The ever-evolving nature of the modern workplace has seen employers being thrown into the media spotlight over the past 18 months. Generating the most interest recently has been a case involving a plumbing firm, Pimlico Plumbers, and an individual, Mr Smith, who brought several claims after being dismissed following requests to reduce his working hours following a period of ill-health.
Mr Smith brought claims of unfair and wrongful dismissal, disability discrimination, unpaid wages and holiday pay against his previous employer. The key question for the employment tribunal to answer in the first instance was whether Mr Smith was, in fact, an employee, a worker, or was self-employed, because his rights (and therefore, ability to make the claims presented) hinged on where in the three-tiered hierarchy Mr Smith sat.
Following a sequence of judgments and appeals all the way to the Supreme Court, Mr Smith was ultimately found to be a worker.
Costly mistakes
When employers get their assessment of employment status wrong, not only they can they get tribunal judgments against them publicly published and suffer the related reputational damage that follows, they also risk a huge financial burden of other claims being made by the remainder of the workforce. If an individual is deemed to be an employee, they will benefit from the greatest level of employment law protection and will have the right not to be unfairly dismissed. It is, however, more common for individuals who are thought to be self-employed to be determined to be workers, which entitles them to be paid national minimum wage, and receive holiday pay and pension contributions.
Debating employee status is nothing new to employment tribunals; hundreds of cases have tested this point over the years, with many individuals being denied the opportunity to pursue their claims by virtue of the fact that they do not fit into a category which affords them the rights to do so.
Unhelpfully, the law does not provide a clear definition of what an ‘employee’ or ‘worker’ is. Tribunals therefore have to decide which category an individual falls into based on a number of tests developed through decades of case law. Tribunals will carry out a balancing act to determine status by considering the reality of the situation.
Common ‘tests’ applied by tribunals to assist with determining an individual's status are based around the following key areas: if an employee is required to carry out the work personally, or whether they are allowed to send a substitute to carry out work; whether an employer is obliged to provide work, and whether the individual in turn is obliged to accept it; the level of control exercised by the employer over the individual—the greater the level of control, the more likely it is that the individual will be an employee; to what extent the individual is ‘integrated’ into the employer's business, be that (among other factors) through wearing the employer's uniform and using its resources, or participating in its training courses. Other indicators that might be considered are the level of financial risk incurred by each party, who is responsible for paying tax, working hours and pattern.
In Mr Smith's case, he wore Pimlico's uniform, drove their van, was required to work at least five days per week and was bound to comply with the company manual, which appears inconsistent with a self-employed person. He could, however, send a substitute in his place when he could not work, was under no obligation to accept work offered to him (nor was the business obliged to offer it to him) and was not paid a salary; instead being required to raise invoices for payment.
Disguising (often unintentionally) an employee or worker as a self-employed person can have serious tax implications. Self-employed individuals do not pay tax through PAYE and instead are responsible for handling their own tax affairs and paying their own National Insurance Contributions (NICs) by completing a self-assessment on an annual basis to HMRC. In some circumstances, they may even have to register for VAT. Employees and workers, however, do not have to worry about handling their own tax affairs, as they are taxed through the PAYE system which collects income tax and NICs at source through the business's payroll (or via an agency for some workers).
If an individual is found to be an employee or worker as opposed to a self-employed person, the employer could find itself liable to pay for backdated tax and NICs, associated interest and penalties which could run back a number of years. For large businesses, if this mistake is widespread among the workforce, it could be extremely costly.
With this in mind, it is important to take steps to explore the true nature of an individual's employment status. The recommendation is to take a proactive, rather than reactive, approach. The better prepared employers are at determining the true nature of the working relationship, the less likely they will find themselves having a tribunal decide it for them when all control is lost.
Having robust contracts that correctly reflect the parties' relationship is of vital importance. Where the actual relationship of the parties is different to what the contract describes, it would be advisable to undertake a thorough review of the engagement, because the tribunal will look beyond the label given to the individual's status and will consider the true nature of an individual's employment status, determined on the reality of the work being carried out and how it is done.
It is also worthwhile being aware that an individuals' status could change over time, so conducting reviews of contracts at appropriate intervals is advisable, making amendments where necessary. It is also important to remember that a ‘one-size-fits-all’ contract is unlikely to be specific or tailored enough to each member of the workforce and should be avoided. Contracts should be tailored to the individual or group of employees that carry out the same role and reviewed and updated at regular intervals.
As always, if in doubt, take advice. Businesses need protection to the greatest extent possible should the status of an individual ever be challenged.
Advice from ACAS
The government's Advisory, Conciliation and Arbitration Service (ACAS) explains the various ways in which someone can work, as for the layman, it's not always clear. There are three main types of employment status: an employee, a worker, or someone who is self-employed. An individual's employment rights will depend upon whether they are an employee or worker (the self-employed have very few employment rights).
Employee
An employee will work to the terms within a contract of employment and will carry out work personally. Employees do not have a choice whether or not to accept work and cannot give work to someone else. The employer will deal with the employee's tax and national insurance contributions, which will be deducted at source through the PAYE system. Employees are entitled to a wide range of employment rights, including all those to which a worker is entitled, such as a contract of employment, an itemised pay slip, the National Minimum Wage, holiday pay, maternity/paternity pay, the right to request flexible working hours, and the right not to be discriminated against.
Worker
A worker will also work to the terms within a contract and generally have to carry out the work personally. They may sometimes have a limited right to send someone else to carry out the work; however, generally, the work must be carried out by them and they must not be a business in their own right. Workers are sometimes referred to as a casual worker, agency workers, freelancers (locums), seasonal worker and zero hours worker. Their entitlements include the National Minimum Wage, holiday pay, protection against unlawful discrimination, and the right not to be treated less favourably if they work part-time.
Self employed
A self-employed person runs their own business. Self-employed people are more likely to be contracted to provide a service for a client or work under a consultancy type agreement. They usually submit invoices for work done in order to get paid and therefore are not paid through PAYE and don't have the same employment rights and responsibilities as employees or workers. However, a self-employed person is in some cases protected against discrimination; will have their rights and responsibilities set out in the terms of the contract with their client; in general, will not have right to holiday pay; and will have to submit their own tax return.