The bare facts of employment status: Employee rights v. contractor rights

The bare facts of employment status: Employee rights v. contractor rights

Editor’s Note: We have a special guest on the blog today. Saracens Solicitors is a full service law firm based in the West End of London. For more information visit saracenssolicitors.co.uk.

Distinguishing between employees and contractors is not as easy as it may first seem. Although the division between a typical employee and a typical contractor may be very clear, there is a large grey area where the characteristics of both of these types of worker can become blurred.

In recent years, with the advent of flexible and alternative working arrangements, the need to distinguish between the two types of relationships is more important than ever, but it is becoming clearer and clearer that many people do not understand the distinction between the two and why it is so important.

Does it matter?

Does it really make a difference what someone’s employment status is or whether they are classified as an employee or contractor? In most cases the resounding answer is: yes it does!

The employment status of an individual is significant for both the employer/paymaster and the employee/contractor. This is because the rights and duties of the parties vary according to the type of relationship that exists between them. These duties can be costly for employers and the corresponding rights and entitlements can be invaluable for employees.

Some employee rights and contractor rights and the corresponding duties on the ‘employer’, are set out below:

 

 Employer Duties

Employees’ rights

Contractors’ rights

Minimum notice period

Yes

No
Redundancy payment Yes No
The right to not be unfairly dismissed

Yes

No
Maternity, paternity or adoption pay

Yes

No
Maternity, paternity or adoption leave

Yes

No
Statutory paid holiday

Yes

No
Statutory sick pay

Yes

No
Vicarious liability of the employer for acts done by an individual in the course of their employment/engagement

Yes

No
Obligations implied into the contract, e.g. mutual duty of trust and confidence

Yes

No
Not to be refused employment because of membership/non-membership of a trade union

Yes

No
Not to suffer detriment as a result of jury service

Yes

No
Written statement of reasons for dismissal

Yes

No
Right to continued employment when the business is sold on

Yes

No

As you can see, there are a variety of employee rights which employers need not provide to independent contractors. There are significant differences in employee rights and contractor rights.

Factors that determine whether an individual is an employee or contractor

The key test for determining employment status was discussed in the case of Ready-Mixed Concrete Limited 1968. The test involves considering:

  • whether there is a ‘personal service’ in return for a wage or remuneration;
  • whether there is ‘control’ of the employee/contractor by the ‘employer’;
  • whether other arrangements are consistent with characteristics of employment or contracting.

A further factor to consider, as set out in case law, is:

  • whether there is mutuality of obligation.

1.    Personal service
Providing a ‘personal service’ refers to the extent to which an individual can substitute or subcontract the services he provides. For example, if there is no obligation on an individual to ‘personally’ perform a task, it is unlikely that the law will see this as a relationship of employer/ employee.
The key is to understand the extent to which services or people who provide them can be substituted.
2.    Mutuality of obligation
This is the obligation on an employer to provide work and the obligation on an individual to accept that work. If both are obliged to so, there is a strong indication that there is a relationship of employment.

But there are exceptions to this rule. In the case of ABC News Intercontinental Inc, the employee was a TV reporter who could accept or refuse any assignment offered to him. However, the court found that there was an implied duty on a TV reporter to accept or refuse assignments in good faith, and so the fact that he could technically refuse the assignments was not conclusive. The courts held that, in practice, there was mutuality of obligation.
3.    Control
The next question to ask is whether all the circumstances lead to one party having a sufficient degree of control to make one of them ‘master’ and the other ‘servant’. If the ‘employer’ has a sufficient degree of control, this may indicate that there is an employment relationship.

The court will consider not just whether the individual has day to day control over the work he/she does, but also whether there is a contractual right of control over the individual. For example, in White & Anor 2013 two housekeepers were given the freedom to carry out their daily duties in a way of their own choosing and the owners of the property were mostly absent while they carried out the work. The court said “…it does not follow that, because an absentee master has entrusted day to day control to such retainers, he has divested himself of the contractual right to give instructions to them”. This shows that control over an individual can still exist even where the individual has a high degree of autonomy in the execution of his day to day tasks.
Factors to consider in assessing level of control include:

•    the extent to which the individual works independently from the ‘employer’
•    the difference between the controls and supervision that are exercised over other employees compared with the individual
•    the power of the individual to decide what has to be done, how it has to be done and the time and place it is to be carried out
•    the extent to which the individual can determine their own working days and hours

4.    Other factors
The courts have made clear that determining an individual’s employment status is not a tick-box exercise. All factors should be considered together in order to paint an accurate picture of the relationship. For example, a high degree of control by itself is unlikely to be conclusive of the employment status. All of the circumstances surrounding the engagement should be considered.

Points to consider include:

•    Who supplies and maintains any necessary work equipment?
•    If extra help is required for the work, is it the individual or the ‘employer’ who hires others to help?
•    Who bears the financial risk?
•    To what extent is the individual integrated into the structure of the ‘employer’s’ business?
•    Does the individual profit from their own good performance?
•    Is the individual paid a salary or fixed wage?
•    Is the individual given holiday or sick pay?
•    Do the individuals’ rights under the contract correspond more with contractors’ rights or employees’ rights?
•    Are there restrictions on the individual working for others?
•    What is the nature and length of engagements entered into?
•    To what extent is the individual independent from the paymaster?
•    Is the individual part of the ‘employer’s’ scheme of benefit?

Descriptions applied by the parties

The way the parties describe themselves and their intended employment status is not conclusive of the matter. The true nature of their relationship is what really matters. However, the courts have said that the understanding of the parties should not be completely disregarded, especially where the situation is marginal.

How to ensure you achieve the desired employment status

There is no magic formula to use to ensure a particular employment status is achieved. However, the following points should be borne in mind:

•    The requirement of ‘personal service’ is usually weighted heavily. However, this depends on whether the duties that can be delegated are the ‘dominant purpose’ of the agreement, when and how the right to delegate arises, who organises the substitutes and whether there are any limitations on the substitution.
•    The requirement of ‘mutual obligations’ is also very important to a finding of an employment relationship. However, as noted above (under ‘mutuality of obligation’) the courts will take a flexible approach in determining whether this element exists.
•    The extent of ‘control’ exercised over the individual is important, but is unlikely to be the only relevant factor.
•    It will usually be necessary to assess the overall nature of the relationship, including the ‘other factors’ referred to above, in determining whether an over-arching employment contract exists.

For confidential advice on any employment law matters, contact Saracens Solicitors online or on 020 3588 3500.

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