This guide is based on UK law. It was last updated in June 2011.
Not everyone who works is an 'employee'. Often, workers set themselves up in business as consultants or independent contractors so that they have more control over the type of work they do and how they do it. Employees, by comparison, normally have less control over what they do and how they do it, but they do benefit from certain legal protections that independent contractors do not. For example, only employees can bring a claim of unfair dismissal against their employer. Employees and independent contractors are also treated differently for tax purposes. It is therefore essential that contractors (and anyone hiring contractors or consultants) understand the distinction so that their legal rights and obligations are clear.
How can you decide if someone is an employee?
Courts and tribunals look at lots of different factors in order to decide whether someone is an independent contractor or an employee. Nevertheless, there are three essential requirements for a contract of employment to exist – control, mutuality of obligation and personal service. If any of these are missing, the contract will not be a contract of employment. If all of these elements are present, there may be a contract of employment but it will necessary to look at all the other factors to decide whether they are consistent with a contract of employment.
Control Is the worker controlled by anyone?
Is the worker told what to do and when and how to do it? Can the worker be punished if he doesn’t do the work properly or turns up late? Of course, if the worker works remotely or from home, or if the worker is particularly skilled or senior, it might be harder to decide whether the worker is actually 'controlled' by anyone else. It may be that a computer programmer is so skilled in his field that in reality the person setting him work cannot really tell him how to do his job. In such a case, the employer’s theoretical right to control the worker, rather than his practical ability to do so may suffice. So if the employer has ultimate control because, for example, he can discipline the worker, then it is likely that there will be a sufficient level of control indicating that the programmer is an employee.
Mutuality of obligation Does each side owe obligations to the other?
Is the worker obliged to do any work he is given or can he just decide not to do it? Is there an obligation to provide work for the worker to do? If the worker does the work, is the party giving him the work obliged to pay him for it? If the worker is obliged to do the work, he is likely to be an employee. However, it is not strictly necessary for the party providing the work to provide a constant stream of work for the worker to do for an employment relationship to exist. It may be sufficient if the worker is obliged to accept and do the work he is offered and the employer is obliged to pay him for the work he does, as long as there is some form of retainer in place when there is no work to be done. A truly 'casual' worker who only works as and when required but who suffers no penalty if he refuses, will not be an employee.
Personal service Does the worker have to do the job himself or could he ask someone else to do it?
If it does not really matter who the worker asks to do the job as long as the work is done, then this will normally indicate that the worker is not an employee. In other words, if the worker is permitted (either historically or under the contract) to substitute another worker to do the work, then there is no requirement to do the work personally and the worker will not be an employee. However, if there is only a limited right to send a replacement, for example when the worker is sick, the worker may be an employee.
Other factors which help indicate employment status
Other factors which can give a clue as to a worker's employment status include if the worker:
- works set hours, or a given number of hours a week/month;
- is paid by the hour/week/month;
- works at the employer's premises or at places determined by the employer;
- is not allowed to work for others (especially competitors); and
- could be dismissed.
Other factors which point towards to the worker being an independent contractor include if the worker:
- risks his own money in the business - bearing the risk of loss as well as taking the benefit of the profits;
- has the final say in how his business is run;
- provides his own equipment;
- hires others on his own terms to do the work and pays them himself; and
- is free to work for others.
Are there any documents describing the arrangement which is in place?
If there are any emails, letters or contracts which describe the way the relationship will work, these will be helpful in deciding whether the person is an employee or an independent contractor. However, just because someone is treated as self-employed for tax purposes, or is described as an independent contractor or consultant does not necessarily mean this is the case – the label given to the relationship by the parties, whilst relevant, will not be decisive. The courts will always look at the true nature of the relationship. If the relationship has changed, perhaps over time, then it is possible that the court or tribunal might find that someone who started work as an independent contractor has become an employee. Nonetheless, if you want to try to ensure that a contractor or consultant you engage to do a job does not bring an employment claim against you, it will be helpful if the contractual documentation expressly states that he is not your employee. Whilst this won't necessarily mean a court or tribunal will agree with you, it will help your argument.