Whether or not we choose to admit it, changing relationship status is something we are all too keen to keep under review in the world of social media. But are you as careful when it comes to reviewing the employment status of your company’s staff?  If not, take heed of the case of Dakin v Brighton Marina Residential Management Company. It warns that employers who fail to afford careful consideration to the employment status of their staff may face costly pay-outs in the Employment Tribunal.

Mr Dakin brought claims against the Respondent for holiday pay and unfair dismissal. An Employment Tribunal dismissed both claims, apparently on the basis that Mr Dakin was not a worker or employee and, as such, was not afforded the relevant protections under employment law. At face value the Employment Tribunal’s decision was not that radical, particularly as both he and the Respondent agreed that he had been engaged on what was described as a self-employed basis. Mr Dakin was paid gross without deductions for tax and at a rate that the Respondent argued it would not have contemplated had there been any doubt over the Claimant’s self-employed status. Moreover, there was no obligation for the parties to provide or perform specific hours of work.

The Employment Appeal Tribunal (EAT) was not convinced. It found that the Employment Tribunal had taken the wrong approach to determining employment status, commenting in particular that it had relied “heavily and arguably too much” on the label which the parties attached to their relationship when it was reality of the relationship which it had to assess.

In relation to mutuality of obligation, the EAT commented that the focus should not have been on whether there was precision in the hours worked. Instead, it stated that the correct approach was to ask whether the history of the relationship showed that the parties had agreed there was an obligation to do at least some work and a correlative obligation on the employer to pay for it. It discounted the Employment Tribunal’s consideration of the rate of pay as illogical and, crucially, found that it had failed to conclude as to whether an unfettered right of substitution existed, a central factor when determining employment status.

The EAT remitted the question of Mr Dakin’s employment status back to a new Judge for consideration. However, it is not his fate that matters but the message that now, more than ever, Employment Tribunals are looking behind the wording of a contract to the reality of the relationship between the parties. This is compounded by the fact that many companies are searching for increased flexibility when engaging workforces against the backdrop of prolonged financial hardship – something that is evident not only in the utilisation of self-employed contractors but also the much publicised rise in zero hours contracts.

This is understandable and may offer a workable solution for employers and individuals, provided that the agreement matches the reality of the situation.

But what are the potential pitfalls? The greatest risk is that faced by the Respondent in the above case, namely that some core legal protections apply only to employees. This applies most particularly to the rights on termination of employment granted under the Employment Rights Act 1996. Failure to label employment status correctly may lead to individuals being treated outside of the appropriate procedure and, if the individual can later establish that they were an employee, they could be awarded significant compensation by an employment tribunal.

Other factors to bear in mind include the mutual duty of trust and confidence implied into employment contracts and the fact that an employer is vicariously liable for acts done by an employee in the course of their employment. As these considerations are unlikely to apply to independent contractors, these can be easily overlooked if there is an agreement in place that labels the relationship as client/self-employed contractor. While workers have less extensive employment protection rights that employees, they are often covered by statutory employment protections.

The distinction between the classes of employment status can be unclear. Indeed, an individual may not carry the same status for all purposes and a court may apply different tests dependent on the cause of action involved e.g. the fact that a person is considered self-employed by HMRC for tax purposes does not preclude an Employment Tribunal from determining them to be a worker or employee under employment legislation.

As a guide, the following minimum standards will always apply:

• Employee: an individual who works under a contract of employment. For there to be a contract of employment there must, as a minimum, be an obligation for that individual to perform the work personally, the existence of mutuality of obligations between the employer and employee and the employer must have sufficient control over the employee’s work. Employers should bear in mind that to retain contractual control is not the same as dictating the minutiae of how an employee approaches their daily tasks.
• Worker: an individual who, under any other contract undertakes to perform personally any work or services for another party to the contract, who is not a professional client of the individual. In other words, someone who is not in business on their own account. Mutuality of obligation also forms an essential element of this relationship.
• Self-employed: an individual who contracts with a company to provide services over a certain period of time and for a fee. They are likely to be in business in their own right and work for a variety of clients. There is no obligation on the individual to perform the service personally, provided they can supply a suitable substitute. Self-employed individuals submit regular invoices and are paid without deductions for tax or national insurance.

Although seemingly onerous, regular contract and policy reviews are an invaluable way to ensure that both parties are clear about the scope of their obligations and can save the much greater time and expense of having an Employment Tribunal determine this for you at a later date.