Employment status is significant because it effects what rights that person has, what responsibilities a company has towards them, and what the tax position is of that person.
The following are the different statuses:
A worker is an individual who works under a contract where they agree “to do or perform personally any work or services for another party to the contract whose status is not … that of a client or customer”.
An employee is an individual employed under a contract of employment. The difference between a worker and an employee is a blurred line, but generally it accepted that workers are not an employee if they are free, without penalty, to accept or reject any offer of work made to them.
Further factors to consider on status are discussed below.
If someone doesn’t fall into any of the definitions above, then it is likely that they are self employed.
Why does it matter?
Employment status matters because it effects what rights each individual has. For example, self-employed individuals cannot bring matters before the employment tribunal, have no entitlement to a regular salary, maternity or paternity pay, sick pay, holiday pay, etc.
Perhaps most importantly for some people, status also matters because of tax implications. We’re not tax lawyers here at Thrive, but broadly self-employed individuals are responsible for their own taxation, and responsible for registering for VAT, whilst employers must register employees for PAYE and National Insurance.
IR35 is the tax legislation which allows HMRC to collect additional payment where a contractor (or self employed person) is in fact an employee in all but name. IR35 is subject to changes in April 2020.
Factors Indicating Status
HMRC has a CEST tool which considers what status an individual might have from a HMRC perspective. But HMRC and the Tribunal do not always have the same tests and considerations, and do not always have to come to the same conclusions. This means that, whilst a HMRC might accept an individual’s tax status, there are some situations where a Tribunal may find that the individual was an employee or worker, affording them right to claim unfair dismissal/owed holiday pay/owed sick pay etc. These kinds of decisions would usually be made at a preliminary hearing at the Tribunal if there was a dispute about employment status.
The following factors are considered when deciding status:
In an employment relationship, an employer is under an obligation to provide an individual with work and the individual is also obliged to make themselves available to do the work.
Alternatively, if a company is not obliged to offer work on a regular or frequent basis and the individual has no obligation to accept any work that is offered, that would be more indicative of self-employed status.
An employed individual is required to provide their services personally. Usually, there is no right for an employee to appoint a substitute. If there is a right of substitution, it would in most cases be subject to the employer’s approval and may only be invoked where the individual is unable, rather than unwilling, to work.
A self-employed individual would not be obliged to carry out the work personally, and would be able to appoint a substitute.
A self-employed person can determine when, where and how they work and are not under the direct supervisor of the employer or any management within the employing organisation (save for where their tasks might have objectives which require approval).
An employee is under the control of the employer to such a degree as to make the employer their “master”. In other words, the employer controls what the individual does, how they do it and when they do it. Those holding senior, professional or skilled positions, including directors, may retain significant control over how they carry out their work but still be employees. Employees are also expected to conform to the employer’s day-to-day direction and rules and policies governing, for example, conduct and standards at work.
An employee will not usually be free to work for other employers without the express permission of the employer (especially where an employee works full time – but it is not unusual for a person to have more than one part-time employment). Senior employees may also be subject to post-termination restrictive covenants in their contract.
Self-employed individuals will be free to provide their services to whomever they choose without operating exclusively for one employer/organisation.
Employees are, more often than not, engaged indefinitely until their employment is terminated (with the exception of fixed-term contracts of employment), and the period of engagement does not usually relate to the performance of a specific task. Self-employed persons are usually only engaged for finite periods to carry out specific task.
Self-employed individuals will usually be paid completion of a specific task or project or on a commission-only basis. They are not entitled to participate in any benefit schemes and will not normally be paid overtime (except at pre-agreed rates for some professional roles). They are not entitled to sick pay or holidays, or payments to reflect any such entitlement by any other name. This means that, with self-employed invoices, an employer should be careful to ensure that they are not paying a self-employed person for days which are not worked, as this may give rise to accidentally paying sickness or holiday pay, which may give an incorrect indication of status.
Employees, on the other hand, are usually paid fixed amounts on a regular payment date based on the amount of work carried out, irrespective of performance targets or completion of a specific task (however, note that shift workers or commission workers may still be employees, especially where the other factors are satisfied).
Employees may receive benefits such as a pension, bonus, private medical insurance, company car or other benefit and may be entitled to company sick pay. They will be entitled to holiday.
An employee is integrated into the employer. For example, they perform services which are similar to or substantially the same as those performed by other employees, they have line management responsibilities, they are entitled to use the employer’s disciplinary and grievance procedures, their name appears on the internal telephone directory, they have a company email address, they wear a uniform, they have a company business card and are invited to the employer’s internal social events, they appear on the company website, or they generally seem (to a third party) to be a part of the company.
Self-employed individuals, on the other hand, are not sufficiently integrated within the employer to have a defined role and does not perform services similar to or substantially the same as those performed by an employee. They rarely have line management responsibilities and are not within the scope of the disciplinary and grievance procedures. They are identified as external contractors (such as in the internal telephone directory, ID badges and email addresses) and are not usually invited to social events, especially where they are addressed as staff parties.
An employer provides employees with the facilities and equipment required by them to carry out their job.
Self-employed individuals usually provide their own equipment and materials.
Self-employed individuals risk their own capital in the business and will be personally responsible for any losses arising from their work. They may be required to correct any unsatisfactory work in their own time and at their own expense. Conversely, they may have the opportunity to profit from the success of the project. They may also have their own insurance.
Employees are paid even if there is not sufficient work to keep them fully occupied and they assume no financial risk in working for the employer, and they will be covered by their company’s insurance. A company will also be vicariously liable for the negligence of their employees.
Employees are subject to PAYE and therefore they are not responsible for payment of employment-related income tax and national insurance contributions (NICs) on their earnings. Self-employed individuals are responsible for their own taxation, and responsible for registering for VAT if the level of their supplies exceeds the relevant registration limit and will issue an invoice, which will be paid upon receipt.
The description by the parties on contracts or paperwork (eg. employee/self-employed) can be inactive of the relationship but is not decisive if it does not reflect the reality of the situation.
Employment status is complicated and here at Thrive we’ve assisted numerous companies in disputing the status of their contractors when they’ve tried to raise employment tribunal claims.
If we can be of any assistance, or you have any further questions on the contents of this page, please do not hesitate to get in touch.