Employment Contracts

by Kate Russell

Workers and self-employed staff

Introduction

The number of people who work for themselves has increased significantly in recent years. Nearly five million UK workers are now classified as self-employed, a 45% rise since 2000.

It is not always easy to determine employment status and there is no one single test applied by the courts. To complicate matters further, individuals can sometimes be accepted as self-employed for tax purposes, but workers for the purpose of employment rights.

Many of these so-called self-employed workers are involved in the gig economy. The ginphrase ‘gig economy’ was coined at the height of the financial crisis in early 2009, when the unemployed made a living by ‘gigg’, or working several part-time jobs, wherever they could.

In reality these individuals have little control over their workplace and are either employees or workers.

While flexibility is important for business, the gig model has come in for considerable criticism because workers have almost no rights and very little protection. The employment status of workers in a number of gig businesses has been challenged in several high profile cases.

In 2017, The Taylor Report was published and has made a number of recommendations related to the modern workplace, one of which recommends defining employment status more clearly.

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.

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 the early 2000s suggested that in certain circumstances the courts would be willing to infer that a contract of employment has come into being where the contract was originally a contract for services. 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 found that the issue must be decided in accordance with common law principles of implied contract and, in some very extreme cases, by exposing sham arrangements. Earlier case law does 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.

The gig economy

The gig economy describes the part of the labour market which concentrates on short-term/ temporary jobs and contracts. Often these workers can have more than one job, for example, a taxi driver who works both for a traditional taxi company and Uber.

Many of the individuals working in these companies are described as self-employed. Recent case law has made it clear that such individuals are workers rather than self-employed.

Example

Uber treated the drivers as independent, self-employed contractors, not employees or ‘workers’. It argued that it was acting as their agent when dealing with potential passengers, not as their employer. This meant they were not allowed employment law rights such as the national minimum/living wage, paid annual holidays, rest breaks, maximum weekly working hours and auto-enrolment pension contributions. However, two Uber drivers claimed they were workers under UK law. Workers are entitled to these basic employment law rights, even though they are not full employees.

Uber claimed it was a technology company, not a transport business (in fact, this was acknowledged expressly in their contracts) so it argued it had no need of driver workers for its business. The company said that it provided an online platform to connect people wanting to travel from A to B with a driver of a vehicle prepared to take them on that trip. The drivers were not its employees or workers but its customers, who paid it to get access to the Uber app so that they could connect to potential fares. They pointed to the paperwork involved, which included not only the agreements between the various parties but documents such as invoices generated on behalf of the drivers for customers. They also argued that the drivers were contracting with the foreign Uber parent which owned the app, not the UK company, which handled the local administration of the business.

The employment tribunal found as follows.

  • The terminology in Uber’s contracts – such as ‘interviews’, ‘providing job opportunities’, ‘on- and off-duty’, ‘Uber drivers’ and ‘our drivers’- suggested that it was also operating a transport business.
  • The drivers’ contracts with Uber prohibited them from providing driving services directly to customers. Uber must therefore have been providing driving services for its own benefit, which implied it must be providing transport services.
  • The paperwork involved contained ‘fictions’, i.e. it did not reflect what actually happened on the ground. For example, the invoices generated on behalf of drivers were ‘fakes’ that were never sent to customers.

Uber’s argument that it was simply providing the drivers with leads was not sustainable since the drivers had no leeway to negotiate the terms on which they provided their services to passengers. Both driver and passenger were bound by Uber’s terms.

In addition, the tribunal found that Uber:

  • exercised significant control over its drivers, inconsistent with their being independent, self-employed contractors;
  • could accept (or refuse) bookings at its ‘sole and absolute discretion’;
  • recruited and interviewed drivers before allowing them onto the app;
  • owned valuable marketing information, including passengers’ names and destinations. Drivers were not allowed to give passengers their contact details;
  • required drivers to accept 80% of jobs, and could not cancel them. Drivers who refused a fare three times were 'disciplined' by being logged off the app for ten minutes by Uber;
  • set the route to be taken for each passenger;
  • set the fares and prohibited driver and passenger from agreeing a different fare. Uber could make deductions from the sum paid to drivers if passengers claimed they had been overcharged;
  • required drivers to follow its processes and procedures which regulated how drivers did their jobs and controlled their behaviour in a number of ways;
  • rated drivers in a manner akin to a performance management procedure;
  • at one point guaranteed drivers’ earnings, akin to a basic salary;
  • was responsible for handling complaints;
  • bore any loss made;
  • had power to change drivers’ terms and conditions unilaterally, similar to an employment contract.

The tribunal concluded that Uber was not a client or customer of business undertakings run by the individual drivers. Instead, the drivers were workers in Uber's transport business during the periods when they were using the app and able and willing to accept fares from it within their local area. Uber was not acting as their agent to negotiate trips with potential passengers, but their employer. They were therefore entitled to the employment law rights they claimed.

On appeal, the EAT agreed with the tribunal’s findings. It said that when drivers had the Uber app switched on, they were workers entitled to certain important employment law protections, including the working time (rest breaks, paid holidays, etc) and national minimum wage regulations. Uber was not acting as their agent but their employer.

The Uber case was followed by Pimlico Plumbers case which was considered by the UK Supreme Court in June 2018.

Example

Mr Smith worked as a plumber for Pimlico Plumbers for six years until 2011. He successfully argued that he was a worker for the purposes of employment legislation.

The company maintained that he was a ‘self-employed operative’ – which is how he was described in the agreement between Mr Smith and Pimlico – and appealed to the Supreme Court.

Despite the fact that Mr Smith filed tax returns on the basis that he was self-employed, was VAT registered, was entitled to reject work and was able to take outside work, the Supreme Court held that the employment tribunal had been entitled to find that he was a ‘worker’. Significant factors in its decision included:

  • Mr Smith was required to wear a Pimlico branded uniform and to use a Pimlico branded van leased from Pimlico.
  • Mr Smith had to carry a Pimlico identity card and closely follow the administrative instructions of its control room.
  • The contract referred to ‘wages’, ‘gross misconduct’ and ‘dismissal’, and included a suite of restrictive covenants concerning Mr Smith’s working activities following termination.
  • While Mr Smith was able to swap assignments with other plumbers already working for Pimlico, this was more akin to swapping a shift between workers than providing a substitute – this was not a case where the employer was uninterested in the identity of the substitute.

The Supreme Court’s decision will entitle Mr Smith to proceed with claims of disability discrimination, unlawful deduction from wages and holiday pay against Pimlico. In the meantime, a number of other cases on employment status continue to make their way through the courts.

While each case will turn on its facts, where an organisation retains a significant degree of control over how the individual works and where there is no (or very limited) right of substitution, it may be that the individuals they engage will be 'workers'.

Although these decisions do not add to or change the established principles involved in determining employment status, there is currently significant cross- industry and policy focus on the question of employment status, particularly within the gig economy. More legal challenges to the employment status of individuals working in companies like Deliveroo, Hermes and Amazon are underway.

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 (AWR) 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.

In the case of Kocur v Angard Staffing Solutions Ltd [2018], the court ruled that providing an agency worker with 28 days’ holiday and half-hour rest breaks when comparable permanent employees were entitled to 30.5 days’ holiday and rest breaks of one hour breached the AWR. 

Example

Mr Kocur was an agency worker who had worked for the hirer, Royal Mail, long enough to become entitled to 12-week rights and equal treatment with Royal Mail’s permanent staff under the AWR. He was unhappy with certain aspects of his terms and conditions. In particular, he was given a one-hour break for each eight-hour night shift but was paid for only half an hour, whereas direct recruits were paid for the entire hour; and he was entitled to 28 days’ annual leave compared to direct recruits’ 30.5 days. Mr Kocur received higher hourly pay; £10.50 per hour as opposed to a comparable employee’s £9.60 per hour. A tribunal dismissed his claims. He appealed.

The EAT allowed his appeal. An agency or hirer cannot offset a failure to confer a specific AWR entitlement with a higher rate of pay. The entitlement is to the same basic terms and conditions as comparable employees on a ‘term-by-term’ basis with equal terms, not by comparing the overall package.

As to Mr Kocur’s leave entitlement, there was a breach of the AWR. The EAT did not accept the tribunal’s view that Mr Kocur could choose not to work on 2.5 days per year; such an approach lacked transparency and it was difficult to see how it could be enforced. Moreover, the failure to give the additional leave could not be compensated for by Mr Kocur’s enhanced hourly rate of pay.

The EAT noted that the AWR doesn’t specify the way in which an agency worker must receive parity in relation to annual leave. Thus, if identical holiday pay was provided by a lump sum at assignment end, or in ‘rolled-up’ holiday pay, this would not, in principle, breach the regulations. But the EAT said any such arrangements would have to be transparent, and the agency worker would have to be able to ascertain precisely what aspect of his or her remuneration relates to annual leave. In Mr Kocur’s case the payment said to compensate for the 2.5 days’ leave was neither transparent nor readily comprehensible.

As for Mr Kocur’s rest breaks, while there was no disparity in the length of his break (unlike his holiday entitlement), the difference in pay for the rest break (pay for half the time as against pay for all the time) was a breach of the regulations. The term relating to rest breaks was not the same, and merely having a higher rate of pay cannot compensate this.

This decision makes it clear that under the AWR less favourable treatment in one respect, for example, providing less annual leave, cannot be offset with more favourable treatment in another respect, for example, by providing a higher hourly rate of pay. This is not new and is in keeping with the judicial approach taken in discrimination and equal pay cases. 

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.

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

Some 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.