Why Is It Important to Pick the Correct Employment Status For Your Employees?
Business owners or managers can enter into various types of contractual relationships with their staff, some of which may suit their interests better than others.
Ordinary employees are bestowed with the greatest number of employment rights out of any staff category. Apart from all the rights generally granted to workers, agency workers, and self-employed individuals, employees are likewise entitled to protection against unfair dismissals, as well as to redundancy payments.
For this reason, many employers feel tempted to classify most of their staff as anything other than employees. However, this course of action could eventually warrant an employment tribunal claim against them (a successful one, in many scenarios).
- Why Is It Important to Pick the Correct Employment Status For Your Employees?
- How Do I Determine Whether or Not a Person Has “Employee” Status?
- Who Are Considered “Workers”?
- What Is an Agency Worker?
- What is The Employment Status of Agency Workers?
- What Is a Self-Employed Person?
- What Differentiates a Self-Employed Person from a Worker and an Employee?
- What Employment Rights Do Self-Employed Individuals Have?
- What Are the Advantages of Hiring Self-Employed Persons?
- What Are the Disadvantages of Hiring Self-Employed Persons?
- Contractor vs. Freelancer vs. Consultant
- Agency Work, Independent Contractorship, and Self-Employment Advice. How We Can Help
- Frequently Asked Questions
Before dissecting the different categories of non-employees (contractors, self-employed persons, and agency workers), we should first dispel any doubts about what constitutes “employee status”. This is possibly the most important matter to discuss before all else, owing to all the legal repercussions that it carries and the risks of undermining good faith if overlooked.
Even though tribunal judges take into account how the parties define their relationship, this definition is not enough.
A person working for your company could be deemed an employee if they fulfil certain objective criteria. Unfortunately, these criteria are not clearly laid out in any piece of legislation, which is why we must turn to case law to learn about them.
Section 230(1) of the Employment Rights Act 1996 contains a vague definition of what an employee is. On the other hand, the 1968 Ready Mixed Concrete (South East) vs. the Minister of Pensions and National Insurance case left us with a handy test consisting of the following stages:
Mutuality of Obligations
The tribunal could examine whether the employed individual has a right to minimum pay or work or if they may refuse work when they so wish.
If the employee were able to appoint another individual to perform work at their behest, that would indicate that they held contractor status and not employee status.
The judge has to evaluate whether or not the employer has extensive control over the person carrying out the job. These are the factors that a tribunal would assess:
- How subordinate the individual is to the employer
- Their involvement in the business’ internal operations (whether or not they were given access to corporate email, their own desk, business cards, company laptops, etc.)
- Whether the person working for the company was imparted any sort of training.
- The individual’s seniority.
Consistency of Other Contract Provisions with Those of an Employment Contract
These elements should be considered:
- How much financial risk is assumed by the individual (e.g., if they must fix any wrongdoing at their own expense).
- Whether or not the person performs the job through a service company distinct from the employer or through their own business.
- Whether the individual has their own insurance contract or not.
- How payment is made (if it’s based on an annual/hourly wage or a set amount payable for the entire work).
- Whether or not they’re entitled to sick or holiday pay or other benefits that regular employees enjoy.
- Whether or not they may profit from their performance.
- How much time/money the person invests in the company.
Who Are Considered “Workers”?
Another category of labour introduced in UK law is that of the “worker”. According to section 230(3) of the ERA 1996, the category of “worker” describes someone under a contract of employment or any other contract who performs personal work or services for another party who’s not a client or customer of their profession or business undertaking.
While it may be easier to differentiate between an employee and a non-employee, establishing the difference between a worker and an “independent contractor” is an effort fraught with bigger challenges.
The worker test, similar to the employee test, comprehends a series of criteria to be scrutinised. They may be summarised as follows:
This requisite is mildly similar to that linked to employee status, but contrary to what’s the case with an employee contract, workers are not required to perform work when asked, nor is the employer obliged to provide it. In other words, there is no “mutuality of obligation”.
Just as with an employee, a worker must undertake the work themselves, without the possibility of summoning any intermediaries to work on their behalf.
The Other Party is Not a Client or Customer of Their Profession or Business Undertaking
A tribunal will ascertain whether the nature of the relationship is that of a worker or independent contractor by focusing on the main purpose of the contract. If the purported worker signs the contract as a sole trader, through partnerships or other business structures, they would not be considered a worker. On the flip side, if the person’s work is integral to the client’s operations, they would carry the status of a “worker”.
We will return to the subject of independent contractors later. First, let’s segway into the topic of agency workers.
What Is an Agency Worker?
Agency workers (typically called “temps”) work through agencies or recruitment services. They would either sign an employment contract or a services contract with an employment agency or business, which, in turn, finds them work according to their skills and profile.
Employment Business vs. Employment Agency
While these are oftentimes treated as synonyms, employment agencies and employment businesses are very distinct concepts from each other:
Employment agencies (in the strict sense) assign work-seekers to employers, who then assume the responsibility of fulfilling all employment obligations, both contractual and statutory. In other words, the work-seekers become employees under the hirer, detaching themselves from the agency.
These are also called agencies, though they’re technically businesses that assign workers to “hiring companies” while retaining a relationship with said workers. In that sense, these agencies are ultimately responsible for handing out the workers’ paychecks, while the hiring company pays a fee to the agency.
These businesses can’t charge any fees to work-seekers for their recruitment services, nor can they restrict them from finding a job elsewhere or ceasing to utilise their work-finding services. Furthermore, they can’t withhold payment on account of the hiring business’ delay or neglect in paying the fee.
What Are the Advantages of Using Agency Workers?
There are numerous reasons why agency workers could be an attractive alternative to a business owner. Among others:
- Agency workers can fill temporary gaps in the workplace due to holidays or sick leaves.
- They can be handy for when there’s excessive demand because of peak season.
- They can be more easily hired and dismissed.
- They may help you elude headcount restraints.
- It could be more cost-effective to hire them in lieu of permanent employees, though this doesn’t always follow, as we’ll see shortly.
What Are the Disadvantages of Using Agency Workers?
Agency workers could pose some other difficulties, such as:
- Administrative burdens associated with sending the payment information to agencies, with potential compliance risks in the interim.
- Depending on the agency’s markup, the rates – which include the worker’s wage, holiday pay, and pension contributions – could turn out costlier than directly hiring the worker as a permanent employee.
- Agency workers will be less likely to abide by their hirer’s policies than regular employees would, for they would not have the same level of commitment. This is owed primarily to the fact that, since there’s no contract between the agency worker and the hirer, the former won’t have the same chances of getting promotions, hence no incentives to remain engaged in their work.
What is The Employment Status of Agency Workers?
Agency workers are immersed in a tripartite arrangement by which they agree with the agency to work for one of the agency’s clients (hirer), with whom there is no contractual link, as indicated before.
Though they’re tagged as “workers”, their status is not necessarily that of a “worker”. Each case would have to be assessed separately to unequivocally declare an individual as a “worker” or an “employee” of the agency, albeit hirers are usually off the hook either way.
For the record, the possibilities of having an agency worker recognised as an “employee” are exceedingly slim, especially when considering that most of the time, they would be under the direct supervision of the hirer in their daily undertakings.
What Is a Self-Employed Person?
A self-employed individual or contractor is one who runs their own business and is not under the direct supervision of an employer or hirer. These self-employed persons are solely responsible for the success and failure of their venture and do not enjoy the same employment rights as employees or workers.
Self-employed persons are in charge of their tax filings. They must make their self-assessments and pay tax (income tax and VAT whenever applicable) to HM Revenue & Customs, as well as the respective National Insurance contributions. Integral self-employment advice would have to encompass these subjects.
What Differentiates a Self-Employed Person from a Worker and an Employee?
Apart from the qualities we just exposed, these are other important distinctive traits of self-employed individuals (in contrast to workers and employees):
- The possibility of choosing when and how to perform their work.
- The capability of employing others to do the job for them.
- The ability to work for more than one client at a time, drafting separate agreements for each one.
- They don’t receive a wage. Rather, they invoice their clients.
- They typically carry and employ their own equipment.
What Employment Rights Do Self-Employed Individuals Have?
While the employment rights bestowed to self-employed persons are not as numerous as those of employees and workers, they still maintain certain fundamental entitlements, such as:
- The right to request information on how organisations use their data and what data they keep (in accordance with the Data Protection Act 2018).
- According to the Equality Act 2010, the right to be shielded against discrimination on account of any protected characteristics such as age, civil status, pregnancy, disability, race, religion, etc.
- The right to a healthy and safe workplace.
Other rights with respect to government authorities include:
- The right to claim a Maternity Allowance (MA) for 39 weeks, provided that they were self-employed for a minimum of 26 weeks within the 66 weeks prior to their due date and earned at least £30 a week.
- Whistleblowing protection, particularly if they work as self-employed healthcare providers for the NHS.
Those with self-employment status do not enjoy protection against unfair dismissals, nor the rights to:
- Redundancy pay
- Paid sick leave
- Paid holidays
What Are the Advantages of Hiring Self-Employed Persons?
These are the most relevant benefits from the point of view of employers:
- People with self-employed status are regularly less expensive because they’d be getting paid for the specific work they’ll undertake and are not entitled to any additional benefits or training.
- There is no obligation to summon them when there is no need for their services.
- Managers might call upon them to take part in specific projects that require their specialised knowledge.
- “Employers” are not bound to assign a specific working space for them, making it possible for the former to increase their headcount.
- Just as with agency workers, it’s markedly easier to terminate the relationship with self-employed people than with employees.
- You won’t need to assume any responsibility for any tax and National Insurance liabilities that they could incur. This means you won’t have to withhold income tax and NICs through the PAYE system.
What Are the Disadvantages of Hiring Self-Employed Persons?
As with every other type of relationship, relying on self-employed individuals carries some disadvantages. These are just some examples:
- Availability or willingness to take part in a project or work is not guaranteed on the part of self-employed professionals.
- There is a lesser chance of developing a solid relationship with them, especially if they’re hired for small, short-lived projects. This will create stability problems in the workforce.
- You won’t be able to place restrictive covenants on them in the same way you would on senior employees. This could hinder your ability to maintain certain trade secrets and protect your own business from potential unfair competition.
- You won’t be capable of imposing hedges on how, when, and where they may perform or deliver their work or service. This could bring more uncertainty about the yields resulting from their labour. By contrast, employees and workers are given clear guidelines that are aimed at producing more predictable outcomes.
Contractors are positioned in a particularly grey area, for they normally don’t take various clients at once as most freelancers and consultants do. What’s more, they tend to work on long-term projects (such as construction projects).
Independent contractors, in most instances, are under the umbrella of self-employment, but they may be classified as workers in certain situations (as explained earlier), which would make them entitled to a number of workers’ rights and privileges.
What mostly differentiates independent contractors from workers is that contractors undertake work via a limited company or under the modality of a sole trader. Furthermore, they ordinarily have a level of autonomy that’s more similar to that of freelancers. Nevertheless, as a client, you may have a bit more control over what a contractor does as they’re inclined to work in their client’s premises or designated locations.
Contractors in the construction sector are regulated by the Construction Industry Scheme (CIS).
Freelancers fit the definition of self-employed persons the most, for they enjoy ample freedom in their dealings.
While the term freelancer is not technically legal, it has been generally utilised to describe self-employed individuals who work in media and tech industries or fields akin to those. Some of them may undertake work as commercial agents and are thus entitled to certain rights under commercial agents’ regulations (more on this later).
They usually work in their own premises and arrange their working hours at their leisure. Their only concern is to accomplish the end goals that clients set out for them with due diligence.
Consultants place their knowledge in a specialized field at the service of businesses. They are not charged with bringing a client’s objective to fruition, but they provide the tools and means for reaching that goal. They may be likened to troubleshooters or, in other words, individuals who offer guidance on how organisations can overcome obstacles.
Their work tends to be highly remunerated, especially in contrast to internal professionals.
The Case of Commercial Agents
Commercial agents are within a special regulatory framework that allows them to make certain claims against their principal (client) upon the termination of their contract, many of which are very similar to those made by regular employees but in the application of commercial law instead of employment law.
For example, both the agent and the employee are entitled to a statutory notice period, in addition to compensation or indemnity.
Compensation is a sum claimable by the commercial agent for the loss of their agency, which is calculated on the basis of the agency’s market value at the moment of termination. Indemnity serves a similar function to compensation, but the calculation is capped at a year’s gross commission.
Moreover, commercial agents can pursue commissions earned up to the date of termination and those generated due to sales made after termination but owing to the agent’s prior efforts (pipeline commissions). A competent agency lawyer should be capable of helping agents claim all these rights in court.
Agency Work, Independent Contractorship, and Self-Employment Advice. How We Can Help
As you may already see, navigating through the rugged terrain of UK law when determining the employment status of individuals can be overwhelming, let alone stressful.
We at IAS Law can provide assistance to employers and agencies by:
- Advising on the right types of contracts for your business needs.
- Reviewing your contracts to make sure they fulfil the regulatory demands, eluding prospective employment status claims.
- Providing counsel on the ways to manage your workforce legally.
- Arranging representation services in the event of an employment tribunal claim.
We will also support individuals by:
- Giving advice on your employment status and its repercussions.
- Making sure your proposed contract consistently upholds your rights according to the employment status you’ll enter into.
- Devising a tribunal claim for unfair dismissal, unlawful treatment, or incorrect depiction of your employment status.
Call us at 03334149244 for more information. Our friendly employment experts are here to help!
According to the Commercial Agents (Council Directive) Regulations 1993, commercial agents are entitled to:
- 1 month’s notice during the first year.
- 2 months’ notice throughout the second year.
- 3 months’ notice for subsequent years after the third year.
Initially, clients are not obliged to process a contractor’s taxes or NICs through PAYE, as the latter is solely responsible for doing their self-assessment.
However, in some circumstances, self-employed persons may be deemed as employees only for the purposes of HMRC/NI. The tests for determining said status for fiscal purposes are similar to those performed for strict employment law matters, although in this particular situation, all the factors are considered without giving priority to one over the other.
These cases are admittedly rare (but not impossible).
According to UK statutes, agency workers are entitled to the same terms and conditions as permanent employees in relation to pay, working time, night work, breaks, rest periods, and annual leave, but only after 12 weeks’ continuous employment in the same position.
Hirers must inform agencies of these terms and conditions so that the latter may uphold their workers’ rights after the aforesaid period.