written agreements that stated they were self-employed. The Supreme Court looked beyond the written contracts and instead considered the reality of the workers employment. This ruling supported the decision of Protecta as the Court looked behind the contract even when there was no deliberate intention to deceive. Significant weight can be placed on the Autoclenz case as it is from the Supreme Court.

Other important factors in determining the relationship

Factors tending to establish a person is an “employee”:-

  1. That there is a mutuality of obligations between the person and his employer.  This can involve a number of factors including personal service (where only the individual can perform the work), an expectation that the employee will turn up for work regularly (a set working week often with set working hours) and commonly a long-term working relationship.  From the employers’ perspective, mutuality of obligations can involve payment of sick pay/paid holidays and/or provision of a consistent flow of regular work for the employee.  
  2. That the employer controls the work carried out by the person.  This issue of “control” can involve a number of factors such as day-to-day direction by the employer of how the person carries out the work, and provision of a regular workplace, tools, equipment and materials. The more control that there is by the employer the more likely the relationship will be seen as employer/employee.  
  3. If the written rights and obligations are consistent with those of an employment contract, this will help to show that the contract is one between employer and employee. 

Factors for establishing that a person is a “worker”:-

  1. If the worker requires personally to perform services for the employer and that they are unable to send anyone in their place to carry out the work,
  2. That the vast majority if not all of the work tools are provided by the employer,
  3. That the worker signs-in and signs-out at work each day,
  4. If the worker is required to work to regular site hours during the period of work for the employer,
  5. Where the work done is controlled by the employer on a day-to-day basis,
  6. That the worker does not work for other contractors during the period of work with the employer,
  7. That the worker is not working under CIS4, is paid net of tax and does not submit annual tax returns as if clearly self-employed.
  8. That your written contract does not set out that you are to be considered as a self-employed contractor. 

Difficulties have arisen as a result of the decision of the EAT in Bacica v Muir [2006] IRLR 35. In this case Mr. Bacica worked under CIS4. He also worked from time to time with other contractors during the period that he was working for the company against which he was claiming. The Tribunal relied heavily on vi and vii above in deciding that he was self-employed. The Tribunal placed less emphasis on the fact that work had to be carried out personally. This case shows that Courts and Tribunals will consider each case on its own specific facts. If a worker works under CIS4, this is a factor leading to suggest self-employed status but will not be decisive. 

The cases of Bacica and Autoclenz are the key cases in determining employment status. Courts and Tribunals will weigh-up the various factors to determine if a claimant is a “worker” or an “employee” or is properly self-employed.  If many or all the factors come under the heading of a “worker”, the claimant should be considered as a “worker”.  Furthermore, if the factors are weighing so heavily in that direction, there may even be sufficient evidence of mutuality of obligations and control that the worker could even be classified as an “employee” and enjoy further legal rights.

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