Self employed contractors – legal implications

Who and what is a self-employed contractor?

A ‘self-employed contractor’ is a person who is genuinely in business for themselves (ie s/he takes responsibility for the success or failure of the business) and is neither an employee nor a worker. For the purposes of this blog a self-employed contractor is someone who is a sole trader and not employed via a service company or has their own limited company.

An ’employee’ is defined under section 230(1) of the Employment Rights Act 1996 (ERA) as ‘an individual who has entered into or works under (or, where the employment has ceased, worked under) a contract of employment.’

A ‘contract of employment‘ is defined under section 230(2) of the ERA as ‘a contract of service or apprenticeship, whether express or implied, and (if it is express) whether oral or in writing.’

A ‘worker’ is defined under section 230(3) of the ERA as ‘as an individual who has entered into or works under (or, where the employment has ceased, worked under):

• a contract of employment; or
• any other contract, whether express or implied and (if it is express) whether oral or in writing, whereby the individual undertakes to do or perform personally any work or services for another party to the contract whose status is not by virtue of the contract that of a client or customer of any profession or business undertaking carried on by the individual.’

There has been extensive case law over the years dealing with employment status and the difference between self-employed contractors, employees and workers. What makes matters more confusing is that for tax purposes HM Revenue and Customs may determine that a person is self-employed but an employment tribunal may find that the person is either an employee or a worker. The test for determining employment status is multi-factorial and based largely on:

• whether there is mutuality of obligation to provide and accept work;
• whether the person provides his/her own work or skill in the performance of work for the other party in return for a wage or remuneration;
• whether the person personally performs the work;
• whether a party can provide a substitute to perform the work;
• the level of control exercised between the parties; and
• any other provisions that are consistent with a contract of service or contract for services.

The written contract between the parties is the starting point in determining the relationship but is not necessarily conclusive as other documents and the surrounding circumstances may show the opposite (Carmichael and another v National Power plc [2000] IRLR 43).

The parties cannot avoid the legal consequences of the employment relationship merely by attaching a particular label to the contract (Young and Woods Ltd v West [1980] IRLR 201). Nor does the fact that a person pays his/her own income tax and National Insurance contributions (NIC) provide conclusive evidence of self-employed status (Lane v Shire Roofing Company (Oxford) Ltd [1995] IRLR 493).

What rights and benefits are employees, workers and self-employed contractors entitled to?

An employee will benefit from, amongst other things:

• statutory employment protections rights under the ERA eg the right not to be unfairly dismissed and the right to minimum notice of dismissal;
• statutory minimum terms of employment under the ERA;
• the right to an itemised pay statement under the ERA;
• a statutory redundancy payment under the ERA;
• the right to request flexible working under the ERA;
• the right to take time off work in certain circumstances under the ERA;
• statutory maternity leave, paternity leave, adoption leave and parental leave, including statutory pay;
• the Acas Code of Practice on Disciplinary and Grievance Procedures;
• automatic transfer of employment under the Transfer of Undertakings (Protection of Employment) Regulations 2006; and
• the implied term within a contract of employment of mutual trust and confidence between s/her and the employer.

An employee and a worker (in certain circumstances) will benefit from:

• the right to rest breaks and paid annual leave under the Working Time Regulations 1998;
• the right to the national minimum wage under the National Minimum Wage Act 1998;
• the right to be automatically enrolled in a pension scheme and receive employer’s contributions in certain circumstances;
• statutory sick pay under the Social Security Contributions and Benefits Act 1992;
• maternity, adoption and paternity pay but not leave;
• the right to ante-natal care under
• protection under the Health and Safety at Work etc Act 1974;
• protection against less favourable treatment if you work part-time under the Part-Time Workers (Prevention of Less Favourable Treatment) Regulations 2000;
• protection again less favourable treatment if s/he is a “whistleblower” under the ERA;
• the right not to be discriminated against unlawfully because of a ‘protected characteristic’ (ie age; disability; gender reassignment; marriage and civil partnership; pregnancy and maternity; race; religion or belief; sex; or sexual orientation) under the Equality Act 2010; and
• the right to be accompanied at a disciplinary or grievance hearings under the Employment Relations Act 1999.

A self-employed contractor is:

• not entitled to any statutory employment rights;
• not entitled to statutory paid annual leave;
• not entitled to statutory sick pay;
• not entitled to statutory maternity leave, paternity leave, adoption leave and parental leave, including statutory pay; but
• entitled to be protected against unlawful discrimination because of a ‘protected characteristic’

Why would you want to use a self-employed contractor?

The main reasons for using self-employed contractors are:

• there is no obligation to pay employer’s NIC at 13.8% of that person’s earnings. Businesses will not have to deduct income and tax and employee’s NIC at source under the Income Tax (Pay As You Earn) Regulations 2003;
• most self-employed contractors will account for the own income tax as part of their profits and loss accounts and pay class 2 NIC, which give them entitlement to the basic state pension and statutory maternity allowance. Class 2 NICs do not provide any entitlement to Job Seekers Allowance, statutory sick pay or the additional state pension;
• there is no entitlement to statutory employment rights or social security rights;
• a business is vicariously liable for acts done by its employees in the course of their employment, which is unlikely to extend to self-employed contractors;
• a business is required to take out employer’s liability insurance to cover the risk of employees and workers injuring themselves at work. Self-employed contractors may not, in every case, be covered by this insurance and may require their own insurance; and
• businesses owe employees and workers statutory duties relating to health and safety. Self-employed contractors may not be covered under these duties although they will be covered under the employer’s common law duty of care in respect of occupier’s liability.

Conclusion

The benefits of using self-employed contractors are obvious in that it provides a business with flexibility and free from statutory obligations. However, if a business gets a person’s employment status wrong this could be catastrophic in terms of legal and tax liability.

If your business is looking to take engage self-employed contractors, specialist employment law advice should be obtained. We are experienced and cost effective, so if you think you need advice, please do get in touch.

Find out how we can protect your business and your reputation as a fair employer by calling us on 01895 207892. Alternatively email your details to employment@ibblaw.co.uk.