James Anderson, Senior Solicitor at Clarks examines employment status and explains how a contractor might be found by an Employment Tribunal to be an employee.

When a business engages:

• An agency worker




• A self-employed individual




• The services of an individual through a services company




• A casual

Businesses would be forgiven for thinking that they had not acquired an employee. While the relationship continues, the status of the individual is rarely questioned. When the relationship ends, the individual who provided services can often consider whether they have any legal rights and decide that they have a reasonable chance of being found to be an employee or, failing which, a worker.

For an individual to be an employee, there must be:

1. a contract and;
2. “mutuality of obligation”
i. Employee must provide personal service
ii. In return for a wage or some other consideration
3. The employer must have the necessary level of control over the employee
4. On balance all the other factors must point towards there being a contract of employment rather than any other sort of contract.

In general terms, the test for worker status is much the same except the thresholds are lower. To be “genuinely” self employed the individual must be in business in their own right, that is the end user business must not be a client or a customer of any profession or business carried out by the individual.

Businesses have, for a number of reasons (including keeping head count down and tax reasons), tried to ensure that certain work is carried out by contractors who they do not want to be their employees. Businesses have used a number of strategies in order to ensure that contractors cannot be considered employees. These strategies have targeted various aspects of the test for employment status, for example:

The Contract
Businesses have tried to avoid there being a contract between the individual and the business. This is most commonly done in two ways:

• By engaging the individual through an agency




• By engaging a service company which will provide that individuals services

The well publicised case of Dacas directed Employment Tribunals to examine whether a contract of employment could be implied between the business and the individual supplied by the agency, even though there was no written contract between them.

By analogy, if a tribunal can imply a contract of employment where an individual is supplied through an agency, they can also imply a contract of employment where an individual is supplied through a services business.

Mutuality of obligation
To prevent mutuality of obligation arising, businesses initially inserted clauses in contracts that the business did not have to provide any work for the individual and the individual did not have to accept any work offered.

This prevented an overarching, or umbrella, contract of employment which gave the individual employment status even when they were sitting at home with no work to do.

However, where there were long projects or where business provided a continuous supply of work over a long period, tribunals had a tendency to find that individuals were employees during the period when they were engaged. If the individual had an unbroken period of work for a year or more they could bring an unfair dismissal claim if their engagement was terminated unfairly.

Recently businesses have tried to introduce certainty into the status of their relationships with contractors by ensuring that there is no requirement for personal service.

If the individual has an unrestricted right to substitute themselves for another then they can be neither an employee nor a worker. However, if a business is trying to engage the services of a specialist in their field then they may be reluctant to agree to a substitution clause only to find that it has not acquired the services of the particular specialist it wanted.

Similarly a building firm may be reluctant to have a procession of bricklayers on a site none of whom they have dealt with before and about whose skills they know nothing.
To avoid this type of scenario businesses have introduced limited rights to substitute, for example the right to substitute:

• someone who has been approved by the business




• someone from a pool of approved substitutes

Although an unrestricted right to substitute would defeat a claim of employee or worker status a restricted right to substitute may not.

Businesses have also tried to ensure that they do not pay the individual directly. Payment can be made through an agency or through a services company. However, Tribunals do not necessarily see payment through an intermediary as being a bar to an employment relationship.

Control
It is impossible to gauge what is sufficient control for an employment relationship to exist. To try to avoid an employment relationship, measures should be taken to reduce the level of control exerted by the business over the individual. This can be done by allowing the individual to choose their own hours and the manner in which they carry out the work.

This is easier to do in project based work. Often commercial requirements dictate a certain level of control over the individual. The more control exerted the greater the likelihood that the individual will be found to be an employee.

The balance of all the other factors
Any other factor of the relationship could be examined and considered indicative of employment status or worker status. Some of the more common factors that are considered include:

• Provision of tools




• Commercial risk. If the individual/service company is insured, this can help demonstrate a level of commercial risk.




• The manner in which the task is carried out (linked to control above)




• The mechanics of any disciplinary




• Manner of payment




• The practice within the industry




• The extent to which the individual is an integral part of the business

Conclusion
Unless a business is prepared to allow an individual contractor the unfettered right to substitute someone else to perform the services, there is always a risk that the individual might be found to be an employee.

In order to reduce the risks, employers should ensure that any written contracts (either between the business and an intermediary or between the business and the individual) defines the relationship as clearly as possible.

Businesses must then ensure that the provisions of the contract are mirrored in the workplace that is if the individual has the right to set their own hours, do not make them start work at 9.00 and leave at 5.00. Also, ensure that the written contract is in no way varied through conduct. For example if the individual has the right to reject work, do not coerce the individual to take any work offered.

Ascertaining the status of an individual is not an exact science, it is determined by looking at a number of factors. The commercial needs of a business may mean that certain aspects of a contractor’s contract may look like an employment contract.

However, the business should ensure that other factors clearly show the individual is a contractor so that when a tribunal or the Inland Revenue looks at the complete picture it is apparent that the individual is, indeed, a contractor. To do otherwise might lead to some nasty surprises.