Employment Status - Worker or Self-Employed?

The Supreme Court on 27 July 2011 provided its decision in the case of Autoclenz Ltd v Belcher and Others [2011] UKSC 41. The case concerned the legal status of contractual workers. The outcome has made it easier for contractors assumed to be self-employed by an employer to claim that they have status as workers, even in the event that their contract states otherwise.

The Supreme Court's Decision
The case concerned valet workers who were trying to claim that they were workers within the meaning of the National Minimum Wage Regulations 1999 and of the Working Time Regulations 1998 and that, as workers, they were entitled to be paid the National Minimum Wage and to receive statutory paid leave. These regulations define a worker as an individual who has entered into or works under

1.        A contract of employment or

2.        Any other contract (oral or written) under which the employee performs personally

The workers' contracts described them as "sub-contractors", a term which can be commonly used by small businesses. The contracts themselves bore many hallmarks of a sub-contractor's employment contract including clauses such as;

'the sub-contractor is self-employed and will pay his own tax and National Insurance contributions'

and

'the sub-contractor is not an employee of Autoclenz'.

So what persuaded the Supreme Court to disregard the written agreements and instead find that the documents did not reflect what was actually agreed between the parties? There may be several reasons why the written terms do not accurately reflect what the parties actually agreed, but in each case the question the court will ask is:

'What is the true agreement between the parties?'

This means that what matters is the reality of the situation. For example, if no one seriously expects that a worker will use his right to substitute someone else to do his work for him, the fact that the contract provides for this unrealistic possibility will not alter the true nature of the relationship.

The Supreme Court said that where there is a dispute as to the genuineness of a written term in a contract, the focus of the enquiry must be to discover the actual legal obligations of the parties. In practical terms this means the actual work involved can be considered more important than the concrete terms of the contract. In a dispute, the Employment Tribunal will examine all the relevant evidence such as the contract itself, evidence of how the workers conduct themselves at work and how they perceived their co-workers.

Fortunately for businesses, Employment Judges have a good knowledge of the world of work and a sense of what is real and what is window-dressing. The conclusion here that the valets were workers in all but name was the correct decision based on all the evidence. The inclusion of the words 'self-employed' in the contract bore no practical relation to the reality of the employer-worker relationship. The contracts contained obligations consistent with employment and the obligations which were not consistent were found to be unreal. In addition it was emphasized that the workers;

• Had no control over the way in which they do their work e.g. the worker is told when to go for lunch,
• Had no control over their hours of work e.g. the worker's hours are specified and non-negotiable,
• They had no economic interest in the way in which their work is organized, e.g. the worker has no personal interest in the profit margins or sales figures
• They were subject to direction and control of the 'official' worker of the business; e.g. they are told what tasks to perform by a supervisor, and
• They had no say in the negotiation of terms in their contracts

All of these factors will persuade the Tribunal that the self-employed sub-contractors are in actual fact workers of the business. As such the workers were entitled to claim the National Minimum Wage and holiday pay.

How This Can Affect You

Employers
Employers should be aware of the potential liabilities which can arise from an incorrect assessment of employee status. This ruling demonstrates that there is no point in drafting a perfect contract of 'self employment' unless it reflects the true nature of the relationship between parties. The decision has not changed the law; it has merely provided clarification to organizations which seek to avoid their responsibilities as an employer by hiding behind sham contracts which describe their employees or workers as 'self-employed contractors'.

It is important to note that an Employment Tribunal will not only look at the terms of the contract, it will also look at the circumstances of the real relationship between the employee/worker and the employer – not just what the parties have stated their relationship to be. This approach is employee-friendly to take into account the fact that employers have more bargaining power when the contract is formed.

Employers should be wary of using 'sham' contracts which create a business-to-business relationship with a 'client' when in reality the relationship is that of worker and employer. The Court stated that only one party needs to claim that a clause in the contract does not reflect their intentions in order for the clause to be considered a sham.

First Interests - Workers
So what should you do to ensure that your employees and workers/contractors have the correct status in your business? The judgment says that the fundamental question to be answered is 'what is the true agreement between the parties?' If the relationship between you and the individual is one where the worker;

• Has little or no input in the formation of terms in the contract;
• Is given instructions on how to do their work, where to do their work and when their hours of work are;
• Has no economic interest in the way in which their work is organized; and
• They are subject to direction and control of the 'official' employees of the business.

Then the worker is likely to be a worker. This is a broader category than 'employee' but normally excludes those who are self-employed. A worker is any individual who works for an employer, whether under a contract of employment, or any other contract where an individual undertakes to do or perform personally any work or service. Workers are entitled to core employment rights and protections.

• the National Minimum Wage
• rest breaks, paid holiday and limits on night work under the Working Time Regulations
• protection against unauthorised deductions from pay
• maternity, paternity and adoption pay (but not leave)
• protection against less favourable treatment because of being part-time
• Statutory Sick Pay
• protection against less favourable treatment if you make a disclosure in the public interest (often called 'whistleblowing')
• not to be discriminated against unlawfully

Secondary Interests – Self-Employed Contractors
If your 'worker' is in reality a self-employed contractor then their rights are limited because they are, in effect, their own boss. Employment legislation in general does not cover self-employed people. However, self-employed people will benefit from health and safety protection and, in some cases, protection against discrimination. Self-employed people can be identified by several factors;

• They are in business for themselves
• They provide a service to multiple clients
• They are generally more independent than workers
• They will usually be better able to protect their own commercial interests, although they will bear any financial risk from the business they operate.

Self-employed individuals are responsible for their own tax payments and national insurance contributions. In addition to this they have almost no protections in terms of employment law. This is a huge difference in treatment compared to employees which emphasizes how important it is to have the correct employee status. It is extremely important to have up to date contracts in place that you agree with, especially if changes are introduced to a long-standing contract.

Should you require any assistance in respect of this summary please do not hesitate to contact Laura Salmond or Elizabeth Smith of our Employment Law Team who will be happy to assist.

This bulletin is written as a general guide only. It is not intended to contain definitive legal advice which should be sought as appropriate in relation to any particular matter.