The test to establish employment status is notoriously complex. Determining whether someone is an employee, a worker or a self-employed contractor has never been an easy task. We look at the implications for employers of getting it wrong.
What the law says
An individual's status determines what rights that individual has.
A self-employed contractor has very limited rights as they are viewed to be operating as a business in their own right. A worker benefits from additional rights including the right to paid annual leave, national minimum wage and to rest breaks. Finally an employee has the full range of employment rights including of course the right not to be unfairly dismissed.
The 'gig economy' is the current buzz word to describe individuals who are hired by companies often on a temporary basis and treated as self-employed individuals. These arrangements have and are coming under scrutiny both from the government and as a result of a number of high profile cases, none more so than the case of Pimlico Plumbers v Smith.
The facts of the case
Gary Smith is a plumber who was engaged by Pimlico Plumbers Limited (company) under the terms of an agreement which clearly identified him as a 'self-employed operative'.
In January 2011, Mr Smith suffered a heart attack and as a consequence was unable to work a full week of 40 hours (as he was contracted to do). This led to the company terminating its arrangement with him. Mr Smith challenged his status as a self-employed contractor and brought various claims including claims of unfair dismissal, wrongful dismissal, entitlement to pay during the period of a medical suspension, failure to provide particulars of employment, unpaid holiday pay and unlawful deductions from wages.
The question before the court was to decide whether Mr Smith was an employee, a worker or a self-employed consultant, and therefore whether he could bring the claims.
Factors in favour of worker/employee status
The agreement set out that Mr Smith's work would be governed by terms and conditions set out in the company's manual, which included stipulations as to his working hours, details about wearing the company uniform, provisions restricting his ability to work for himself or other companies, obliged Mr Smith to use a company van with the company's logo on the side and provided that Mr Smith could only swap jobs with other company operatives. All of these provisions would usually indicate either a worker or employee relationship.
Factors in favour of self-employment
During Mr Smith's engagement with the company he raised invoices, was VAT registered and personally accounted for tax and national insurance. Further the company was not under a contractual obligation to provide him with work if there was none available, all of which would point towards Mr Smith being self-employed.
Mr Smith's claims hinged on him being able to establish that he was either an employee or a worker. At a pre-hearing review, an employment tribunal held that Mr Smith was not an employee pursuant to section 230(3)(a) Employment Rights Act 1996 (ERA) and not employed under a contract of service. It had no jurisdiction to hear his claims of unfair dismissal, wrongful dismissal, pay during the period of a medical suspension and his claim for the company's failure to provide particulars of employment.
The remaining issue for the employment tribunal to decide was whether Mr Smith was a worker or a self-employed contractor. In order for Mr Smith to establish worker status he needed to show that he was engaged under a contract 'whereby the individual undertakes to do or perform personally any work or services for another party to the contract whose status is not by virtue of the contract that of a client or customer of any profession or business undertaking carried on by the individual'.
The employment tribunal considered the agreement between the parties and the reality of the working arrangement in practice and held there was an obligation for Mr Smith to provide his services personally and that the company exercised a high degree of control over Mr Smith. The employment tribunal concluded that he was a worker - a decision that was upheld on appeal by the EAT.
The Court of Appeal dismissed the company's further appeal and upheld the employment tribunal's decision that Mr Smith was entitled to basic workers' rights even though his agreement stated he was self-employed.
In particular the Court of Appeal considered the concept of personal performance under the definition of a worker and agreed with the employment tribunal and the EAT that in this case Mr Smith was under an obligation to provide his services personally and there was no express right for him to engage a substitute in his place. In addition, the Court of Appeal held that the level of control which the company exercised over Mr Smith including him being obliged to complete a minimum number of hours per week and being subject to onerous restrictive covenants, precluding him from working as a plumber in any part of Greater London for three months after termination was inconsistent with the company being a customer or client of a business run by Mr Smith.
Despite this decision, determining the difference between an employee, worker and a self-employed contractor remains difficult. As with all cases on this topic this was a fact sensitive case. The case highlights that employment tribunals are taking a pragmatic approach to status cases, despite written agreements between the parties. In view of the number of cases and a recently convened government review into the issue of workers' rights in the '"gig'" economy we are recommending that all employers review their engagement models, particularly those who currently engage individuals on a self-employed or worker basis to determine whether there is a risk that their status could be challenged.