This week, Esther Smith, partner at Thomas Eggar, and Martin Brewer, partner and employment law specialist at Mills & Reeve, advise on whether a contractor is considered an employee or self-employed, should any dispute arise with regards to employment status.

The question:

An employee began work with our company two years ago as an IT projects advisor. After six months, he left to start up his own business. Three months later, he returned as a contractor (he has a contract which states this. He only works for our company and I wondered whether he would be considered an employee, under employment law, should any dispute arise with regard to his employment status or should we wish to terminate his contract with us.

Pamela Dale

Legal advice:

Esther Smith, partner, Thomas Eggar

The status of ‘contractors’ is never a straightforward area, and one where there are usually no definitive answers. A great deal depends on the wording of the agreement between the parties and, without seeing the document, it is hard to comment on whether the agreement supports his status as self employed or not. The two key things that need to appear in the documentation are the right to provide a substitute for the work, and a clause confirming that there is a lack of mutuality of obligations between the parties. In layman’s terms, this means a clause confirming that there is no obligation on the company to provide work and if it is provided, no obligation on the contractor to undertake it.

A lot also depends on the actual reality on the ground, in terms of what is being done by the contractor. If he is operating effectively as an employee alongside other employees; does not provide services to any other party; and has been providing services to your company for over a year, then you may struggle to convince a tribunal that he is really self-employed.

It is also worth pointing out that it is not unknown for the Inland Revenue to take a different view of someone’s status than a tribunal, so just because the Inland Revenue take the view that he is self-employed, does not mean the same view would be reached by a tribunal should this individual challenge any termination of his ‘consultancy’ arrangements.

If you are in any doubt as to the status of the individual working for your company, it really is worth taking some advice now, and if it appears that he is an employee rather than a self employed consultant you are better off facing this position up front and transferring him to the status of an employee, rather than waiting for a challenge in the future. If you know or believe him to be an employee and continue to go along with the self-employed status from a tax perspective, there is a risk that you could be seen to be defrauding the revenue, which is a criminal offence.

Esther Smith is a partner in Thomas Eggar’s Employment Law Unit. For further information please visit Thomas Eggar

* * *

Martin Brewer, partner and employment law specialist, Mills and Reeve

In order to assess whether any individual is an employee, you need to ask two fundamental questions: first, is there a contract between your company and the individual concerned and, second, if there is, is it a contract of employment?

Assuming you have a contract then how do you determine whether it is a contract of employment?

The current state of the law requires you to look at three factors, as follows:

• Must the individual personally provide work to you in exchange for remuneration? These are the requirements of personal service and what is termed mutuality of obligation.
• Do you exercise a ‘sufficient degree of control’ over the individual to constitute the individual your ‘servant’?
• Are there any terms of the contract inconsistent with an employment relationship?

Let’s look at each of these in turn.

If there is no requirement for the contractor to do the work himself (he could sub-contract or employ/engage someone else to do the work) he is unlikely to be an employee as there is no requirement for personal service.

If the contractor can turn down any work offered under the contract then again he is unlikely to be an employee as there will be no mutuality of obligation. This may not be the case if the contract is for a specific project, although if that is the case the contract should say so.

If you control the contractor less than you would your employees, or perhaps exercise different control, then again this suggests no employment relationship, but control is a complex issue so if this is a concern you need to seek detailed advice.

Finally, terms inconsistent with an employment relationship include such things as requiring the contractor to carry insurance against the risk of claims caused by his work for you, not giving holidays, sick pay and other benefits available to your employees, requiring the contractor to indemnify the company for faulty work or claims against the company caused by the contractor, and clauses dealing with remuneration and tax which will be different to those applicable to your employees.

The key with any contractor is to get the documentation right and to have your contractor contracts health checked if you haven’t already (or haven’t done for some time).

Martin can be contacted at: martin.brewer@mills-reeve.com

* * *