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Employed vs. Self-Employed – Can You Spot the Difference?

A self-employed/independent contractor working arrangement has considerable attractions for both the employer and the self-employed worker, but it can be difficult definitively to identify the difference between employed and self-employed status.

HMRC provides helpful guidance that employers and workers can use to determine if an individual is an employee or self-employed and the key factors that determine whether a worker is an independent contractor depend on the tests of control, substitution and mutuality of obligation.

Control

If the client/employer specifically tells a contractor how to perform a task, what task to perform, when to perform it and where the task should be performed – known as ‘how, what, when and where’ tests – then the worker is probably controlled by the client and therefore an employee.

Substitution

If a contractor is required to perform the services himself/herself without being allowed to provide a substitute, then this, too, is an indication of employment.

Mutuality of Obligation

This is where an employer is obliged to provide work and the employee is obliged to perform the work. If a worker has to perform any task allocated by the client or employer then there is a mutuality of obligation and the worker is probably not an independent contractor.

In the case of a dispute, a range of factors are taken into account but these are the main ones.

With the rise of the gig economy worker, the situation has become even more complicated.

A Gig as a Plumber

Earlier this year, a gig economy worker status question came before the Supreme Court for the first time in the case of Pimlico Plumbers Ltd v Smith.   Its decision – that Mr Smith was indeed a worker and not a self-employed contractor as stated in his contract – follows the direction of travel set by other cases which have considered whether staff in the gig economy are workers, and so entitled to paid holiday and limited other rights, or genuinely self-employed and out of employment protection altogether.

Pimlico Plumbers Ltd v Smith concerned Mr Smith, a plumber working for Pimlico Plumbers, who claimed that the company had deprived him of a number of employment rights, such as paid holidays and sick pay, because it wrongly classified him as a self-employed contractor.  The background of the case was that Mr Smith had worked for Pimlico Plumbers Ltd for over five years and had a contract with the company which described him as an independent contractor.  Mr Smith was registered for VAT, submitted invoices, and filed tax returns on the basis that he was self-employed.  Mr Smith’s contract was terminated four months after he suffered a heart attack. He subsequently brought various claims in the Employment Tribunal and his employment status was considered as a preliminary issue. The Supreme Court has now upheld the rulings of the Employment Tribunal, Employment Appeal Tribunal (EAT), and Court of Appeal that Mr Smith was a worker, not an independent contractor. This decision is a significant one and means that Mr Smith can now proceed with his claims for unlawful deductions from wages, paid holiday, and disability discrimination.

In reaching a decision, the Supreme Court noted that Mr Smith took on a significant proportion of the commercial risk (i.e. he would not be paid in the event a customer failed to settle an invoice), provided his own tools and materials, was personally liable for his work, and was not supervised by the company. However, the facts considered by the court showed that Pimlico Plumbers had tight control over Mr Smith’s working life, which pointed away from Mr Smith being a truly independent contractor.

The following factors were particularly relevant to the Court’s decision:

  • • Mr Smith was required to carry a company identity card, wear a branded uniform, and use a Pimlico Plumbers-branded, tracked van leased from the company;
  • • Pimlico Plumbers had tight control over payment terms and the administrative aspect of all jobs;
  • • Mr Smith’s contract referred to ‘wages’, ‘gross misconduct’, and ‘dismissal’;
  • • Mr Smith was subject to post-termination restrictive covenants, including a three-month non-competition covenant;
  • • The terms of Mr Smith’s contract clearly pointed to an obligation of personal performance. Although he could appoint another Pimlico operative to do a job he had quoted for, but no longer wished to perform, this was more like swapping a shift than providing a substitute; and
  • • Mr Smith’s contract stated that the company was not obliged to offer him work and he was not required to accept work, but Mr Smith’s contract also stated he must work at least 40 hours per week for Pimlico. The working hours indicated a level of commitment to the company on Mr Smith’s part which was inconsistent with his self-employed status.

Although this is an interesting and significant case, the question of employment status is always tied closely to the facts of any given case, and it does not automatically follow, therefore, that other gig economy workers have employment rights.

More cases are due to be heard by courts and tribunals in the coming months and this should hopefully provide more clarity.  In the meantime, employers should ensure that they have written contracts in place that reflect the reality of the working relationship.  Here at Simply-Docs, we have a variety of documents covering a wide range of employer/employee and freelance working relationships accompanied by explanations of when the document should be used.  If in doubt, always seek professional advice.

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