Given the recent press over Uber, we thought it would be apt to explore the distinctions between the status of different staff – this is critical to understanding the rights they have and your responsibilities towards them as an employer.
Who do you have working in your business?
But first, why not take a minute or so to think about those you pay on the periphery of your organisation i.e. those you pay but who you do not consider to be employees. Think about the cleaners/window cleaners, drivers, non-exec directors, gardeners, travel consultants, those who you work with who are sole traders such as consultants and associates, even perhaps a number of people who you used to employ but who retired and now work for you just occasionally.
Which of these are genuinely self-employed? Which are workers, and which are employees? Do you know? You need to know to protect your business.
In law, there are various types of employment status. The key ones are:
- Worker (sometimes called a casual worker)
- Self-Employed (most contractors and freelancers are self-employed although they may be workers or employed by an agency or another organisation)
Whilst we are all probably familiar with the status, rights and responsibilities of an employed person, the boundaries with self-employed contractors can be fuzzy and with workers fuzzier still! So let’s consider what these three types of employment status look like, their rights and your responsibilities as an employer.
Employees are those who work under a contract of employment, whether in written or verbal. The employment relationship should be formalised through a contract of employment or written statement of terms (issued on or before the first day of employment).
Most people who are in work are employees; they have extra employment rights which don’t apply to a ‘worker’, include (subject to eligibility):
- Statutory sick pay, statutory redundancy pay
- Statutory maternity, paternity, adoption leave and pay
- Shared parental and parental bereavement leave and pay; and entitlement to parental leave
- Minimum notice period if their employment is ending
- Protection against unfair dismissal
- Right to request flexible working and unpaid time off for emergencies
- Rights under TUPE
An employee status is characterised by:
- The requirement to work unless they are on leave or absent
- The guarantee of work: the business has an obligation to provide them work
- The requirement to fulfil the work provided and be paid for the time worked
- The control there is over what work is done, when, where and how
- They cannot send someone else to do their work
- The business provides the materials tools and equipment for them to do the work
- The business deducts tax and National Insurance contributions from their wages
- The employee can join the pension scheme (or may be automatically enrolled)
- The business has disciplinary and grievance procedures which apply to them
- They can be subject to covenants e.g. specifying that they must only work for the business and that if they have another job, they must ask permission from the employer
The relationship is usually formalised through a contract or other agreement (it isn’t always written).
Workers have employment rights, which include:
- The right to the National Minimum Wage.
- Protection from unlawful deductions from wages.
- Minimum paid holiday.
- Minimum rest breaks.
- To not work more than 48 hours per week (unless they have opted out).
- Protection from discrimination and for whistleblowing.
They may also be entitled to Statutory Sick Pay, Statutory Maternity, Paternity, Adoption and Shared Parental pay.
Workers are characterised:
- By their lack of obligation to accept work (and the employer isn’t obliged to offer it).
- They are normally under the control of a Manager/Supervisor (in the same way an employee is)
- They are not usually able to send someone else to do their work.
- They are normally paid through PAYE, and tax and National Insurance is deducted from their wages.
- The business provides the materials, tools and equipment needed to do the work.
- Relationship should be formalised through a contract for services (or consultancy agreement)
- Individuals who are self-employed usually run their business for themselves and as such they are responsible for themselves and aren’t covered by employment law so don’t have the same rights as either workers or employees
- The exception to this is that self-employed staff do still have protection for their health and safety and may have protection from discrimination
- Individuals who are self-employed can be characterised by:
- The requirement that they submit invoices rather than being paid through PAYE. The self-employed are responsible for paying their own tax and National Insurance and don’t get paid holiday or sick pay.
- Their ability to decide what work they do, which clients they want to work for (they probably have more than 1), when, where and how they do it, or even whether they want to hire someone else to do their work.
- The requirement that they fix any unsatisfactory work in their own time.
- Needing to use their own money to buy business assets, cover costs and provide tools and equipment for their work.
Take a look at our recent Blast on some of the perils of employing self-employed workers.
⚠️ Beware of your self-employed workers being ‘employees in disguise’
On 6 April 2021 the Law is changing with regard to how medium and large organisations treat these ‘workers’ for tax purposes – they could be classed as an employee if they were providing their services directly to the client and they must pay, broadly, the same tax and National Insurance contributions as employees. These rules are known as ‘IR35’. If they are ‘disguised employees’ you will need to establish this, issue a ‘Status Determination Statement’ confirming this and deduct Tax and NI at source.
This is all about Tax Avoidance and could be very lucrative for HMRC – when the rules were introduced in the public sector in 2017 HMRC raised an additional £550M in additional taxes!
How do you identify which category your staff fall into?
Unfortunately in employment law, this is not straight-forward and there is no one particular test or rule that will identify whether someone is an employee, worker or self-employed. An Employment Tribunal would look at the contract that’s in place and critically look at how the contract works in practice. For example, if the contract suggested that the individual was self-employed, but they were clearly treated like an employee, then the Tribunal would look at the practicalities of the situation and probably rule that the individual was an employee.
At Jaluch some of the errors we see employers making when managing their ‘self-employed staff’ include:
- asking them to provide doctors certificates if they are ill
- inviting them to attend a disciplinary hearing
- processing their pay through payroll
- inviting them to employee only events (social events)
- penalising them if they do not make themselves available for work etc.
It is possible however, that the status of someone can be different for HMRC purposes and employment rights purposes, so don’t assume you are safe from the Employment Tribunal just because HMRC has categorised them in one way! They will be looking for different things.
In the Uber case, Uber maintained that its’ taxi drivers were self-employed individuals and therefore weren’t entitled to the same rights as workers or employees. Their entire business model is dependent on this approach. The GMB, who brought the case on behalf of drivers, said that the drivers should be paid the minimum wage and minimum amount of paid holiday.
On 19 February 2021 the Uber ruling in the Supreme Court established once and for all that in the UK the self-employed app-based driver model was no longer viable.
The case of the 25 drivers named on the Uber v Aslam case will now return to the employment tribunal and the claimants will be compensated for the benefits they have missed out on since 2016 including holiday pay and the national minimum wage.
What’s the risk of not having clear distinctions between staff?
The biggest risk is the enormous cost of getting it wrong. If you view staff as self-employed when really they are being treated like employees or workers, then if the individual decided to challenge it in a Tribunal and they are subsequently confirmed as a worker or employee, you could be liable for paying the cost of wages, holiday, benefits. You may also suddenly find yourself having to defend any claims employees can bring e.g. unfair dismissal.
Had you been aware of this when identifying your original business model, it might be that you would have taken a very different approach to pricing and business planning. Paying out compensation that goes back up to 6 years and having to suddenly start paying for workers’ rights going forwards can be very costly if you have not accounted for that. It could even bring a business down if not sufficiently capitalised.
These types of claims rarely only affect one individual, as in the Uber case, although only two employees actually brought the claim, Uber has around 40,000 drivers who could be affected by the decision, and has potentially enormous repercussions and costs for Uber. Anyone want to take a stab at what that could cost them?
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The information contained within this article is for general guidance only and represents our understanding of employment and associated law and employee relations issues as at the date of publication. Jaluch Limited, or any of its directors or employees, cannot be held responsible for any action or inaction taken in reliance upon the contents. Specific advice should be sought on all individual matters.