Guidance on employment status: the end for self-employed contractors?

You could certainly be forgiven for thinking so. The trusty old role of independent contractor has fallen like dominos in a raft of cases: Uber, Addison Lee, Deliveroo… Then, in Pimlico Plumbers v Smith the Supreme Court upheld the decision of all the courts before it that Mr Smith was a worker and not self-employed. This trend can feel disconcerting for charities that retain individuals off-payroll. 

But despite the headlines, it is of course still possible for someone to be genuinely self-employed. The onus, however, is on organisations to ensure they properly understand the concepts underlying employment status and to apply them appropriately in each particular case. Easier said than done admittedly, this article aims is to help you with that task.

Pimlico Plumbers

The Supreme Court’s decision in Pimlico Plumbers in fact adds very little to the law on determining worker status. There was some interesting discussion about the right to substitution i.e. the right for self-employed contractors to have someone else perform their duties for them, and the need to assess whether the “dominant feature of the contract” remained an obligation to perform work personally notwithstanding such a right. However, in the main, the Court just reminded us how much employment status cases depend on their individual facts. 

What is employment status?

In order to recruit someone with the correct employment status, it is important to understand the different relationships which might arise between the parties. In the employment law context, there are three different categories:

1. Employee – an individual working under a contract of employment with obligations to work generally at set times, under the control of their employer.
   
   
2. Genuinely self-employed – covers individuals engaged to provide specific expertise for a particular project or purpose (and will include, for example, independent contractors, freelancers, consultants etc). 

3. Worker – an intermediate hybrid category, created by statute. It covers people who do not reach the higher pass mark to qualify as an employee but nonetheless there are a number of features of the relationship which point towards employment. This is only relevant for employment law purposes, not tax purposes (but see our comments on the Employment Status for tax tool below).

When assessing the question of employment status, the contractual documentation will be the starting point but is not conclusive. Instead, the courts have identified a number of factors which will be taken into account when considering status, including mutuality of obligation, personal service and control.

Why is employment status important?

The distinction is important because it affects the rights and protections granted to individuals and the way in which they are taxed. 'Employees' for example have significantly more rights than any other category. ‘Workers' have fewer employment rights, but nevertheless are still afforded a number of important protections, including the right to statutory sick pay, paid annual leave and the National Minimum Wage.

If you get someone’s employment status wrong, it could be costly.

The majority of issues are likely to arise if you incorrectly classify someone as self-employed when they are in fact an employee or, which is perhaps more likely, a worker. This could give someone a claim for backdated pay in respect of things like annual leave, pension contributions and sick pay.

Practical tips: what it means for the contracting process

There is no denying that the so-called gig economy cases have created a greater culture of challenge when it comes to employment status and so increased the need for organisations to try to get employment status right from the start. Here is our guidance for how to do this:

• Employment status should be assessed for each contract on a case-by-case basis. A blanket approach – as adopted by the likes of Pimlico Plumbers and Uber – can lead to difficulties since it fails to appreciate the nuances in individual cases.

• You will be in the best risk position if you properly think status through at the start – consider what the reality of the relationship will be like and document your thought process in case you're ever asked to justify it.

• Be honest. It may be more convenient to label a role as self-employed but if, for example, you want a high level of control over the individual, that may not be the correct label to use. 

• Remember, the courts will look behind any contract you draw up. So do not include things like a substitution clause in a contract if you have no intention of ever allowing the individual to use a substitute.

• If in doubt, play it safe and engage someone as a worker (eg provide them with paid holiday, statutory sick pay etc) or possibly an employee (perhaps via a fixed-term contract, remembering that employees do not obtain unfair dismissal rights until they have two years' service).

• Keep things under review on an ongoing basis. It is all too easy for someone to start off as genuinely self-employed but for their role to change over time and for boundaries to blur. If that happens, you may need to consider whether a new contract is necessary.

• Consider using the government's Employment Status for Tax tool. This allows you to input information about the relationship into a survey and HMRC will give a view on how the engagement should be classed for tax purposes. There are two words of warning:
  • the tool is only as good as the information put in, and
  • it is only relevant for tax purposes and will not, for example, give any indication about whether someone might be a worker. 

However, it can form a useful part of your thought process when considering the status of a role.

This publication is a general summary. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, September 2018