Most of us will be required to declare our employment status from time to time; when we open a bank account, are completing a mortgage or credit card application or even an upgrade on a mobile phone contract.  Most working people are confident in being able to determine their employment status, as to whether they are employed or self-employed.  However, the situation is far from clear as the term “employee” has no precise meaning in English law. 

 

Section 230(1) of the Employment Rights Act 1996 defines “employee” as “an individual who has entered into or works under (or, where the employment has ceased, worked under) a contract of employment”.  The Act then goes on to define a “contract of employment” as “a contract of service or apprenticeship”.  However, it provides no further definition of the term “contract of service”, which must be determined according to the rules of a common law over several decades.  

 

In order to determine the nature of the contract, “contract of service” (employed) or “contract of services” (self-employed), the Employment Tribunals will look into relevant factors such as the amount of control the employer has over the worker, the intention of the parties when entering into the contract, methods of payment regarding remuneration, and whether or not the worker has a right to delegate his work to a third party etc.  However, none of these factors are decisive and the Employment Tribunals would look into all the relevant factors in order to establish the commercial reality between the parties.  In practice, Employment Tribunals readily discard clear written terms that declare self-employment if, upon investigation, they are found not to reflect the commercial reality of the parties’ relationship.

 

The lack of definition and clear determinate factors in considering the worker’s employment status create problems for business.  In recent years, we have seen an increase in claims made to the Employment Tribunals from contractors asserting their employed status.  Many businesses suddenly found that their assumed self-employed workers or contractors have become employees of their business, where their relationship with those workers is now governed by employment law. The business will also find themselves in arrears of holiday entitlements owing to their workers throughout the period of employment but more importantly they will now be in arrears of PAYE owing to the Inland Revenue.  

 

The consequence of getting this wrong is serious for most businesses.  It is therefore important to provide their workers with service agreements (contract of services) that reflect the commercial reality if the business does not intend to create an employer and employee relationship with their prospective workers.

 

 

This article was written by Lester Kan, Senior Partner of Lester Dominic Solicitors.