The question of employment status is not always easy to determine. Indeed, the overlap between employment statuses means that it can often be unclear and difficult to navigate. But knowing whether you are engaging an employee, worker or a consultant/contractor is vital to understand the legal rights afforded to those individuals you engage, while also preparing for future developments in the evolving labour market.

Under UK employment law, individuals providing services in the current labour marker can be classified as:

• Employee: an individual who has entered into or works (or worked) under a ‘contract of employment’. A contract of employment means “a contract of service or apprenticeship, whether express or implied, and (if it is express) whether oral or in writing”.
• Workers: an individual who has entered into or works (or worked) under either a contract of employment, or another contract (whether express or implied, written or oral) to personally do or perform work or services for another party, whose status is not by virtue of the contract that of a client/customer of any profession or business undertaking carried on by the individual.
• Consultant an individual who works under a contract for services, responsible for paying their own tax and national insurance contributions and who does not satisfy the test for being an employee or a worker. They would undertake a profession or business independently, providing services to other parties through contractual agreements.

Both “employee” and “worker” are defined in statute but not the “self-employed”. However, the distinction between categories is often still murky in statues, often considered to not reflect emerging modern working practices. There are a variety of reasons why it’s important to get employment status right.

Ensuring legal rights

Distinguishing between an employee, worker, and the self-employed is important to understand the obligations you might have in respect of those who carry out work for you.

• Employees are entitled to core protections under the Employment Rights Act 1996 (ERA 1996), especially rights related to termination of employment (including the right not to be unfairly dismissed and to be paid redundancy pay). Usually, these rights will mean the employee has to have a set length of service to be able to bring employment claims against you, but that isn’t always the case.
• Employers and employees have terms that are ‘implied’ into the contract between them. This includes the mutual duty of trust and confidence; the employee’s duty of fidelity (including not to compete whilst in employment) and the employer’s duty to provide work and pay the employee’s wages, to name but a few.
• The ACAS Code of Practice on Disciplinary and Grievance Procedures only applies to employees, and in most cases, it is only employees who would be automatically transferred to any purchaser of the employer’s business under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE).
• Employers owe employees statutory duties relating to health and safety (although contractors will usually be covered through the common law duty of care relating to occupier’s liability).
• Workers are afforded a more limited selection of protections including some health and safety protections, working time, and the minimum wage.
• An employer is obliged to have employer’s liability insurance to cover risk of injury of their employees hurting themselves at work, but workers and the self-employed may not have the benefit of this insurance.

Getting the tax right

Tax treatment of an individual depends on their status. For instance, an individual may be considered an employee for IR35 tax purposes but not employment law, or vice versa. It is worth noting that “worker” status is not recognised for tax purposes. The process of determining the tax treatment involves using similar but slightly different tests and definitions to that used for employment law tests, so it is highly advisable to seek legal advice to protect both your business and those engaged by you.

Data protection

Employment status influences how personal data is handled under UK GPDR especially in respect of data processing obligations associated with self-employed contractors. Under UK GDPR and EU GDPR, it becomes an issue if the contractor is a data processor, as processors can be held directly responsible for non-compliance with their obligations. This could prove costly. At the same time, UK GDPR does not include details on data handling obligations applicable to workers, making the distinction between whether they are an employee or self-employed contractor even more unclear.

Employment status and the ‘gig economy’

Growth in the ‘gig economy’ (where individuals are engaged by businesses on a flexible ad hoc basis) has brought to light the difficulties in determining employment status.

The UK Supreme Court ruling in the February 2021 Uber BV v Aslam case demonstrated a landmark decision whereby individuals who were Uber drivers (thought to be independent contractors) were classified as workers and therefore entitled to corresponding legal protections. In recent years, case law is setting new precedents to navigate the ‘gig economy’, working to ensure suitable rights and protections are upheld.

Understanding employment status enables businesses to handle and limit their liabilities We recommend seeking legal guidance to fully understand the distinctions between employment statuses and statutory rights shaping your working arrangements. Our team can help you design effective employment contracts and other important legal documents to enable robust and flexible working relationships working towards your commercial success.

Our insights, articles and guides do not, and are not intended to, constitute legal advice or be an exhaustive review of all legal developments. Although every effort is made to ensure that the information provided in this article is accurate as of the publication date, please be aware that this is area of law may be subject to change. Please seek legal advice before applying the information provided to any specific circumstances, transactions or legal issues.