Employment Contracts

by Kate Russell

Workers and self-employed staff

Workers

This is a broader category than ‘employees’ but normally excludes those who are genuinely self-employed. Legally, 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 services.

Tip

It is possible, in some limited cases, to be self-employed for tax purposes but classified as a ‘worker’ or an ‘employee’ for employment rights purposes.

The following groups of people are likely to be workers but not employees:

  • Most agency workers
  • Short-term casual workers
  • Some freelancers.

They are not employees, nor are they genuinely self-employed.

Employees work under a contract of service. Workers in the wider sense work under a contract for services.

Most of the legislation which applies to workers uses the following definition of a worker.

Definition

Worker: an individual who has entered into or works under a contract of employment or any other contract whereby he undertakes to perform personally any work for another party to that contract, provided that the other party is not a client or customer of the individual’s profession or business.

One of the key points in deciding if an employment relationship exists is whether or not there is mutuality of obligation. If there is mutuality of obligation, it is likely that an employment relationship exists, though that is not automatic. If there’s no mutuality of obligation, it cannot be a contract of employment.

A number of cases in recent years have indicated that in certain circumstances the courts are willing to infer that a contract of employment has come into being where the contract was originally a contract for services. Greatly to the relief of employers, this line of reasoning was reversed by the Court of Appeal in 2008, which said that employment tribunals should only imply a contract of employment between an agency worker and an end user where it is necessary to do so.

Example

J was supplied by an agency to carry out work for Greenwich Council. Following a period of absence, a replacement was appointed and she brought a claim for unfair dismissal. She had to be employed under a contract of employment to be eligible to bring the claim.

She had no express contract with the council, but contended that there was an implied contract, given in particular that she had worked for the council for several years and had been treated in all respects like other permanent employees.

The Court of Appeal agreed with the EAT approach and expressly approved of its guidance. The issue must be decided in accordance with common law principles of implied contract and, in some very extreme cases, by exposing sham arrangements. The recent authorities do not entitle all agency workers to argue successfully that they should be treated as employees in disguise. A wide spectrum of factual situations can arise and labels are not a substitute for legal analysis of the evidence.

The Court of Appeal went on to say that it was fully aware of the controversy about the absence of job protection for agency workers, but that it is not for courts or tribunals to express views about or initiate change. The protection of agency workers is a matter of social and economic policy for debate by Parliament, informed by discussions between the interested parties, such as government bodies, employers’ organisations and the European institutions.

Note

The mere passage of time doesn’t confer employment rights in the circumstances, but see notes on the Agency Workers Regulations 2010.

If there is no mutuality of obligation, you are not required to provide work. Equally, the individual is not obliged to attend for work. In such circumstances, there is unlikely to be an employment relationship. In such a case, you should always make clear to the individual concerned that there is no intention to create such an employment relationship.

Determining employment status

There is no one thing that completely determines a worker’s employment status. If there is a dispute about the status between a worker and employer, an employment tribunal will consider all the circumstances of a case.

The sorts of things the tribunal looks at fall into four main categories. Below are some questions to help explain what the categories mean.

The more questions being answered ‘yes’, the more likely it is that the worker is self-employed. The more questions are answered ‘no’, the more likely the worker is to be an employee.

This is for guidance only and a definitive answer can only be given by an employment tribunal or court.

Control

To what extent does the employer decide what tasks the worker does and how he does them?

  • Does the worker have the final say in how the business is run?
  • Can the worker choose whether to do the work himself or send someone else to do it?
  • Can the worker choose when and how he will work?

Integration

To what extent is the worker part of the organisation?

  • If the worker needs assistance, is he responsible for hiring other people and setting their terms of employment?
  • Is the worker excluded from internal matters, such as corporate training and staff meetings?
  • Is the worker exempt from having action taken against him using the disciplinary procedure?
  • Is the worker excluded from organisation benefits and pension schemes?

Mutuality of obligations

To what extent is the employer required to offer the worker work and to what extent is the worker is required to do it?

  • Does the organisation offer work only if and when it is available?
  • Can the worker decide when he will work and can he turn down work when offered?

Economic reality

How much financial risk does the worker bear?

  • Is the worker responsible for meeting the losses as well as taking the profits?
  • Is the worker responsible for correcting unsatisfactory work at his own expense?
  • Does the worker have to submit an invoice to the organisation in order to receive payment?
  • Does the worker get a fixed payment for a job (including materials and labour)?
  • Does the worker provide the main items of equipment needed to do the job?
  • Does the worker work for a range of different employers?

Personal delivery of work

Employees and workers have to deliver work in person. Self-employed workers can arrange for a substitute to do the work. However, the mere presence of a substitute clause in a contract won’t confer self-employed status on the worker if there are stringent conditions attached.

Example

M was a qualified gymnastic instructor working at recreational and sports centres operated by GCC. If, for any reason, M was unable to take a class, she would arrange for a replacement from a register of coaches maintained by the council. Occasionally, the council itself organised the replacement. The replacements were paid directly by the council, not by M.

In 1998, M was presented with a new form of contractual agreement which, in her view, significantly changed her terms and conditions of employment and had the effect of making her self-employed. She declined to accept the new form and subsequently claimed that she had been constructively and unfairly dismissed. GCC argued that M had always been self-employed.

The case eventually came before the EAT. The court agreed that M was an employee of GCC.

It said that a provision allowing for a limited ability to delegate does not always lead to a conclusion that the contract was one for services. In the present case, the provision allowing M to arrange for an approved replacement, if unable to attend work, did not have such force that it overwhelmed opposing factors and clearly led to a conclusion that she was not an employee. M could not simply choose not to work in person. Only if she was unable to attend could she arrange for another to take her class. Secondly, she could only provide someone from the council’s own register. To that extent, the council could veto a replacement and could also ensure that such persons as were named on the register were persons in whom the council could repose trust and confidence. Thirdly, the council itself sometimes organised the replacement. Fourthly, the council did not pay M for the time served by a substitute, but instead paid the substitute direct.

Workers may work on a casual, wages-only agreement, where they are paid only for the hours they work and do not assume any other employment rights.

See A summary of rights in the workplace.

If a casual worker works regularly and continuously for you to a fixed pattern of hours, a contract of employment may come into being. Whether there is an employment contract will depend on the circumstances in each case.

If you use casual workers, make sure you do the following.

  • Clarify their employment status and make clear that you have no obligation to provide them with work and they have no obligation to take it.
  • Explain the likely duration of employment.
  • If you recruit casual workers through an agency, use the agency to administer employment matters (for example, sickness holidays) and to manage disciplinary and grievance matters.
  • Try to avoid predictable patterns of work forming.
  • Leave reasonable gaps between periods of work.

Agency staff

Typically, an employment agency will engage a person and then supply his labour to a third party (the end user) for specific engagements, generally temporary in nature. In these circumstances, the person carrying out the work for the end user would be a worker.

Generally, agency staff who are workers have a contract of some sort with the employment agency. The contract will be based on a promise to supply their labour to a third party who is a client of the agency.

The engagement may be long or short in duration and may be on an open-ended basis or for a fixed term.

In a typical engagement, the work will be done for the end user and the end user will be billed by the agency, which will pay the worker. The agency will usually deduct tax and National Insurance from the earnings. This is for administrative convenience and no inference that the worker is an employee can be drawn from this.

Historically, the worker’s primary contractual relationship is with the agency, but it is not an employment contract.

Agency Workers Regulations 2010

The Agency Workers Regulations 2010 came into force on 1 October 2011. These Regulations give a number of basic rights to agency workers after 12 weeks’ service and outlaw less favourable treatment or dismissal of agency workers on the ground of their status. Note that these are selective and don’t apply to all employment rights.

‘Day one’ rights

From the first day of the assignment, agency workers are entitled to access shared facilities and amenities or services provided by the hirer and information on job vacancies.

The worker’s rights are based on those of someone doing a comparable (similar) job. A comparable employee is someone doing the same job or broadly similar work to you usually at the same workplace (but may be located elsewhere. If there are no comparable workers or employees there is no entitlement to equal treatment.

Agency workers should have the same access to shared facilities and amenities as comparable employees or workers. These can include:

  • access to a canteen or other similar facilities
  • a workplace crèche (subject to the same waiting lists or conditions as comparable employees or workers)
  • transport services (local pick up service, inter-site transport)
  • toilet/shower facilities
  • a staff common room
  • a mother and baby room
  • a prayer room
  • car parking (subject to the same restrictions as comparable employees or workers)
  • a waiting room
  • food and drinks machines.

Hirers can only refuse access to facilities if they can objectively justify denying access.
Cost alone is unlikely to be a sufficient reason for a refusal.

12 weeks service

Under the regulations, agency workers will be entitled to the same basic working and employment conditions as those who are directly employed by the end-user (‘hirer’) once they have completed 12 consecutive weeks in the same role for the same hirer.

‘Basic working and employment conditions’ relate to pay, working time, rest breaks and annual leave. Pay for these purposes is any amount paid in connection with the employment or engagement and includes bonuses, fees or commissions that are directly attributable to the amount or quality of the work done by the worker and benefits in the form of fixed-value vouchers or stamps. It does not include any contractual enhancement relating to sick leave, pension, redundancy or maternity, adoption or paternity leave.

Agency workers who have permanent contracts of employment with temporary work agencies, under which they continue to be paid the ‘minimum amount’ when they are available to work but are not placed on an assignment with a hirer, are excluded from the right to equal pay. Under the regulations, the ‘minimum amount’ that agency workers must receive during such a period is pay equal to 50 per cent of the highest level of pay that they have received within the previous 12 weeks of an assignment.

Agency workers who have been denied the terms and conditions granted under the regulations will be able to claim compensation. This compensation will be for an amount that the tribunal considers just and equitable, taking into account the loss suffered as a result. Both temporary work agencies and hirers will be liable to pay this compensation to the extent they are responsible for the breach of the regulations. The temporary work agency can reduce their risk by showing that they have requested the relevant information from the hirer, used it to determine what terms and conditions the agency worker is entitled to and provided those terms and conditions. If this is shown, this will be the hirer’s risk.

There are a number of measures to deter employers from trying to work round the 12-week qualifying period. Where a temporary work agency or hirer is found to be in breach of this provision, the tribunal is also entitled to make an additional award of compensation of up to £5,000.

Agency workers will also have the right to access the same collective facilities and amenities as permanent workers and to be informed of any relevant job vacancies with the hirer. If the hirer denies this, he may face a tribunal claim. Collective facilities and amenities include staff canteen, childcare and transport facilities. There is no qualifying period for this right to apply and agency workers will be entitled to this from their first day.

Agency workers will also have the right to request information relating to terms and conditions, first from the temporary work agency and then from the hirer. This will help them to determine whether or not they are suffering any detriment on the grounds of their status.

Continuity of service – stopping and pausing the clock

Continuity of employment is preserved, broken or continues depending on a number of circumstances. The metaphor of a clock is being widely used to describe these situations.

  • The clock stops and is reset to zero if there is a break of more than six weeks between assignments or if the agency worker is being engaged to perform a substantially different role from the previous assignment. In this case, continuity of service is broken.
  • The clock ‘pauses’ if the agency worker is absent from work for less than six weeks and then resumes when the agency worker resumes work with the same client. The clock also ‘pauses’ if the worker is on annual leave, jury service, is absent on grounds of ill health or if the business is closed for refurbishment or affected by industrial action.

In certain circumstances, service continues unbroken even though the agency worker is not working for the client, for example, because he or she is on maternity, adoption or paternity leave.

Swedish derogation

At the time of writing there are reports that significant numbers of hirers are seeking to avoid the increased costs imposed by the AWR by using the ‘Swedish derogation’. This means that the AWR rights to equal pay of an agency worker don’t exist when agency workers are employed on a permanent basis by their umbrella company or temporary work agency and receive pay in-between assignments.

The agency worker must be genuinely employed by the umbrella company or agency with a permanent contract of employment in place and the contract has to have been entered into before the beginning of the worker’s first assignment. This means that agencies or umbrella companies have an obligation to pay agency workers during non-working periods.

Workers will have to be paid a minimum amount for an aggregated period of not less than four calendar weeks (subject to National Minimum Wage). The ‘minimum amount’ must be at least 50 per cent of the worker’s basic pay while on assignment. It cannot be less than the national minimum wage.

Hirers must ensure that the agencies and umbrella companies they work with are applying the model correctly and can support the ‘non-assignment’ payment obligation.

Self-employed staff

Self-employed people are those engaged in running their own businesses. Below are a number of factors which may help in determining whether a person is genuinely self-employed.

  • Responsibility for taking the financial risk inherent in running a business
  • Looking for his own work
  • Often supplying his own tools or equipment
  • Probably having a number of clients
  • Maybe working for more than one client at once
  • Maybe determining when he will carry out the work
  • Using other staff to carry out the work on his behalf
  • The element of supervision or control by the business for which he is carrying out the work is low or absent.

The mere presence of one of these does not automatically mean that the court will regard a person as self-employed from an employment point of view.

Self-employed staff have very limited employment rights.

Here is another example of a case regarding workers and self-employed staff:

Example

There are a number of examples of workers who describe themselves as self-employed but in reality would be considered to be workers. In the following case, the court decided that self-employed individuals could fall within the statutory definition of ‘worker’ and therefore would be entitled to holiday pay.

The case involved bricklayers who worked for RH for up to seven months on a self-employed basis. They claimed holiday pay as ‘workers’. Holiday pay is not a right given to the self-employed. The following facts emerged:

  1. The bricklayers worked exclusively for RH during the relevant period
  2. They could be ordered to rectify defective work
  3. The payment method was a fixed hourly rate or piece rate
  4. There was no opportunity to profit and there was no risk of loss
  5. Payments were subject to tax on account (in other words, they held CIS4 registration cards rather than the CIS5 or CIS6 certificates that would have indicated that they were operating as a business).

The court confirmed that the obligation to do the work personally can be implied. It does not have to be explicit in the contract. The bricklayers were self-employed workers, not genuinely self-employed, and therefore had the right to be paid holiday pay.