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Ask the Expert: What is the notice period for a perm gone freelance?

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The question

One of our members of staff was employed by our organisation in a permanent capacity on a fixed-term basis.
 
He had a two-month notice period. At the end of the contract, the employee was kept on but asked to act as a freelancer, which meant coming off payroll and billing us on a monthly basis.
 
Nothing has changed for this employee other than he now bills us on a monthly basis and has been with us for a total of 18 months. He asked me what his notice period would be if his employment was terminated and I said that, as there had been no break in service, it would still be two months. Is that correct? What is his legal status?
 
 
The legal verdict
 
Esther Smith, a partner at Thomas Eggar
 
The question of the worker’s legal status really comes down to how the relationship works in practice rather than a strict interpretation of the previous contract terms or how you label the relationship. 
 
A ‘freelance’ worker usually has the ability to turn down work when it is requested, will work largely unsupervised and can, in some instances, put forward another person to work in their place if, for any reason, they are unable to do it themselves.
 
These are all signs of a self-employed person and, if you and your worker have this kind of arrangement, he will most likely be self-employed (regardless of the fact that your previous contract referred to him as an employee).
 
This means that he will not be entitled to any notice of termination unless there is a contractual agreement for you to provide such notice. The previous notice under the employment contract will not automatically translate into current circumstances.
 
If this is not the case and, under the new arrangement, you continue to have an obligation to provide him with work that he must accept, have a sufficient degree of control over his actions and there is a requirement that he perform the work personally, he will likely be viewed as an employee.
 
This situation will hold even if you are referring to him as a ‘freelance’ worker and he has to account to HM Revenue & Customs for his own National Insurance and tax payments. 
 
If it is the case, then provided there has been no break in employment, which appears to be the case here, he will be treated as though he has been with the company for 18 months. 
 
By law, an employee with 18 months of service only needs to give one week’s notice, unless a longer period had been agreed by both parties. Assuming that he either agreed to continue on the same terms as before or the company’s standard notice requirement (which is applied consistently) is two months, requesting that your employee provide two months’ notice will be correct.
 
Esther Smith is a partner in Thomas Eggar‘s Employment Law Unit.
 
 
Adam Partington, a solicitor at Speechly Bircham
 
Determining whether an individual is an ‘employee’, ‘worker’ or ‘independent contractor’ can be complicated and a tribunal will often look beyond the contract to the reality of the arrangements between the parties.
 
Even if the parties in this case have arranged that the individual will act as a freelancer (ie an independent contractor), it does not necessarily follow that this is in fact his legal status under employment law.
 
The issue of employment status is important because it has significant implications for both parties in terms of their rights and obligations. ‘Workers’ have some protected employment rights but not to the extent that ‘employees’ do, and ‘independent contractors’ have even fewer rights. 
 
The tax arrangements for employees and independent contractors are also different and can be scrutinised by HMRC.
 
Broadly speaking, a ‘worker’ is an individual who falls between the definition of an ‘independent contractor’ and an ‘employee’. ‘Workers’ have the same statutory rights to rest breaks and annual leave as ‘employees’ and are also protected under whistleblowing and discrimination legislation.
 
They also have the same rights against unlawful deduction from wages. However, many other statutory entitlements of ‘employees’ such as maternity and paternity leave, do not apply to ‘workers’.
 
Even if both parties state that an individual is an independent contractor, there are several factors that may suggest they are in fact an employee or worker. In the event of any dispute, it would be for an Employment Tribunal to decide the correct status. 
 
Such factors would include: whether there is a requirement on the individual to provide services personally, with no or limited rights of delegation; mutuality of obligations between the parties; the degree of control over the individual; the extent to which the individual is integrated into the business, for example, in things such as payroll, appraisals etc; and whether the individual provides his own equipment and materials.  
 
An Employment Tribunal will take into account HMRC’s view on their status, but this opinion would not be conclusive.
 
It is difficult to say what the person in question’s employment status might be without having further details about his job and the working arrangements with your business.
 
What is ‘reasonable’?
 
However, if the working arrangements have changed little since he was employed on a fixed-term contract, he may rely on this situation to indicate that he is in fact an employee, particularly if he is required to provide services personally and is prevented from undertaking work for any other employer. Again though, this will depend to a large extent on the nature of the working arrangements.
 
As regards the individual’s notice period, this situation would be determined in the first instance by his contract. Was a new contract issued when he was asked to act as a freelancer?
 
If so, it will simply be a matter of following the relevant clause in the contract. If not, you need to consider whether the notice period in the previous contract will still apply. 
 
If there is no agreement as to his notice period, he will be entitled to ‘reasonable’ notice, which will depend on the circumstances, regardless of his employment status. The previous notice period of two months may be taken into account in determining what is reasonable.
 
If the individual is an employee or worker, a tribunal would consider several factors when determining what a ‘reasonable’ period of notice would be, including (but not limited to): the industry standard for the type of role he has; the contractual notice periods of comparable colleagues; his length of service and his level of seniority and salary.
 
It is worth noting that if someone is an employee, they are entitled to the statutory minimum notice period, which in this case would be at least one week’s notice as the individual concerned has been employed for 18 months.
 
Nevertheless, taking into account the factors above, it may well be that, in this instance, a notice period of longer than one week would be considered reasonable. 
 
It would be sensible to consider this situation in more detail and take legal advice so that you have a clearer view of his status. If there is a good chance that he is an employee, it may be best to record that and treat him accordingly. 
 
This is important because if you get his status wrong and he is an employee, you would be under an obligation to tax him through PAYE. If you do not do this, you may have to pay tax for previous years as well as interest and penalties.
 
You would also have to observe his rights as an employee. Therefore, it would also be sensible to expressly agree a notice period with him so that you have clarity on this, but do seek guidance on how to approach the situation.
 
Adam Partington is a solicitor at Speechly Bircham LLP.
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