Employment Status: A Worker, An Employee Or Self-Employed?

Employment status is an important but often confusing issue as the distinction between different types of employment status is not always clear.

We outline below the three main types of employment status and highlight the key differences between them.

The Importance of employment status

It is essential that you clearly and accurately establish the employment status of individuals that your business engages.

The three main types of employment status are:

• Employee
• Worker
• Self-employed

Failure to recognise an individual’s actual employment status and disregard of their associated employment rights opens your business up to a risk of claims.

For example, a worker or employee who has not been paid their statutory holiday entitlement could bring a claim for you to pay this.

When you engage an individual, you should use appropriate documentation which makes it clear what their employment status is:

• A contract of employment should be issued to employees before their employment begins.
• A casual worker agreement should be issued to workers before they start to work for you.
• A contract for services should be issued to self-employed contractors/consultants/freelancers before they carry out any work for your business.

Employee

Nature of relationship

Employees provide work personally under a contract of employment.

The contract does not need to be written, and it can contain implied terms so long as the key terms (known as the ‘particulars of employment’) are written, e.g. pay, hours of work, annual leave etc.

Employees are paid through PAYE, so the employer deducts tax and national insurance contributions from their salary.

Rights

Employees are afforded the most protection in employment law, as they have important rights that workers lack.

The employment rights of employees include:

• National minimum wage
• Statutory holiday pay
• Statutory rest breaks
• Statutory sick pay
• Statutory minimum notice periods
• Statutory redundancy pay (2 years’ service requirement)
• Claim of unfair dismissal (2 years’ service requirement)

Worker

Nature of relationship

A worker also provides work personally under a contract, but the terms are slightly different from an employee.

There is no mutual obligation between a worker and an employer.

This means that the employer is not under any obligation to provide work to the worker, and the worker is not under any obligation to carry out work offered by the employer.

Workers are paid through PAYE, so the employer deducts tax and national insurance contributions on their behalf.

Rights

The employment rights of workers are more limited than those of employees and include:

• National minimum wage
• Statutory holiday pay
• Statutory rest breaks
• Statutory sick pay

Self-employed

Nature of relationship 

A self-employed person runs their own business and offers services to a company.

They have freedom to provide the services however they want: there are no fixed hours, they can use substitutes or engage other workers to do the work and they use their own tools and equipment.

They are paid a fee for the work they do rather than a salary, and they are not paid through PAYE, so they are responsible for dealing with tax and national insurance themselves.

Rights 

Self-employed people do not have any employment rights.

However, they have protection for their health and safety, and in some circumstances, they are protected against discrimination.

Determining employment status

Terms of contract

As explained above, the type of contract an individual is engaged under and the terms it contains provide an indication of their employment status.

For example, an individual engaged under a contract that requires them to work a set number of hours for the employer in return for a salary and prohibits them from working elsewhere without the employer’s express permission will most likely be an employee.

This is because these terms are commonly used in employment contracts and they do not apply to workers or self-employed individuals.

Relationship between parties

It is important to note that the relevant contract or documentation alone cannot be used to determine an individual’s employment status.

When deciding employment status, courts and tribunals also look at how the individual actually works in practice and more weight is attributed to the practical reality than the contractual terms.

For example, if the contract describes the individual as self-employed but in reality they are not allowed to use a substitute, the employer exerts a great deal of control over their work and they are treated the same as other employees (e.g. they are subject to the disciplinary procedure) then the contract will be considered a ‘sham’ and the individual will be an employee.

Establishing employment status​

The tests for establishing an individual’s employment status are rather ambiguous and the tests used by different bodies (e.g. employment tribunals and HMRC) are not always coherent.

However, each employment status has some key elements that must be satisfied.

Employee

There are four main elements to the employee test:

1. Perform work personally - Employees themselves must carry out all their work for the employer, they cannot send a substitute.
2. Mutuality of obligation - This is the key element that distinguishes an employee from a worker. The employer is obliged to provide work under the employment contract, and the employee is obliged to carry out work under the contract.
3. Control - The employer exerts control over the way that an employee carries out their work. This does not need to be control or supervision over the employee’s day-to-day duties, as this rarely occurs with skilled employees who are given more freedom over their daily work. There just needs to be general control over an employee’s hours of work, the work they are required to do and when they can take holiday.
4. Integration - If an individual is integrated into the business, this will suggest that they are an employee. For example, if the individual wears a uniform, is subject to company policies and procedures and uses company equipment or vehicles.

Worker

There are three parts to the worker test:

1. Work under a contract - Workers provide work under a contract, which, as explained above, can be oral or written. It does not need to be a contract of employment, as many employment terms will not apply to workers.
2. Perform work personally - Like employees, workers themselves must carry out work they agree to do on behalf of the employer, they cannot send a substitute.
3. Not working for own business - Workers provide work to their employer as an individual, they do not offer work to a client as a business. They should not be independent but seen as part of the employer’s workforce.

Self-employed

An individual will be self-employed if they are genuinely operating their own business.

Factors which indicate that an individual is self-employed include:

1. Lack of control - The individual is given complete freedom about how the work is performed. They can decide their hours of work, who works with them and they use their own equipment and tools. The individual is not restricted and is free to provide their services elsewhere.
2. Substitution - The individual can appoint a suitable substitute else to carry out the work on their behalf if they are unavailable.
3. Lack of mutual obligations - The company and the individual owe no obligations to each other in terms of work and conditions. The individual can negotiate their fee and will only be paid in respect of the services they complete. The arrangement can be terminated by either party at any time.