This a guide to help determine how you should consider employment status.
It is important to establish how individuals who will carry out work for or on behalf of the business should be classified: as employees, workers, or self-employed. There are some defining characteristics for each category, but these can be blurred or overlap and a judgment must be made based on the facts of each case as to which category most accurately reflects the relationship. Employees have the most rights and protections and self-employed the least, with workers in the middle.
This issue has become even more pertinent in recent years due to the emergence of the ‘gig economy’. This is characterised by companies who offer access to platforms that connect customers with providers of goods or services such as Uber, Airbnb, Hermes and Deliveroo.
One of the drivers of the gig economy has been the increasing availability of mobile technology, which allows businesses to respond immediately to fluctuating demand for services by calling on any individuals who happen to be available to work at the relevant time. Many businesses want this flexibility and as a result are increasingly relying on more adaptable types of work contracts, as traditional fixed-hours contracts do not provide the flexibility needed to respond to this demand.
What are the benefits of self-employed contractors?
The business models of many ‘gig economy’ companies rely on engaging individuals to provide goods or services directly to customers as self-employed contractors, who have the freedom to accept work or reject it, rather than as employees. The market is therefore characterised by temporary jobs with a prevalence of short-term contracts or freelance work.
The benefits for companies engaging self-employed contractors are significant:
- They are cheaper and more flexible, their contracts can be terminated without notice.
- They only need to be paid for the work that they perform, not for their time.
- They do not need to be paid holiday pay, the national minimum wage or national living wage.
- From a tax perspective, employer’s National Insurance contributions are not chargeable in respect of fees paid to self-employed persons.
Having a pool of self-employed contractors enables a business to expand quickly and efficiently in busy periods to satisfy customer demand. One of the features of the gig economy is that it directly links customer demand to the supply of workers.
How can you distinguish status?
Three primary factors must exist to establish employment status, along with a range of others:
Mutuality of obligation: The employer must be obliged to provide work and the individual must be obliged to accept and carry out the work in return for pay. There must be a minimum degree of commitment on both parties.
Personal service: The individual is obliged to perform work personally in return for a wage or remuneration and is not permitted to use a substitute to perform the work or to subcontract the work.
Control: The employer must exercise sufficient control over the employee and the way that they perform the work, including when, where and how. An employer will normally exercise this control by giving directions to the employee and invoking disciplinary proceedings if the employee fails to carry out the directions.
Why is this important?
Recent legal challenges on employment status have highlighted the significant risk that individuals engaged on a purportedly self-employed basis, may turn out to be categorised by a Tribunal as workers or employees.
This may entitle them to a number of employment rights including:
- Rights to rest breaks and paid annual leave.
- The national minimum wage or the national living wage.
- The right not to have unlawful deductions made from their wages.
- The right to be automatically enrolled in a pension scheme.
- The right not to suffer detriment for exercising rights in respect of trade union membership.
One of the biggest challenges for companies operating in the gig economy is individuals being misclassified as self-employed and therefore have incorrectly not been paid for any annual leave accrued. This opens the possibility of large claims for unpaid statutory holiday by the entire workforce.
If you would like advice on any issues related to employment status please do get in touch with us.