Am I an employee, a freelancer or a worker?

Deciding someone’s employment status can be complicated and Employment Tribunals and HMRC may consider different factors when deciding your status, as there is no single legal definition. IR35 legislation has muddied the legal waters further, and not knowing how to correctly define yourself can lead to Tribunals and, in some cases, financial penalties. For more information on determining your legal status if you’re a contractor, see our IR35 Guide.

HMRC published a ‘Supervision, Direction or Control‘ guidance in March 2014. And HMRC have an online Check Employment Status for Tax (CEST) indicator tool which you can use, or, if you’re a contractor concerned about IR35 then our IR35 calculator can help you see whether you’re at risk, without giving any of your details to HMRC!

There are three different types of working individuals

• an Employee
• a Worker (someone who works on a casual basis or is an agency temp)
• or someone who is self-employed (i.e. a freelancer or contractor).

It’s important to establish your status, as:

• Employees generally have more employment rights than Workers or those who are Self-Employed (see our Guide to your Employment Rights).
• There’s also a difference in National Insurance contributions, tax, and benefits between Employees/Workers and those who are Self-Employed.

It’s therefore equally important for Employers to know the correct status of those you employ:

• To read about Internships/Work Experience, see our Interns article
• For more information on unpaid Volunteers and Voluntary Workers see our new article.
• If you’re taking on an Apprentice read our Guide to Apprenticeships.

In 2015, the Office of Tax Simplification published a report on employment status, making several proposals on how to simplify establishing someone’s status.

You can also read our articles on the details of the 2016 Uber drivers employment tribunal and details of how the HMRC will investigate the ‘gig’ economy.

ACAS has published guidance for employers in relation to employment status (March 2017) . The guidance is to assist employers following the numerous cases regarding employment status in the ‘gig economy’ and also covers agency workers, apprentices, fixed term workers, piece work, volunteers, work experience, internships and zero hours contracts.

An Employee

Presently, there’s no single legal test to determine if you’re an employee or a worker, but you’re likely to be an Employee (whether on a permanent, open-ended contract or on a Fixed-Term contract) if:

• Your Employer provides the work, any tools and equipment for it, and they decide how and when you do the work (known as the What, Where, When and How Tests)
• You’ll usually have a written contract (although a verbal contract will count)
• You’re expected to do the work yourself that you’re employed to do, and may be moved to different tasks
• You’re paid a regular amount according to the hours you work (through the Pay as You Earn system – so Tax and National Insurance is deducted), and you usually have to work a set amount of hours. You may also get extra pay for overtime and bonuses.

The legal definitions of these (from case law, not from statute) are personal service, mutuality of obligation and control.

If you’re an Employee your contract is called a ‘contract of service’.

There’s now a provision in law where someone employed on a Fixed-Term contract can receive a permanent (open-ended) contract if:

• You have been continuously employed (i.e. no significant breaks) by the same employer on a fixed-term contract for four years or more that started after 10th July 2002 (unless your Employer has changed this time limit by a ‘workforce’ or ‘collective’ agreement)
• If this is the case you can ask your employer for a statement confirming that you’re now permanent and no longer employed on a Fixed Term contract
• Your employer can only keep you on a Fixed Term contract after four years if they could objectively justify this at the point your Fixed Term contract was last renewed
• If your employer fails to give you this statement (when you’ve requested it) or gives you a statement of reasons why you must remain on a Fixed Term contract that you don’t agree with, you can make a claim to an Employment Tribunal.

For more information about Fixed Term contracts read our article.

A Worker

This is a broader category than an ‘employee’, introduced by European Union legislation (although there is no EU definition). A worker is anyone who works for an employer under a contract of employment (this may or may not be a written contract, and the contract may not come directly from the Employer) and performs the work personally (which can include some freelancers).

Workers are usually either:

• Agency workers (‘temps’) – the Agency who finds you work pays your wages, or if you are a contractor, you may get work through an Agency but an Umbrella company pays your wages. The Company who hires you pays a fee to the Agency for your work. DirectGov has got more information on how to working out if you’re an Agency worker
• Short-term Casual Workers hired directly by the Employer, often with a written contract, and usually paid via PAYE (with Income Tax and National Insurance Contributions deducted). Casual Workers aren’t usually part of the permanent workforce but supply their services on an irregular or flexible basis or have a ‘minimum guaranteed hours‘ or ‘zero hours‘ contract. For further information on zero hours contracts, and whether casual workers ever become employees, see our What are Zero Hours Contracts article. DirectGov has got more information on how to work out if you are a Casual Worker
• Some Freelancers and Contractors – there are occasions when those who are self-employed for tax purposes may be classified as ‘workers’ for employment rights purposes, including when a self-employed person is personally providing a service under a contract for another party to a client (i.e. not providing services directly to the client or business). You can’t be a ‘worker’ if you’re self-employed and the contract between yourself and your client includes a genuine right entitling you to ‘substitute’ someone else to do the work. See our 2014 article about the new ‘False’ Self-Employment legislation which affects self-employed people who are employed via intermediaries such as employment agencies, payroll or umbrella companies (any business that supplies labour) who currently only pay taxes as a self-employed person
• In May 2014 the Supreme Court ruled that members of Limited Liability Partnerships are workers for the purposes of the Employment Rights Act 1996 – which gives entitlement to statutory rights and protections including to rest breaks, annual leave, part-time workers rights – and for whistleblowing protection.

In addition, there are also home-workers (or Piece-Workers) who have more limited rights than normal ‘workers’. See our guide to what Employment Rights you have for full details.

Generally, Foster Carers/Parents are NOT seen as workers, although in 2018 there are several cases to watch with regard to their ‘employment’ status with their local authority – you can read more here.

More about Agency Workers or temps: On 1st October 2011, the government introduced the Agency Workers Regulations which gives ‘agency workers’ the right to equal treatment (with permanent staff working at the same organisation). For full details of these regulations see our guide to the Agency Workers Regulations.

At present, the Employer hiring the temp (not the Agency) is responsible for ensuring the Working Time Regulations weekly hours and rest breaks entitlements are met and are responsible for the temp’s health and safety. The Agency that employs the temp’s services is responsible for ensuring the temp takes their statutory holiday entitlement and ensuring they’re paid at least the National Minimum Wage.

See our article “Can an Agency Worker ever become an Employee”.

Self-Employed (freelancer or contractor)

You’re likely to be self-employed if:

• You determine how and when you do the work within reason (known as Master/Servant Relationship)
• You can hire helpers or replacements for you if you’re unable to do the work (also known as Substitution)
• You pay your own Income Tax and National Insurance Contributions on a self-employed basis (meaning you complete a Self Assessment tax return)
• You’re contracted to provide services to the Client/Employer over a certain period of time for an agreed fee and aren’t integrated into the Company
• You run your own business and take financial responsibility if it’s successful or not, and provide the main items of equipment
• You may work on your own premises
• You may have several customers (employers) at one time (known as Economic Reality).

If you’re self-employed, your contract is called a ‘contract for service’. You can read what rights you have if your client cancels your contract here.

If you’re freelance, have you considered forming a limited company?

See also our article is my contract inside or outside IR35.

There’s no one single thing that completely determines your employment status

An Employment Tribunal will make a decision based on all the circumstances of the case to decide your status if there is a dispute between you and your Employer. There are four main categories they look at:

• Control – Do you have the final say in how your business is run? Can you choose whether to do the work yourself or can you send someone else to do it (Substitution)? Can you choose when and how you work (or does your employer tell you what to do and when to do it?). In summer 2014, an employment tribunal considered what ‘control’ means – in the context of the old self-employment legislation – in the case of Oziegbe V HRMC
• Integration – Are you responsible for hiring other people and setting their terms of employment if you need help? Are you excluded from your Employer’s internal organisational matters, corporate training, staff meetings? Are you exempt from having action taken against you using the company’s disciplinary procedures and have no access to their grievance procedures? Are you excluded from company benefits and perks? If, for example, you lead a team of employees, you may be integrated
• Mutuality of Obligation – Does the Employer offer work to you only if and when it is available? Can you decide when you will work and can you turn the work down that is offered? (or are both parties of a view that a contract of employment exists)? An important case in May 2014 went to the Employment Appeal Tribunal (EAT) to decide if someone as a worker or an employee.
• In Saha v Viewpoint Field Services Ltd, Ms Saha worked as a telephone operator for a market research company. The application form she completed in 2006 asked for her availability for three separate shifts each day, and she was required to commit to at least two shifts per week. During her work at Viewpoint, the arrangement was that, each week, Ms Saha would email her availability for the next week, but if the work wasn’t available she didn’t work. She could also cancel her availability after she had committed to work even if the work was available. The Company referred to her as an employee and she worked between seven and 43 hours per week until her position was terminated in 2012. The Employment Tribunal, however, decided that she was not an employee and couldn’t pursue an unfair dismissal claim. The EAT agreed because there was no obligation to provide her with work, or for Ms Saha to take work – the essential ‘mutuality of obligation’ wasn’t there
• Economic Reality – Are you responsible for meeting the losses of your employment as well as taking the profits? Are you responsible for correcting unsatisfactory work at your own expense? Do you have to submit an invoice to the company for them to pay you? Do you get a fixed payment for the job (including labour and tools/materials)? Do you provide the main items of equipment needed to do the job? Do you work for a range of different employers?

However, none of these on their own will decide your status on its own. One Judge has described it as ‘painting a picture’ of all the details and looking at the ‘picture’ from a distance.

In the 2014 case of Pimlico Plumbers v Smith, Mr Smith was employed as an ‘independent contractor’. He was described as “in business on his account” and was required to provide his own tools, submit invoices to be paid, and to have professional indemnity insurance. His agreement with Pimlico said he could choose his particular working hours and reject jobs, although the Tribunal accepted that he was required to work a minimum number of hours per week (five days per week/40 hours). Pimlico Plumbers weren’t under an obligation to provide work if there was no work available.

He did, however, have to wear a Pimlico uniform, have a Pimlico ID badge and mobile phone, drive a van with a Pimlico logo (which he had to pay rent for) and could only be contacted by customers through the company; Customers would receive contracts and estimates in the name of Pimlico and would only pay Pimlico. He had his movements monitored by Pimlico through GPS installed in the van, and the agreements he signed said if he did private work for a customer, this would result in dismissal; this agreement also contained post-termination restrictive covenants.

Following a heart attack, Mr Smith asked to reduce his working hours to three days per week and when this was refused Mr Smith bought claims for unfair dismissal and/or wrongful dismissal and direct disability discrimination, among others. The original Employment Tribunal found that he was not an employee and the Employment Appeal Tribunal agreed: Mr Smith assumed a financial risk, had a degree of autonomy and both parties acted as if he was self-employed without mutuality of obligation.

Both Tribunals found, however, that he was a ‘worker’ for employment rights purposes because he provided a personal service and there was no right of substitution, because he was required to work a minimum number of hours per week (despite what the documentation said) and because of the amount of control exercised over Smith by Pimlico. The Court of Appeal agreed with this in February 2017 and confirmed he was a ‘limb’ worker (defined as someone who is self-employed and providing services as part of a profession or business undertaking carried out by someone else).

The Court of Appeal’s decision provides principles in relation to substitution clauses in a contract:

• If the right of substitution only applies when the individual is unable to carry out the work, or the employer needs to give consent for the individual to provide a substitute
• This will normally mean the individual is a worker, as this is consistent with ‘personal’ performance. If the right of substitution can apply at all times (is ‘unfettered’), then this will normally mean the individual is genuinely freelance; similarly when the right of substitution only requires the individual to show that their substitute is as qualified as they are to do the work, and no consent is needed by the employer other than this, will normally mean the individual is genuinely freelance.

This Pimlico Plumbing case above, predictably, went to the Supreme Court and in June 2018 it upheld the Court of Appeal’s decision. This is the first time the Supreme Court has made a judgement on employment status.

The Supreme Court concluded that the “dominant feature” of his contract was that he should perform the work himself (the contact referred to his skills with a warranty that he was competent to carry out the work, and required a high standard of conduct and appearance; there was no ‘substitution’ clause.

So, on the four main categories: Control, Integration, Mutuality of Obligation and Economic Reality, if you answer:

• Yes to all or most of the questions above then it’s more likely that you’re self-employed
• No to all or most of these questions then you are likely to be an employee
• Yes to some (specifically that you can decide when you will work and can accept work or turn it down; that your employer will only offer work when it’s available) but you’re not in business on your own account, it’s likely you would be considered a Worker
• These questions are a summary for guidance only and the Courts take a view of all of the tests – none will decide a case on it’s own. You should get advice from an expert if you’re unsure.

In March 2014 HMRC published a ‘Supervision, Direction or Control‘ Guidance in March 2014.

A very important legal case in 2011 (Autoclenz Ltd v Belcher) has made it clear that the courts will focus on the actual reality of the working relationship (using the tests above) and not what the contractual documentation says.

Another important case in 2012 (Stringfellow v Quashie) made it clear that the Courts find the most important factor in determining the employment relationship was the control that the Employer had over the individual, and Mutuality of Obligation was placed in a secondary position. This decision was overturned at the Court of Appeal in 2013.

Unsure?

• You can, of course, be employed and self-employed at the same time (you may be an employee during the day and run your own business in the evening, or take a freelance contract with one employer and your next contract is on a PAYE basis). You may also not be self-employed for every job – each job needs to be considered separately. HMRC can help you decide what is right in these circumstances
• In the Film and TV Industry, there are many people working who find it difficult to determine their status. HM Customs and Revenue issue detailed criteria to help determine whether you are Employees or Self-Employed
• HMRC also have a specific guidance list for the film and TV Industry, specifying which jobs are allowed to have Self-Employed status (see Appendix 1 – updated 2012)
• There are also occasions when, in the Film and TV Industry, you’ll do a job that isn’t on the recognised HMRC list (above), but the if you contact them, may class you as self-employed and give you a letter of authority. The above link (guidance notes) gives details of how to do this and the letter of authority must be given to your employer
• If your Employer believes that you should be self-employed, but you don’t think you can be, you must tell your employer this and they should not insist that you’re self-employed
• You can’t be classed as self-employed if your employment looks like it has employee status, regardless of whether your contract says you have no legal bearing
• If the HMRC decides you’re ‘deemed employed’ (i.e. you’re an employee, not a freelancer), they would seek to recover the higher levels of tax due from your client, generally not from you.

We have an article on things you need to think about before going freelance – outlining the pitfalls, perils, benefits and joys and if you’re thinking of working for yourself then this guide should get you up to speed.

You may also like to read our article looking at the Office of Tax Simplification 2015 Report on Employment Status, which looked in detail at:

• the problems of defining status
• whose responsibility it is
• what the HMRC can do to help including their Employment Status Indicator Tool
• improving the current situation by a Direct ‘Statutory Employment Test’ or a ‘de minimis’ test
• improving the current situation by an Indirect Route including making changes to tax and NIC’s or a ‘third’ way.
  

If you are an Employer and need ongoing professional help with any staff/freelance issues then talk to Lesley at The HR Kiosk – a Human Resources Consultancy for small businesses – our fees are low to reflect the pressures on small businesses and you can hire us for as much time as you need.

Please note that the advice given on this website and by our Advisors is guidance only and cannot be taken as an authoritative or current interpretation of the law. It can also not be seen as specific advice for individual cases. Please also note that there are differences in legislation in Northern Ireland.