Update: Defining Employed or Self Employed

In our second series of articles we look at how the employment status of an individual is determined. Last week we touched on the non-existence of a legislative definition and, as such, how most decisions on employment status are made by the courts. A considerable amount of case law therefore exists in this area and numerous factors have been developed.

Hall v Lorimer (1993)

Mr Lorimer was a vision mixer who undertook a series of short-term contracts, typically of one to two days each, for a number of different television companies in the 1980s.

His work was always undertaken on company premises using equipment provided by the studio company. Mr Lorimer would issue an invoice to the production company after each job and was registered for VAT purposes. He had significant financial risk in making good his own losses and incurring bad debts. He also had an insurance policy which covered him in the event of sickness.

On a number of occasions Mr Lorimer was unable to fulfil his obligations and provided a substitute worker.

HMRC argued that Mr Lorimer had been engaged vis a series of employments and should be taxed as such. They put particular emphasis on the fact that he worked on studio premises using studio equipment. However, the courts agreed that Mr Lorimer was self-employed, commenting that it was important to make a judgement based on an evaluation of all the factors rather than one or two.

Autoclenz Ltd v Belcher (2011)

Autoclenz Ltd provided car valeting services via teams of individuals engaged via a self-employed contract. This contract gave the workers: the right to provide a substitute, no mutuality of obligation, and requirement to provide their own insurance, cleaning materials and equipment at their own cost.

Twenty of the valeters claimed that they were, in fact, employed and therefore entitled to certain rights such as the national minimum wage and holiday pay. The Supreme Court analysed the contract and found that, despite the clauses, the individuals were required to carry out the work personally and could not provide substitutes. In addition, Autoclenz sourced the clients therefore the individuals were obliged to carry out work offered to them, indicating the existence of mutuality of obligation. As the other real terms of the contract were not inconsistent with employment and the valeters were not in business on their own account, the court found that they were employees.

Autoclenz is perhaps one of the first instances in case law of the emergence of the ‘gig economy’ and it should be noted that there are distinct similarities between this case and the recent ‘Uber’ and current ‘Deliveroo’ cases.

It is generally agreed that no single test indicates employment and that all factors should be considered in the round with each case assessed on its own merits. It is also important to review the reality of the engagement not merely the terms of the contract.

Control

The right to control includes what the worker has to do, and where, when, and how it has to be done. It is important to note that it is the right to exert control that is significant, not whether that right is exercised.

Integration within a Company

Although it is typically difficult to decide whether a person is an integral part of an organisation, where they are involved in company meetings, invited to events such as the Christmas party, manage employees or are accountable to a manager there is a strong indication of integration.

Financial Risk

Individuals who risk their own finances are likely to be self-employed. This could be by way of the purchase of assets, paying for their running costs and paying for overheads and materials. 

Provision of Equipment

If the engager provides equipment for use by the worker there is a strong indication of an employment relationship. Where the reverse is true there is an indication of self-employment. Provision of equipment is of most significant when it is essential to the service provided and sufficiently important to affect the substance of the contract.

Right of Substitution

An employment exists where there is a contract of service i.e. the worker must carry out the work personally. If an individual undertakes to perform a task and is free to hire someone else to do it for them or to provide substantial help, it is unlikely that that individual will be an employee. The conditions for this to be true are that the obligation or right to provide a substitute must be genuine and the worker must engage and pay the substitute.

Statutory Entitlements

Entitlement to Statutory Sick Pay (SSP), Statutory Maternity Pay (SMP) and pension rights are consequences of employment and are not indicators of employment. Equally paid leave (holiday etc) suggests an employment relationship exists.

Length of engagement

Whilst the length of service is not indicative of an employment relationship in itself, in general, the longer the engagement the more likely other factors are to be in existence which would indicate this to be the case, such as control or integration.

Edge Tax have considerable experience of undertaking employment status reviews for a number of clients in different industries. If you would like to discuss your current working practices, or any concerns regarding the forthcoming legislative changes, please do not hesitate to contact us.