All businesses hiring staff need to know whether their workforce are employees, workers or self-employed contractors, otherwise it can create complex problems for business models.
Here our expert employment solicitors have compiled an advice guide to the law on worker status and what it means in practice for employers in the UK ‘gig economy’.
We'll be covering:
- What is the background to the situation?
- What is employment status?
- Why does worker or self-employed contractor status matter?
- Is there an issue relating to data protection and employment status?
- Isn’t it a tax issue?
- How can you tell whether someone is a worker or self-employed?
- What do the court cases on worker status tell us?
- How will the law on employment status change?
- What should employers do now about contractors and workers?
What is the background to the situation?
In the past, employers with fluctuating needs typically took on casual or temporary workers to top-up their permanent staff. But now they are increasingly reliant on a workforce that they regard as self-employed independent contractors – referred to as ‘gig’, freelance, locum, consultant, platform or on-demand workers. The attraction of this business model is that self-employed contractors are not entitled to statutory employment rights, and they pay their own tax.
This issue has always been complex; although there are statutory definitions of ‘employee’ and ‘worker’, the law is essentially based around the court and tribunal cases and, as a result, is in a constant state of flux. Recently there has been a cluster of cases on the ‘gig’ or ‘sharing’ economy, and the majority have been successful claims for worker status. Some of the claimants have been backed by a trade union. Added to this is the likelihood of changes in the law, because of Government-sponsored reviews, such as the Taylor Review of modern working practices.
What is employment status?
Employment protections and obligations depend on the employment status of the individual. The broad categories of staff are employee, worker or self-employed. Employment status is notoriously complex – for more on this generally see our advice guide The honest guide to what you do and don’t need a solicitor for – Part 3: hiring employees.
In short, employees are entitled to the core legal protections, such as the right not to be unfairly dismissed, the right to a statutory redundancy payment, and notice periods. Workers don’t get these. But crucially, both employee and workers get working time protections (paid annual leave, rest breaks, maximum working week) and the minimum wage. Both categories are entitled to employer pension contributions under the auto-enrolment rules, so long as they qualify in terms of income, age etc.
Self-employed people don’t get any of these rights. A contractor is usually self-employed but there are certain cases where a self-employed contractor can be classified as a worker, and therefore entitled to certain workers’ rights.
Why does worker or self-employed contractor status matter?
When staff are taken on, there is no official confirmation of employment status. So, unless they are clearly employees, you won’t know for certain what rights your staff are entitled to, unless they bring a claim in the courts or tribunals. What you put in their contract may be relevant, but it isn’t conclusive – especially if it doesn’t reflect the reality.
If someone successfully establishes worker status, they may be able to make other claims – for unpaid holiday, for example. In King v Sash Window Workshop Ltd in 2017, the European Court of Justice found that where an employer had misclassified a worker as self-employed, with the result that the worker couldn’t and didn’t take annual leave, the worker could claim carry over of untaken holiday indefinitely and be paid in lieu.
In the most recent case of Uber BV v Aslam in 2021, the Supreme Court unanimously declared that Uber drivers are workers which not only qualified them for rights they would not have received as a self-employed contractor, such as worker rights to:
- protection from unlawful deductions from wages
- to receive the National Minimum Wage
- Trade Union recognition
- the right to not suffer detriment under whistleblowing provisions
- to be paid annual leave
But working time also includes any period when the drivers are logged in to the Uber app within the territory in which they are licensed to operate and ready and willing to accept trips.
Employing workers rather than self-employed contractors is a significant expense and a different deal for an employer, particularly if hiring a large number of people. So, ensuring you and the person you employ knows the status and in reality sticks to the typical rules for that status, is imperative. For more specialist advice on this, contact one of our employment solicitors, who can guide you.
Is there an issue relating to data protection and employment status?
You may try to highlight that your contractors have a right to substitute another person to do their work and so there is no personal service requirement, and as such they are self-employed. However, the right to substitute must be genuine and there are potential issues relating to data protection, as the right to appoint a substitute is limited under the retained EU law version of the General Data Protection Regulation if the contractor is also a processer. A controller (the employer) must give prior specific or general written authorisation for a processor to be allowed to engage another processor (substitute), which contradicts the usual right of a contractor to appoint a substitute of their choosing and at their discretion. There may be an argument that, like an employee, a contractor is acting as an agent of the business, but this has not yet been tested.
The reason why it matters if a contractor is a processor is because the GDPR introduced direct obligations on processors; like specific provisions dealing with data processing in their contract and putting in place data security measures, such as on their own computer or phone. Non-compliance with processor obligations can lead to action taken by individuals and authorities, and fines or penalties imposed. A processor may be able to claim back from the controller the share of compensation they were liable for, so employers need to be wary of a contractor pointing to the lack of data processing clauses in their contract as evidence that they are not self-employed.
Isn’t it a tax issue?
For tax purposes, the distinction is between ‘employee’ and ‘self-employed’ – there is no ‘worker’ category – and the test is not the same as for employment purposes. Someone can have a different status in employment law and for tax purposes. For example, they could be exempt from PAYE but still be entitled to employees’ rights.
Tax status is just one factor in assessing whether someone has employee or worker status. In many of the cases (see What do the court cases tell us?), the fact that the workers paid their own tax and national insurance contributions didn’t stop them being categorised as workers.
How can you tell whether someone is a worker or self-employed?
For gig economy business models, the distinction between worker and self-employed is critical. There are definitions of ‘employee’ and ‘worker’ in employment legislation but ‘self-employed’ is not defined. Traditionally, it may have been presumed by employers that an individual running their own business was self-employed. However, where an individual provides services as part of a business run by someone else – the model increasingly used now – they are much more likely to be a worker.
Broadly, individuals are ‘workers’ if they work under a contract to perform work or services personally for another party to the contract and are not running their own business.
The tests for whether someone is a worker have been established by court cases and are very fact dependent. So, if you need bespoke advice on your own business and whether individuals are self-employed or workers, please contact our specialist employment solicitors. However, as a general guide, the three key elements for worker status are:
- A contract between the employer and the individual,
- Personal service to be performed by the individual with limited, theoretical or no right to substitution, and
- The other party to the contract isn’t a business customer or client of the worker.
Whether an individual is a worker or self-employed is an area which has had a lot of media attention in recent years. Many of the cases have involved couriers and taxi drivers where the employer has a significant level of control by setting the pay, hours, rules on how to conduct their business and sometimes even wearing uniform, to the point where the public believe that individual is integrated and part of the employer's business.
Other pointers to worker status include:
- ‘Mutuality of obligation’ – the ‘employer’ must provide work and the individual must accept it
- The employer exercises a lot of control over the worker, which might include how, when and where the work is done
- The individual works exclusively for the employer
- The employer supplies equipment, uniform and so on
- The worker has been recruited to work as part of the employer’s organisation and is fully integrated into the business (and is advertised to customers as being part of the business)
- Sick pay, holidays, family leave are given
- Most or all the financial risk is with the employer
- The worker can’t negotiate terms
- The individual doesn’t have a business plan or advertise their services
- The written contract doesn’t reflect the realities
The more of the above points that reflect the relationship between you and individuals working for you, the more likely it is that they would be construed by a court or tribunal as a worker for your business, rather than a self-employed contractor.
What do the court cases on worker status tell us?
Case law is very important in this area, because of the lack of detail in the definitions in the legislation.
Examples of successful claims for worker status include:
- Uber BV v Aslam – the Employment Appeal Tribunal found that the contractual documentation didn’t reflect the reality, which was that the drivers were integrated in the business and worked under Uber’s control. This was confirmed by the Supreme Court in 2021, who upheld the Employment Appeal Tribunal’s decision that Uber drivers were in fact workers and not self-employed contractors.
- Addison Lee v Gascoigne – a cycle courier was a worker because there was ‘mutuality of obligation’ – when he logged on to the courier’s system, he was expected to accept an offer of work unless there were exceptional circumstances.
- Dewhurst v CitySprint UK – another cycle courier case where the decisive fact for the Employment Tribunal was the lack of autonomy for the courier and corresponding level of control exercised by the company. Again, the contract didn’t reflect the reality – there was a right to substitute in theory but the way the company operated made it too difficult for the individual not to provide the services personally. And although the courier submitted invoices, payment was weekly in arrears and the invoice was a payslip in all but name.
- The Hospital Medical Group Ltd v Westwood – a doctor providing hair restoration services once a week at a private cosmetic surgery clinic wasn’t self-employed – he wasn’t allowed to provide the same services to anyone else.
- Pimlico Plumbers v Smith – relevant factors were the integration of plumbers in the business, the requirement for them to wear a uniform, the limited right to use a substitute, and very restrictive covenants in the contracts. The fact that the claimant was described as an independent contractor in his contract didn’t change the finding that he was a worker. The Supreme Court also upheld the decision that these plumbers were limb (b) workers, due to personal service being a dominant part of the contract on the facts of this case.
One recent exception to the general findings in favour of individuals being workers and not self-employed contractors was in the case of Independent Workers Union of Great Britain v Roo Foods Ltd, when the Central Arbitration Committee ruled those individuals were contractors and were not entitled to Trade Union recognition as there was an unrestricted right of substitution. A delivery rider didn’t have to be approved by Deliveroo both before and after they had accepted a job, so there was no obligation of personal service, anybody could carry out the work and so Deliveroo riders were not workers. The opposite finding by the Court of Appeal in 2017 in Pimlico Plumbers Ltd v Smith also demonstrates this point, as it was concluded that an unrestricted right to use a substitute is inconsistent with the ‘personal service’ requirement and would therefore prevent someone from being a worker. But if there is a conditional right to use a substitute (such as only when the contractor is unable to do the work), then that might not be enough to prevent worker status.
Similarly, to in the Roo Foods case above, in the case of Johnson v Transopco UK Ltd the Employment Appeal Tribunal (EAT) upheld the decision that a self-employed London black cab driver, who also sourced some work from the Mytaxi app, was not a worker of the company operating the app (Transopco UK Ltd). The EAT found that Mr Johnson was a self-employed contractor and Transopco was his client, as it did not control the way in which the taxi driver operated to any material extent. He was able to carry out the services as, when, and how he wished. He did not have to accept certain jobs and could contact passengers after providing his services via the app. The claimant was also able to accept work from other sources, such as passengers hailing him on the street, as well as the app. The fact that the driver could be suspended from the app if they cancelled too many passengers was not sufficient control, according to the EAT, to make the driver a worker. Taking all of this into account, the EAT did not follow many other recent cases relating to the gig economy and again demonstrated that the judgment of an Employment Tribunal on worker status will hinge on the precise facts and circumstances of the case. Therefore, if you are an employer operating in the gig economy and are concerned about worker status being challenged, it may be wise to look carefully at the facts of these recent cases and if required adjust arrangements to give at least the same level of autonomy to those who work for you as Mr Johnson had in this case.
How will the law on employment status change?
There are still likely to be legislative changes in response to the Taylor ‘Good Work’ Review of July 2017. The Government has started consultation on employment status, with a view to potentially:
- Codifying the case law on the employee and worker tests (and align them with tax rules), with less emphasis on the ‘personal service’ requirement.
- Adopting the Review’s proposal that workers who aren’t employees should be called ‘dependent contractors’.
- Introducing a right to a written statement of terms for all workers.
- Amending the definition of working time for the minimum wage, to take account of periods of low demand.
Since 6 April 2019, all workers (not just employees) have had to be given itemised payslips, and since 6 April 2020 workers have been required to be given a section 1 statement setting out the basic terms they work under. If you would like guidance on how to draft a worker’s section 1 statement, please contact our specialist lawyers.
There were also changes to the off-payroll working rules introduced into larger businesses in the private sector on 6 April 2021. For more information, please see our article on the topic of IR35.
What should employers do now about contractors and workers?
Even if you think you have a robust consultant/independent contractor agreement, the courts and tribunals are increasingly looking beyond what’s in the contract to determine the reality of the situation. So, the provisions need to reflect accurately what’s happening on a day-to-day basis. The direction of travel is very definitely towards finding worker rather than self-employed status.
Another problem is that even if self-employed status isn’t the wrong classification at the start, it can develop over time to become a worker relationship. Liabilities to workers for unpaid holidays, sick pay and minimum wage underpayment, and to HMRC for tax and national insurance, can build up over a period of years. That’s why it’s crucial to audit your employment arrangements on a regular basis.