The Employment Status Test

Even big businesses are getting employment status wrong. There are certain factors in the relationship between the business and the individual that should be carefully considered, regardless of what the contract says. Someone who is not an employee in the traditional sense of the word, may still qualify for ‘worker’ status as a result of their working practices. Workers are a group of people who are not entitled to full employment rights, but do have important rights in relation to areas such as holiday pay and rights under the Working Time Regulations.

So how do you determine whether an individual is an employee, a worker or self-employed? Here are our top ten considerations for that all important employment status test:

Mutuality of obligation
Where the Company is under obligation to provide work and the individual is obliged to accept the work and the tasks delegated to them, this usually points towards an employment relationship. A self-employed person would have no guarantee of work, nor would they be obliged to accept work simply because it is offered. An employee rarely has the freedom to refuse work.

Right of control
In a typical employer/employee relationship the employee will exercise very little control over what he does on a day-to-basis; an employer would usually tell an employee what to do and how and when to do it. Self-employed individuals would typically have a greater degree of autonomy, usually setting their own hours and manner of getting the job done.

Provision of own equipment
A self-employed person would be likely to provide their own equipment such as a laptop or tools of the trade. In an employment relationship however, all equipment is usually provided by the employer to ensure security, uniformity etc.

Right of substitution and engagement of helpers
The ability to provide a substitute and/or engage helpers is something HMRC look at closely when deciding whether a worker is employed or self-employed. The Tribunals too will take this point in to consideration. If a self-employed person has contracted to do a job and is either sick or double-booked, that person will usually have the freedom to provide a suitable substitute to complete the job in their place. It is important that this should be more than a mere statement, it should be acceptable to the client in practice.

Financial risk
Individuals who risk their own money, purchasing assets and paying for general overhead costs and materials are usually considered to be self-employed. Self-employed people quote for work in the knowledge that the risk of additional time or costs may cause them to lose money on other engagements. By contrast, an employee would normally be remunerated on a salary or simple time-spent basis.

Degree of integration into the organisation
The degree to which an individual is involved or participating in the structure of the organisation can indicate either employment or self-employment. An employee may have their own desk or workspace, their own computer and a telephone number. A self-employed person will be unlikely to have a desk, a computer or access to the business premises without prior appointment.

Pay and Benefits
A typical employee has one paymaster –the employer and no one else. A person who provides services to several different businesses, has numerous paymasters. An employee will also usually receive a salary regardless of sickness, performance or holidays. A contractor who fails to turn up may simply not be paid, and may be dismissed on the spot for performing badly.

As an employee you would not expect to have to file your own tax returns since responsibility for your taxation lies with your employer. When self employed, an individual would carry the burden and responsibility for their own taxation and any engagement agreement would usually confirm this and indemnify the client.

Nature and Length of Engagement
Whilst fixed term contracts are not uncommon for employees, usually an employment relationship will be intended to be long term with an indefinite duration. Where engagements are for shorter periods of time, or specific projects within a business, this is often an indication that the individual is not intended to be an employee.

Given these points around financial risk and control, it is not surprising that self-employed individuals cannot be engaged on an exclusive basis. There may be requirements that they do not work elsewhere during the life of a short-term project, but in general, they cannot be subject to exclusivity clauses. Employees conversely would be expected to devote their whole time and attention to their role.

Further reading

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