Employed/self-employed/worker – how can you determine the correct employment status?

In the context of providing immigration advice, particularly in relation to prevention of illegal working checks (please see the following article on changes to prevention of illegal working checks), we are often asked for whom checks need to be undertaken. Often we need to defer to our employment team for initial advice.

Employers will first need to decide the correct employment status of the individual.

The issue of employee status is, frankly, a bit of a mess under English law. Not only can different tribunals come to different conclusions on very similar facts but there is also an additional concept of ‘worker’ (in addition to employee and self-employed). If that is not enough, HMRC also has a view which may well differ from that of the tribunal. The fact that whether someone is working under a contract for service or a contract for services is a ‘mixed question of fact and law’ also means that it is not surprising that there is a lot of case law in this area.

Despite its complexity, the issue is important as it has a significant, and sometimes fundamental, impact on employment rights (the right to claim unfair dismissal for example); immigration status (whether someone is an employee or not will affect the permission they need to/can obtain to work in the UK); and tax.

The way of looking at this issue has almost become a cliché. You look at all of the factors individually and then step back and survey the whole. With that kind of approach how could one fail? Easily.

The best approach is to look at the minor factors first. Are there any benefits such as pension, life assurance, mobile phone or a laptop associated with the engagement? Is there sick pay? Is the person paid a fixed wage or salary and is it paid monthly? How long is the engagement for? If the answer is yes to any of these, the risk of the relationship being deemed to be employment is heightened.

The three main factors by some way, however, are as follows:

• Is there a right of substitution and is it genuine? That is, can the person get someone else to perform the services? If they can, then this is a huge factor in favour of self-employment. Beware, though, because the courts see through such a provision if it isn’t actually ever used or if, for example, it is subject to the engager’s consent and, in practice, that consent is never given.
• Is there mutuality of obligation? Often described as the ‘irreducible minimum’ of an employment relationship, does the engager have to give work and does the engaged have to do it if given? If not, then there is a strong argument that there is no employment relationship.
• How much control does the engager exercise over the engaged? If you want to establish a relationship of self-employment, the less control the better.

With the ramifications being so significant, it is a pity that the law is not clearer and easier to apply. It is also worth mentioning that what you call the relationship is of marginal relevance. It is definitely worth calling a self-employed contract exactly that but do not rely on that to be anything other than very mildly persuasive on a tribunal or court (and even less so on HMRC).

It may be little consolation but a number of overseas countries experience the same difficulties so we are not alone in our frustration. Despite the difficulties, it is possible to get something of a feel for these contracts if exposed to enough of them and it is an area where a gut reaction is often accurate. Once again, that is of little consolation to anyone who is risk averse.

Finally, if you want to minimise the risk, it is worth considering whether other arrangements may work. The main one that can often be considered in this area is to engage someone through their own company (often known as a personal service company). For the engager this minimises risk but, for the engaged, it still involves an element of risk as HMRC, under what is well known as IR35, will impose liability on the personal service company rather than the engager. If it is necessary to arrange a relationship of self-employment, this method is well worth considering.