Determining employment status to avoid legal and financial pitfalls

Employee, worker or self-employed, it is essential to determine the employment status of an individual and distinguish between them. These classifications have significant implications for the rights and obligations of both individuals and their employers.

Steph Marsh, Head of Employment at Coodes, explains how to determine employment status and what this means.

How to determine employment status

To determine employment status, you need to understand how employees, workers and self-employed people are classified.

If an individual is a worker, they will have certain rights under employment law. An employee will have additional rights under employment law, for example, access to unfair dismissal, maternity leave and redundancy rights. If an individual is neither a worker nor an employee, they are self-employed or an independent contractor and so won’t have any rights under employment law – unless they, or a third party such as HMRC, decide to challenge this status.

Workers

All individuals with employee status also meet the definition of a worker for the purpose of statutory protections. However, not all workers will meet the definition of an employee.

Under the employment status categories, a worker is defined as someone who undertakes to perform work or services for another party personally, rather than through a business or as a sole trader. In other words, a person who works for a company and is under contract to carry out work for that company.

Workers have certain statutory rights, such as the right to the National Minimum Wage (NMW) and paid holiday. However, they do not enjoy the full range of protections afforded to employees.

This is because unlike employees, workers do not have what’s known as ‘mutuality of obligation and control’ – an agreement requiring an employer to provide work and an employee to accept that work. In the case of workers, employers have less obligation to offer work and workers possess more flexibility to accept or reject what’s offered.

Employees

Under the Employment Rights Act 1996, an employee is defined as an individual who has entered into or works under a contract of employment. This can be either expressed or implied orally or in writing. There are a few key factors that go into determining this employment status.

The first is defined as an individual offering their own work and skills in return for pay. Secondly, unlike workers, employees have a strong mutuality of obligation and control with less flexibility in this area. Thirdly, the terms of the employees’ contract will be consistent with an employment relationship. For example, setting out employment conditions, rights, responsibilities and duties.

Self-employed individuals

Separate from workers and employees, self-employed individuals or independent contractors are those who are in business on their own account and provide services to clients or customers.

Unlike the previous categories, self-employed people do not have any employment rights in the eyes of employment law. However, if the working arrangements do not reflect the self-employment status definitions, there is a risk that the individual may bring claims as an employee or worker.

The courts and tribunals will look at the realities and day-to-day working relationships rather than the labels given by employers and self-employed individuals. This involves evaluating the overall picture considering factors such as mutuality of obligation, control and how consistent the terms of any contract are with an employment relationship.

What happens if you get it wrong

Employer’s perspective

If as an employer you incorrectly determine an individual’s employment status, it can have significant legal and financial consequences for both parties.

For example, if an employer misclassifies an individual as self-employed when they should be classified as an employee, the employer may face claims from HMRC for unpaid PAYE and NICs. Additionally, the individual may bring claims for employment rights such as unfair dismissal, redundancy payments and other statutory protections.

Employers also face other risks such as being vicariously liable for (responsible for the actions of) their employees. This can result in the employer having to pay damages if the employee is found to be negligent.

Misclassification of employment status can also invalidate insurance policies, lead to the application of unexpected mandatory employment laws and result in additional costs for transferring intellectual property to the correct company.

Individual’s perspective

From the individual’s perspective, if they are misclassified as self-employed, they may lose out on important employment rights and protections afforded to workers and employees. In the event of an accident, illness or job loss, they might seek to challenge their employment status. However, there is no guarantee of success in a tribunal.

Furthermore, HMRC may transfer the liability for unpaid PAYE and employee NICs to the self-employed individual should they be incorrectly classified as an employee.

Further help with employment status

It is vital for both the individual and the employer to determine employment status correctly and ensure any contracts in place adequately reflect this. Getting it wrong can have serious implications for both parties.

Coodes Solicitors are one of the longest-established and leading law firms in Cornwall and Devon. Our Employment team work closely with local businesses to provide support and answer any questions. We can assist with keeping you up to date with the most recent changes in employment law.

If you need some friendly advice, you can call Steph Marsh on 01579 324 017 or email steph.marsh@coodes.co.uk. You can find all of our contact details online.