Employment Status: Independent Contractor, Worker or Employee?Posted in : HR Updates on 28 June 2018
Due to the increasing complexity of the legal system, there is a blurred line between what constitutes an employee and what constitutes an independent contractor or worker. The traditional employer/employee relationship can now be highly complex in light of modern day work practices and today’s growing gig economy. The statute governing employment status, the Employment Rights Order 1996, has become futile in the ever-changing employment world, with the likes of ‘Uber-like contracts,’ ‘zero-hours contracts,’ and ‘freelance working’ being new work norms. In the past, employers were able to abuse this blurred line to their favour, however in recent years the Courts have intervened and attempted to put an end to ‘sham self-employment’. Numerous common law tests are continuing to be developed so that the legal distinction between an employee and an independent contractor is in keeping with evolving modern-day work practices. The Government has also indicated a real interest in further clarifying this area of the law.
Employee, Worker or Self-Employed
In the UK, an individual participating in paid work falls into one of three main categories: an employee, a worker or a self-employed individual. The Employment Rights legislation provides scant guidance as to the distinction between an employee and an independent contractor in the contemporary workplace. The legislation holds that an employee is someone who works under a contract of service, whereas someone who has a contract for services is self-employed (an independent contractor). The term ‘worker’ is defined as ‘anyone who undertakes to do or perform personally any work or service for another party, whether under a contract of employment or any other contract’. When considering the legal distinctions between employees, independent contractors and workers, their respective employment rights should be considered.
Workers are entitled to certain minimum employment rights including getting the national minimum wage, protection against unlawful deductions from wages, the statutory minimum level of paid holiday and rest breaks and the right not to work more than 48 hours on average per week. Employees are entitled to more rights than workers, their rights include all the rights conferred onto workers and additional rights such as statutory sick pay, statutory maternity/paternity and shared parental leave pay, minimum notice periods, statutory redundancy pay and the right to request flexible working.
Independent contractors, on the other hand, are entitled to very few rights beyond basic health and safety rights. The ‘night to day’ contrast in the protective employment rights afforded to independent contractors in comparison to employees and workers has prompted the courts to ‘broaden the reach of protective employment regulations’ for workers or employees who are legally or contractually classified as ‘self-employed,’ while in reality, their work is anything but. Case law in this area has shaped and is continuing to shape the way in which the law distinguishes between an employee and an independent contractor.
Over the years courts and tribunals have added jurisprudential gloss to the simplistic definitions of ‘employee’ and ‘independent contractor’. A number of key questions remain; have the courts gone far enough in expanding the scope of employment protective rights? And have they established a clear legal distinction between ‘employees’ and ‘independent contractors?’
The Integration Test
The ‘integration’ test was the initial method used to determine employment status which denoted that ‘under a contract of service, a man is employed as part of the business and his work is done as an integral part of the business; whereas under a contract for services, his work, although done for the business, is not integrated into it. However, this test is dated in today’s labour market, with its emphasis on flexible employment and the need to match supply and demand ever more closely. Many contemporary businesses have stripped down to a core of permanent, full-time workers who are supplemented by supply workers and ‘flexible workers’. These last two categories may or may not be employees of the firm. In the past, part of the latter categories’ attraction was that they were not employees, hence reducing the administration costs, the labour protection rights afforded to them and the employer’s general responsibility for them. But over time it became apparent that the work that they do is, in fact, an integral part of the business. Thus the use of the integration test as the determinative ‘employee/ independent contractor’ test became less and less relevant and it was soon recognised as potentially encroaching on the rights of the latter category of paid workers.
Courts and tribunals subsequently adopted a multi-factor approach when distinguishing between an employee and an independent contractor, taking into account a plethora of considerations. For example, whether or not the individual provides a personal service, the control exercised over the individual, whether the individual or the employer provides the tools or hires helpers and how far the individual directly profits from good work. Later cases provided further guidance and it was established that for an employment contract to be in place, all three of the following conditions must be satisfied: there must be evidence of personal service and mutuality of obligation, sufficient control must exist to create a ‘master-servant’ type relationship and there must be no other terms inconsistent with a contract of employment.’ Whilst the law advanced to ensure the protection of more workers under an employer’s vast wield of control, they had not yet tackled the problem of workers performing under the contractual guise of a being ‘self-employed’ person whilst in reality possessing many of the characteristics of an employee or worker.
Autoclenz Ltd v Belcher and Others 2011
This issue of bogus ‘self-employed’ personal contracts was considered by the Supreme Court in the seminal Autoclenz Ltd v Belcher and Others 2011 case. Autoclenz concerned 20 car valeters who worked for the company Autoclenz. Their contract described them as ‘self-employed,’ accordingly the corresponding lack of employment protection rights afforded to self-employed persons was attached to this contractual term. They had no obligation to work and no right to receive work. This was despite requirements compounded within both the contract and the general duties of the workers being more characteristic of an employer-employee relationship. The Supreme Court thus upheld the previous Court of Appeal Autoclenz judgment that, ‘it matters not how many times an employer proclaims that he is engaging a man as a self-employed contractor; if he then imposes requirements on that man which are the obligations of an employee and the employee goes along with them, the true nature of the contractual relationship is that of employer and employee.’ It has become commonplace for employers to draft contracts that do not represent the real nature of the relationship and the ‘courts now must ignore such sham appearances’. The courts henceforth have an obligation to engage in a purposive interpretation of disputed employment status contracts. The purpose of this interpretation must always be to identify the actual legal obligations of the parties. The Supreme Court held that contracts of employment are a specific kind of contract because there may be an element of inequality of bargaining power between the parties and this must be taken into account when deciding whether an individual is an ‘employee’ entitled to employment rights or an independent contractor. One of the parties responsible for drafting the instrument may have the intention of ensuring that it is classified as one particular species of legal transaction. This will require the court to look beyond the formal legal documentation to consider the reality of the relationship that is being characterised.
This common law employment status development was met with both support and opposition. Some viewed it as an unnecessary departure from widely accepted principles of contractual law. The wide interpretative obligations imposed on Courts has been criticised, in the commercial arena it must be presumed that the parties realised the importance of the written document, any other approach is inimical to certainty and risks prejudicing others who rely on the natural meaning of words. However, in the context of personal employment contracts, not commercial contracts, it should be noted that it is likely that all parties did not assent or realise the importance of the terms given the unequal bargaining power. The grim reality of many sham self-employment cases should be remembered. As it is often vulnerable, migrant workers who are being discouraged from exercising the most basic entitlements due to bogus self-employment contracts.
Autoclenz represented a judicial shift in thinking in the legal distinction between ‘employee’ and ‘independent contractor. The ways in which the law distinguishes between an ‘employee’ and an ‘independent contractor’ now involves a close and purposive examination of the true nature of the relationship, the terms of the contract itself and the aforementioned integration factors. Determining the employment status of an individual can now be a complex task for courts and tribunals.
Autoclenz sent shock waves throughout the employment law world and the ripple effects of the judgment are still being felt today, especially in regard to the growing gig economy. The gig economy is really a by-product of the digital age. It is a new way of working with people undertaking temporary jobs or doing separate pieces of work, rather than working full-time for an employer. The arrangements for those working in the ‘gig’ or ‘on the demand economy’ (for example, couriers at Deliveroo or drivers for Uber) have created many uncertainties concerning their employment status. Take, for instance, the widely reported Aslam v Uber B.V case. This case involved a careful analysis of the employment status of two Uber drivers. Uber maintained that its drivers were ‘self-employed’ or ‘independent contractors’ because they purchase their own vehicles, they are entitled to work for competitors and they are self-employed for tax and national insurance purposes. Unlike in Autoclenz, the Uber drivers did not claim they were employees but instead claimed that they were workers and therefore entitled to a minimum wage and paid leave. The status of ‘workers’ should catch work relationships that are characterised by a significant dependency on a single employer, even where a lesser degree of subordination exists. The Tribunal did not agree with Uber, they adopted the Autoclenz jurisprudence and found the drivers to be workers and not self-employed. The following factors were relevant to the Tribunal’s decision: the drivers provided their work under a contractual relationship and made themselves available to carry passengers to their destinations for a payment, the drivers could not develop their own businesses, for example, fare calculations were done by Uber and deductions could be made to the driver’s payments if passengers complained about overcharging and thirdly, Uber exercised an element of discipline and control over their drivers. On account of these factors, Uber drivers were not self-employed persons as Uber insisted, but instead were workers entitled to certain employment protection rights. A similar conclusion was held in Pimlico Plumbers Ltd v Smith 2017.
The law distinguishing between ‘employees,’ ‘independent contractors’ and ‘workers has become increasingly complex. Evolution of the common law in this area has allowed for the advancement of employment protective rights and has curtailed the practice of employer’s abusing ‘self-employed’ contracts to avoid responsibility. In response to the complexity of the law in this area, the Government published the Taylor Review 2017 on modern working practices. The government proposed that ‘worker status’ with limited employment rights should be retained but is consulting on how to make the definitions of worker, self-employed and employee clearer. The government are also considering whether the existing case law tests should be put into legislation.
No Single Test
In final analysis, the law distinguishes between an ‘independent contractor’ and an ‘employee’ by utilising a number of case law tests. There is no single, determinative test and the outcome will depend on the particular facts of the case at hand. Factors to be taken into account include, amongst other things, the integration of the individual in the business, whether they provide their own tools, whether they can be substituted, the control exercised over the individual and the direct profit they make from good work. The law now prohibits ‘sham self-employment’ contracts and construes contracts purposively to determine the true nature of the employment. Case law tests can be complex and the waters are muddied further by today’s growing gig economy. A statutory clarification on how the law should distinguish between employees, independent contractors and workers would be a welcomed addition.
The information in this article is provided as part of Legal-Island's Employment Law Hub. We regret we are not able to respond to requests for specific legal or HR queries and recommend that professional advice is obtained before relying on information supplied anywhere within this article.