HR · 31 July 2018

Employment status – Why do I need to know the difference?

As a business owner it’s a necessity to familiarise yourself with the categories of employment

It would be fair to say that employment status has been a contentious issue in recent times as business owners and staff in various sectors dispute the true nature of their respective working arrangements.

As a business owner, it is important that you are familiar with the differences between the three main categories of employment (employee, worker and self-employed) as this will help determine the rights of the individual and the obligations you have towards them.  

Employee 

This is an individual who has a contract of service, whether express or implied, and is under the control of the employer without the right to send a replacement. Within the contract an employee must be informed of their agreed upon pay and working hours as well as other main conditions of employment.

Worker 

These also work within the terms of a contract, however, the main difference to an employee is usually that a worker will be able to turn work down. Additionally, depending on the relationship, the employer may have a limited right to control where and when the work is done.

Self-employed 

Whilst there is currently no agreed upon legal definition of self-employment, case law has dictated that these individuals carry on a business on their own account. They have freedom to decide when and where they work. They will usually provide the main items of equipment used to carry out the work and are free to send other individuals to carry out this work in their place.  

As a business owner it is important that you have an understanding of these main characteristics as it will allow you to accurately define the role of the individual within your organisation. It is also important in recruiting to ensure job adverts contain the correct terminology so as not to mislead potential applicants.  

A key issue surrounding employment status focuses on the rights which are afforded to certain individuals. However, there are rights which are specific to certain categories of employment and it is important you are aware of this.

Employees are afforded the most extensive set of employment rights, including the right to minimum 5.6 weeks of paid annual leave per year, protection from unfair dismissal, and protection under the Transfer of Undertakings (Protection of Employment) Regulations 2006. 

In terms of pay, business owners have an obligation to ensure employees are paid according to national minimum/living wage (NMW) requirements, whilst self-employed contractors will themselves set down the rate that they charge for the services provided.

Although current legislation only requires business owners to issue itemised pay statements to employees this law will be changing, with this right being extended to workers as of 6 April 2019. This new ruling represents the government’s efforts to reduce the risk of NMW exploitation and business owners should ensure payroll processes are adjusted accordingly before this order comes into force.

Whilst workers are entitled to some employment rights, including the right to paid annual leave and minimum wage, there are several rights afforded to employees which workers are not entitled to. These include the right to a minimum notice period if their employment will be ending and the right to request flexible working.

Due to the nature of self-employed work these individuals are responsible for their own employment arrangements, very few employment rights apply. 

It is important that business owners have a clear understanding of how an individual’s employment status impacts their entitlement to specific employment rights as erroneously withholding an individual’s rights could result in a costly employment tribunal claim.

When deciding on employment status disputes tribunals will strongly consider the practical manner of the working relationship and the level of control a business exerts over an individual. It is regularly agreed that employees are subject to a fairly high level of control, including being subject to disciplinary and capability procedures.

Workers, meanwhile, have more autonomy as they do not have to accept work that is offered to them, whereas self-employed individuals are not subject to any control by the organisation they work for and are free to agree their own terms of service on a case by case basis.

Many of the issues in the gig economy, a newly emerging labour market which offers increased flexibility, have surrounded so-called “bogus self-employment”. This involves business owners claiming individuals are self-employed contractors when in fact the reality of their working arrangement and level of control they exert over these individuals suggests they are workers.

Recent cases involving Pimlico Plumbers and Uber have seen tribunals take a close look at this issue of control, focusing on the degree to which the business dictates how and when the individual works. As such business owners need to carefully consider the true nature of these relationships to avoid costly tribunal claims.

The current uncertainty surrounding employment status shows no sign of stopping as gig economy participation continues to increase on a monthly basis. To mitigate this, business owners should be aware of the importance of getting employment status correct and stay on top of legal developments.

The government currently has an open consultation on its response to the Taylor Review of Modern Working Practices on several aspects of the employment status debate, which ultimately seeks to provide more clarity on this area for individuals and employers alike.

Kate Palmer is head of advisory at Peninsula HR

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ABOUT THE EXPERT

Kate Palmer CIPD is the head of advisory at law firm Peninsula and is a member of its senior leadership team. She joined in 2009 having held a senior HR manager's role in another large company. With a specialist background in facilities management in the NHS, Kate offers a wealth of employment law experience. She's an expert negotiator - one notable case was with the NHS's trade unions over terms and conditions in the Agenda for Change pay system.

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