Practical Tips for Deciding the Employment Status of your Staff

Do you engage self-employed contractors? The issue of whether individuals are genuinely self-employed has been in the news on a number of occasions recently.

In late 2016, the Employment Tribunal decided that drivers of Uber (a mobile phone app that connects private car hire drivers with passengers) were “workers” rather than self-employed individuals.

There have also been a number of other similar decisions recently for courier companies and also a plumbing company, Pimlico Plumbers. All of which have decided that the individuals were “workers” rather than self-employed.

These decisions have wide-ranging ramifications for all businesses who operate in a similar manner, not least due to the liabilities for holiday pay and national minimum wage arrears.

Employee, worker or self-employed?

The working status of an individual can significantly impact the rewards and protections afforded to them.

An individual’s work status generally falls into one of three categories:

1. Self-employed;
2. Worker; or
3. Employee

Self-employed independent contractors benefit both the business and the individual in terms of reduced costs, increased flexibility and potentially more favourable tax treatment. However, when the tax benefit is negligible, as it is for lower-paid individuals, independent contractor status is less appealing to individuals.

Workers benefit from flexibility in terms of hours and an obligation to offer or accept work. Workers have a number of rights, including the national minimum wage and holiday pay.

Employees receive the same rights as workers but, in addition, have the right not to be unfairly dismissed and have entitlements to other benefits such as maternity and paternity leave and pay.

The difference between “worker” and “employee” status has been the subject of multiple legal challenges. One of the key factors supporting a worker’s status is the lack of mutuality of obligation i.e. there is no obligation for a business to offer work and there is no obligation for an individual to accept work.

In order to determine whether an individual is a “worker” as opposed to a “self-employed contractor”, a Tribunal considers a number of factors including economic risk, control, substitution (the right to appoint someone else to fulfil the service), integration with the business and the number of other clients the individual works with.

Recent Cases:

Each case is decided on its own specific facts. However, the general principles as stated above apply.

• Uber

Uber engaged self-employed drivers. However, the drivers argued that Uber exercised a significant amount of control over the provision of the services, such as Uber’s use of driver ratings, the GPS tracking of set routes, alleged unauthorised deductions from fares for bad passenger reviews and penalties for not picking up fares.

Uber’s main defence was that as a technology company (i.e. it created and operated a mobile phone app), it was not a taxi company. In addition, drivers worked when they wanted and accepted the fares they wished.

The Tribunal concluded that the drivers were “workers” for the following reasons:

• The drivers were “engaged” as workers for as long as they were:

o   in the territory in which they were authorised to work;

o   they were signed into the Uber app; and

o   were ready and willing to accept bookings.

• The period they were “engaged” counted as working time under the WTR 1998;
• The drivers should be paid National Minimum Wage provisions for each hour of working time; and
• Whilst Uber had complex contractual documentation it did not reflect the reality of the situation.

As a result of this decision, Uber are responsible for paying its drivers national minimum wage and holiday pay. This outcome will have a significant impact financially and structurally for Uber, particularly as its key selling point for customers is competitive fares.

• Pimlico Plumbers

Pimlico contracted with Mr Smith on a self-employed basis for five and a half years.

The Tribunal decided that even though he had worked on a self-employed basis for a significant period, he was actually a “worker” and therefore entitled to holiday pay. The Tribunal reached this conclusion for the following reasons:

• He was required to work personally for the company;
• His contract required him to work on agreed days and hours;
• He drove a van with the company logo and wore a uniform;
• He was only contacted by customers through the company;
• Contracts and estimates for work were all issued in the name of the company and payments were made to the company;
• The company monitored his movements via GPS in the van; and
• There were restrictive covenants within the contract which were inconsistent with a self-employed contractor.

The Impact for Businesses – Practical Tips

Businesses engage self-employed contractors due to the nature of the work they undertake and for cash flow reasons. Issues generally only arise if there is a dispute. However, given the publicity these recent cases are receiving, businesses are receiving queries from their staff in this respect. As such, it is a good time to carry out an audit on your contracts and procedures. The Government may also be looking to review the position for self-employed workers as part of the Budget.

If a Tribunal decides that an individual is a “worker” rather than a self-employed contractor, a business will be liable for failure to pay the national minimum wage, holiday pay and they may also be referred to HMRC. If an individual is deemed to be an employee, a business may also have the risk of unfair dismissal claims.

The most common issues we advise on in relation to self-employed contractors are:

Contracts not accurately reflecting the true position

Indeed, and as the recent cases remind us, even though there may be paperwork in place, a Tribunal is not obliged to accept the contractual position, if the reality of the situation is different. Please ensure that your contracts are up to date. If you do not have contracts, implement them.

The right of substitution

If a contractor is unable to carry out the services required due to illness, for example, the contract should state that the contractor can provide a substitute. In reality, this does not happen very often, if at all. However, it is important not only for the contract to make this option clear, but also for substitution to actually happen.

How to defend a claim for worker or employed status

Businesses should, where possible, keep contractors at arm’s length. As a minimum, contractors should (for example):

• use their own equipment;
• carry out the work required of them with as little input from the business as possible;
• work the hours they need to complete the contract (rather than the same hours as your staff); and
• not wear the staff uniform or drive a company van.

From 6 April 2017, there are major changes to the way in which contractors work through an intermediary (IR35) for the public sector. Where the rules apply, individuals who work in the public sector through an intermediary will be required to pay income tax and national insurance contributions in a similar way to workers and employees. This shall apply to all payments made on or after 6 April 2017, and includes payments made for contracts entered into before that date. If you are supplying workers or services to the Public Sector, you should review your contracts and processes as soon as possible.

If you would like to discuss the impact of this issue on your business or if you would like a review of your contracts, please do not hesitate to contact Andréa or Rachel.