What is employment status and why is it important?

UPDATED 22 April 2021 for the Addison Lee driver case

Employment status defines the rights and responsibilities of a worker and is a key consideration for an organisation in its relationship with that worker. 

Getting the status wrong can be costly to an organisation financially as well as reputationally.

Every individual who provides services to an organisation will engage with it either as an employee, an officer, a worker or as a self-employed contractor. The organisation needs to understand the rules and rights that apply to the working relationship with that individual from the perspective of their status. 

Whilst it is not defined in statute, employment status is characterised through several criteria that have evolved in case law over many years. See our separate article on how to determine status.

The courts have had to work out whether a person is an employee or not in arriving at their tax or employment law position.

A worker’s employment status can differ depending on whether you are considering employment law or tax law.

In employment law, there are three main categories of employment status:

• Employees working under a contract of employment, who have full employment rights.
• The genuinely self-employed, who are independent contractors.
• Workers, who have a status in between employment and self-employment.

Whereas for tax purposes there are only two categories: employed or self-employed

Over the years the government has looked at status as the employment market has changed, particularly with the emergence of the “gig economy”, but it has so far appeared reticent to clarify the law and has left it to the courts.

Simply labelling someone as employed or self-employed does not determine their employment status, as this will depend on the terms of the contract and how the arrangements operate in practice.

Just because a contract states that a person is self-employed, does not make it so; HMRC will want to look at the actual working relationship to see if that differs from the contract.

Employees work under a ‘contract of service’; whereas the self-employed work under a ‘contract for services’.

Status can appear in many forms in a business. It could have a manager reporting to the board, who is likely to be an employee, a freelance contractor running their own business and working for other clients, who is likely to be self-employed, and a salesman receiving a retainer and commission, who may be an employee.

The dividing line between employment and self-employment can be a fine one and will depend on various factors, including the intention of the parties concerned

Why is this important?

The recent announcement from Uber that it will give its UK drivers a guaranteed minimum wage, holiday pay and pensions is a key status development in the gig economy and comes after the company lost a legal battle in the UK over drivers' status.

Following on from the Uber case, private hire firm Addison Lee has also been told to provide employment law rights to its workers, even though for tax purposes they remain self-employed.

Status has an impact on employment rights and pay. An employee will be paid net of tax through the payroll and will have employment rights, whereas a self-employed contractor will be paid gross via invoices and have no employment rights. 

Status impacts on entitlement to the national minimum wage, holiday pay, pension provision and protection against unfair dismissal.

Incorrectly categorising a worker’s status can lead to claims from HMRC for up to six years of unpaid PAYE and national insurance as well as interest and penalties.  

From 6 April 2021, the risk of contracting with an individual via an intermediary (IR35) is shifting to the contracting business, further increasing the risk and potential cost to an organisation of getting this wrong. 

If you have any questions regarding any of the above, please contact your normal Bishop Fleming contact or a member of the Employer Solutions team. 

Further information

For more information on employer issues check out our Employer Solutions Knowledge Hub.