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Blog: Employed or self-employed? How to get it right legally

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19th Nov 2012
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HR professionals at the BBC have had a busy few weeks.

The director general, George Entwistle, resigned and was controversially paid a year's salary (twice his notice period, apparently). The director of news and her deputy were asked to "step aside" pending the outcome of an internal review into the handling of the Jimmy Savile situation by Newsnight, and an evaluation of the employment status of more than 800 staff has also been announced.  But while you will all be familiar with the way that internal investigations and severance packages work, you may perhaps less familiar with employment status issues.  Now that HM Revenue & Customs has stepped up its tax investigation efforts, the BBC and many other businesses will no doubt be conscious that, if they get an individual's employment status wrong, they will be liable for additional tax, national insurance contributions, interest penalties and the like.  However, many organisations don’t necessarily consider the potential liability for expensive and time-consuming employment tribunal claims.   An external tax review of the BBC did not find any evidence of tax avoidance. But the broadcaster’s chief financial officer accepted that its policy for contracting staff was "inconsistent" and he proposed to address the situation with "a more objective employment test for all new contracts".    The Autoclenz case Indeed anyone following the broadcaster’s recent activities could be forgiven for thinking that it is possible to choose an individual's employment status freely, but this is not strictly true. It is also a common misconception that written documentation can be overlooked only if the parties concerned intend to mislead using "sham agreements". But again, this assumption is not strictly true either. And the issue doesn't just affect journalists and broadcasters. It has an impact on every organisation that takes on self-employed contractors. For example, employment tribunals have recently been asked to consider the dubious employment status of lap dancers, Methodist preachers and part-time judges to name but a few.   In the leading case of Autoclenz, the Supreme Court confirmed that, where there is a dispute as to the genuineness of a written term, the focus of the enquiry must be to discover “the actual legal obligations of the parties” throughout the course of the relationship.  This situation involves examining all of the relevant evidence, including the written terms, testimony as to how each party conducted itself in practice and what their expectations were.  Evidence of conduct could be so persuasive that the tribunal could draw an inference that such practices reflected the true obligations of the parties. However, the mere fact that a particular contractual provision was never actually exercised (for example, a right of substitution) would not automatically mean that it was not a genuine clause.  While the written terms are important and relevant in assessing employment status, courts and tribunals will set them aside if they are inconsistent with the "reality of the relationship of the parties".   Reducing the risk In the Autoclenz case, although the written terms suggested that individuals were self-employed, the reality was that they were actually employees. The company was consequently liable for, among other things, unpaid statutory holiday pay, statutory notice pay and unfair dismissal claims. The key message here is that written terms alone will not determine status, and so we must ensure that the true arrangements reflect those written terms. This means that, if you engage self-employed contractors, you should review how the arrangement works in practice and consider what changes to the relationship could help reduce the risk of their asserting an employment status.  Ask yourself the following key questions as a useful starting point: 

  • Are substitution clauses and clauses that purport to allow an individual to refuse work consistent with the reality of the relationship? 
  • Is an individual required to provide a personal service?
  • Is there an obligation on you to provide work and an obligation on the individual to accept it?
  • Do you control how, when and where work is conducted?
  • How can the arrangement be terminated?

 Not dealing with these issues upfront is a false economy. If like Autoclez, you get it wrong, any self-employed contractor could argue that they were, in reality, employed, with the aim of obtaining greater statutory protection.  Determining employment status is not easy - even the BBC has struggled. But to mitigate against the risk of liability from employment claims and additional tax and penalties, it might make sense to include appropriate commercial indemnities in your consultancy agreements or self-employed contracts.     

 

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By melindab
21st Nov 2012 07:48

With regards to the tests for assessing employment status, can anyone advise which tests might trump the others? Eg if you have no obligation to each other as in a zero hours contract, but you control the work done, does control trump obligation?

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By aclark1
04th Dec 2012 12:10

 

There is no statutory test to determine employment status.  Accordingly, whether a person is an employee or is self-employed is determined by consideration of a number of factors established by case law rather than a single test.  Whilst one factor does not necessarily ‘trump’ another, case law suggested that the Employment Tribunal will attach more weight to certain factors.   A common starting point for Employment Tribunals is the decision of Ready Mixed Concrete (South East) Limited v the Minister of Pensions and National Insurance [1968] 2 QB 497.  This case held that the key tests for the existence of an employment contract are that (i) an agreement exists to provide the servant’s own work or skill in the performance of service for the master (personal service) in return for a wage or remuneration (mutuality of obligation); (ii) there is control of the servant by the master (control); (iii) the other provisions of the contract are consistent with a contract of service (other factors). Since Ready Mixed Concrete, personal service, mutuality of obligation and control have been viewed as the central factors in determining whether an employment relationship exists.  These have been referred to as "the irreducible minimum".  This suggests that although all factors should be considered, some are more important than others.  Whether an individual is an employee will ultimately depend on the specific circumstance having considered all the relevant factors.  

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