Kick off the new tax year with 50% off our Ltd company accountancy packages!
Deciding someone’s employment status can be complicated, and Employment Tribunals and HMRC may consider different factors when deciding your status, as there’s no single legal definition.
IR35 legislation has muddied the legal waters further, and not knowing how to correctly define yourself can lead to costly and time-consuming Employment Tribunals and, in some cases, financial penalties. For more information on determining your legal status if you are a contractor, see our IR35 Hub, where we explain IR35 in detail. We also have a free IR35 calculator for contractors to help you check your IR35 status.
We have a knowledge article about supervision, direction, and control, and if you’re concerned about IR35, 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:
It’s important to establish your status correctly since employees generally have more employment rights than workers or those who are self-employed (see our article about 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. Whether you’re taking on an employee, or simply hiring a freelancer or contractor to help your business for a short period. If you’re taking on an apprentice, check out our guide to apprenticeships for all the information you need.
ACAS (the Advisory, Conciliation and Arbitration Service) have published guidance in for employers in relation to employment status. 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.
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, or on a fixed-term contract) if:
The legal definitions of these tests (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 a provision in law where someone employed on a fixed-term contract can receive a permanent (open-ended) contract if:
You can read more in our article “What are fixed-term contracts and how can they come to an end?”.
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:
In addition, there are also home-workers (or piece-workers) who have more limited rights than normal ‘workers’. See our guide to employment rights for the full details.
Foster carers and parents have generally not been seen as workers – but, in August 2020, a Scottish Employment Appeal Tribunal found that a couple who were involved in a specialist foster care programme were workers.
You’re likely to be self-employed if:
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 in our article, and learn more about IR35 in our “Is my contract inside or outside IR35?” article. We’ve got more about becoming a freelancer in our knowledge article what is a freelancer.
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:
However, none of these on their own will decide your status. One judge has described it as ‘painting a picture’ of all the details and looking at the ‘picture’ from a distance.
So, with these four main categories in mind, if you answer:
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.
HMRC published “Supervision, Direction or Control” guidance in March 2014. There is also the thrilling read of the employment status manual from HMRC with all the detail you could ever need on the subject.
There have been several important Employment Tribunal case about employment status and these include:
In the 2014 case of Pimlico Plumbers v Smith, Mr Smith was employed as an ‘independent contractor’:
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 to an Employment Tribunal for unfair dismissal and/or wrongful dismissal and direct disability discrimination, among others.
The original Employment Tribunal and the Employment Appeal Tribunal found that he was a ‘worker’ not an employee. The case was passed up to the Court of Appeal and finally to the Supreme Court, in 2018, who finally concluded that the “dominant feature” of his contract was that he should perform the work himself (the contract 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). Therefore, Mr. Smith was ruled a ‘limb worker’ for employment rights purposes because he provided a personal service and there was no right of substitution. However Mr Smith’s later claim for holiday pay failed, and you can read the details here.
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.
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 what your contract says.
If HMRC decides you’re a ‘deemed employee’ (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.
In the film and TV industry, there are many people working who find it difficult to determine their status. HMRC have issued detailed criteria to help determine whether you are employed or self-employed.
There are also occasions in the film and TV industry when you’ll do a job that isn’t on the list produced by HMRC, but if you contact them, they may class you as self-employed and give you a letter of authority. The above link gives details of how to do this and the letter of authority must be given to your employer.
If you’re thinking of going freelance, you can check out our article, ‘Becoming self-employed’, which outlines the advantages and benefits as the pitfalls and perils, of going it alone.
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.