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Catherine Wilson

Thomas Eggar LLP

Employment Partner

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Who am I? Types of employment status

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This is not simply a philosophical question. A new third type of employment status, namely that of ‘employee shareholder’, was introduced into the UK on 1st September 2013 in addition to employee and worker status respectively. The correct identification of an individual’s status has never been more important given its implications both for their personal legal rights and also the company’s obligations.

Unfortunately determining an individual’s employment status is not straightforward as there is still no clear set of defining criteria from which an individual’s employment status can be definitively adduced.

So aside from the different treatment by the tax authorities, what are the main differences between types of employment status and what are the relative benefits and disadvantages between them for both companies and individuals?

The first category is that of employee status. An employee is someone who has entered into or works under (or, where the employment has ceased, worked under) a contract of employment. For these purposes a contract of employment can be either express or implied and, if expressed, either oral or in writing.

In contrast the second type of status is that of a worker. Created by the Employment Rights Act 1996, a worker is an individual who has entered into or works under (or, where employment has ceased, worked under) a contract of employment or any other contract, express or implied, oral or in writing. A contract whereby the individual undertakes to do or personally perform 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.

In practice the distinction between a worker and an employee can be opaque. Case law provides a helpful test to identify when an individual is a worker as laid out below:

  1. Did the individual undertake under the contract to personally perform work or services?
  2. Was the status of the employer under the contract that of a customer of a business undertaking carried on by the individual?
  3. Was there mutuality of obligation between the individual and the employer?

Further indicators that have been considered by the courts include whether benefits are received by the individual, the length of time the individual has been engaged, whether the employer is obliged to pay the individual, the degree of integration into the employers business and whether or not the individual is free to provide their services to others.

And finally the newest type of employment status is that of an employee shareholder.  Created by the Growth and Infrastructure Act 2013, employee shareholders receive at least £2,000 worth of shares in their employer or their employer’s parent company in return for relinquishing certain employment rights. This new status is not determined so much as by what the employee shareholder does but rather by the actions taken by the employer to satisfy certain conditions, namely:

  • They must be an employee of a company
  • The individual must have agreed with the company that they will be an employee shareholder
  • They must have received a written statement from the company with the particulars of the status of employee shareholder and the rights that attach to their shares
  • The individual must have received advice from an independent adviser in relation to the terms and effect of the proposed agreement and 7 days must pass since the day the individual received the advice
  • The company must have issued or allotted fully paid up shares in the company to the individual or procured the issue or allotment to the employee of fully paid up shares in its parent undertaking which have a value of no less that £2,000
  • The individual’s only consideration is entering into the agreement to become an employee shareholder, if they are found to have given any further consideration they will not be an employee shareholder. 

So what are the consequences of an individual’s employment status? 

As might be expected employees have the greatest variety of rights certainly in comparison with workers. These rights include:

  • The right to receive written particulars of employment
  • Statutory sick pay
  • Remuneration during suspension on medical grounds
  • Protection on the transfer of undertakings
  • The right to be protected from liability for acts carried out in the course of their employment
  • The right not to be refused employment because of membership or non-membership of a trade union 

Employees also have additional important rights in relation to families and pregnancy, time off, termination (including the right not to be unfairly dismissed), redundancy pay and discrimination.

Many of these employee rights are also shared with the new employee shareholders. However, again there are some significant differences.

An employee shareholder does not have the general right to be protected against unfair dismissal or the right to receive a statutory redundancy payment. An employee shareholder does have the right to be protected against unfair dismissal in health and safety cases, automatically unfair cases such as whistle blowing and trade union activities or in cases where the dismissal is founded on one of the prohibited discriminatory grounds under the Equality Act 2010 such as race or gender or disability.

And finally what of workers?  As indicated above, there are a number of rights which are not applicable to workers. However many statutory provisions enacted in recent years confer protection upon workers.  Again these rights include:

  • The right to be protected against discrimination
  • The prohibition against unlawful deductions from wages
  • Protection against detrimental treatment arising from whistle blowing or the making of protected disclosures;

Workers are also covered by the legislation governing working time and the national minimum wage.

The legal issue for companies is therefore how to distinguish between the different types of employment status and, in particular, between contracts of service or employment and contracts for services or so called self-employment. There are unfortunately no easy answers. Ultimately only a tribunal or HM Revenue & Customs can decide on an individual’s employment status and they could both come to different conclusions. The only solution is careful analysis and, on occasions, a healthy dose of gut instinct!

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Catherine Wilson

Employment Partner

Read more from Catherine Wilson
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