Employment highlights - Employee, worker or self-employed?

Employers are becoming increasingly aware that the legal status of their employees is a controversial issue, as the distinctions between the different categories of employee, worker or self employed individual become blurred. This is highlighted by the recent media attention given to BBC executives who have paid their earnings into service companies. Under English tax law individuals should be paying income tax and national insurance unless they are genuinely working freelance (i.e. they are not permanently employed and have several sources of income).

The difficulty in determining if someone is genuinely self-employed has been accentuated as a result of recent cases such as the Court of Appeal’s decision in Hospital Medical Group Ltd v Westwood [2012] EWCA Civ 1005. The increased use of the concept of the term “worker” in new legislation has meant that those who have previously been excluded from protection are now gaining increasing rights despite not being “employees”.  

Many of the provisions of employment legislation now extend to individuals who are neither employees nor self-employed but who are defined as "workers”.  A worker is defined under section 230(3) of Employment Rights Act 1996 (ERA) as an individual who has entered into or works under (or, where the employment has ceased, worked under):

(a) a contract of employment; or
(b) 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.

Workers have less extensive employment protection rights than employees. However an increasing number of statutory protections cover workers as well as employees, such as some of the provisions relating to working time, the national minimum wage, protection for part time workers and the statutory control of deductions from wages.

The Employment Appeal Tribunal (EAT) in Byrne Brothers (Formwork) Ltd v Baird and Others [2002] IRLR 96 set out some helpful tests to consider whether an employee was a worker: Does the individual undertake to provide the work personally? Was there mutuality of obligation between the individual and the employer? Was the individual providing a business or undertaking to the company and was the company a customer or client of that business? It was this last question which arose in particular in the Westwood case.

Dr Westwood was a GP and senior partner in a small surgery in Cheshire. The respondent in this case was the Hospital Medical Group Ltd (HMG) which has clinics throughout the UK and Europe. HMG engages surgeons and doctors to perform surgical and non surgical procedures which are allocated according to demand at the time.

During 2005 Dr Westwood was approached by HMG and agreed to undertake procedures relating to hair restoration on its behalf.

Dr Westwood’s contract was a contract for services which referred to him as a self-employed independent contractor.  Under the contract Dr Westwood was also required to pay all tax and national insurance as a self-employed person; was not entitled to sick pay or holiday pay; was not obliged to work a set number of hours or set times or to accept any assignments given to him by HMG; and was solely responsible for safety and for taking out professional indemnity insurance.

Following termination of the contract on 19 August 2010, Dr Westwood claimed for unlawful deductions from wages and holiday pay.

At the Employment Tribunal (ET) Dr Westwood’s primary case was that he was an employee within the meaning of section 230(3)(a) ERA. This submission was rejected by the ET as there was no mutuality of obligation between the parties and HMG had no direct control over Dr Westwood in carrying out his activities. The ET then went on to consider whether Dr Westwood was a “worker” as defined under section 230(3)(b) ERA.

The ET felt that Dr Westwood was engaged personally to carry out the work himself, he had no right to delegate the work and had been instructed on the basis of his own special skills. HMG was not treated as Dr Westwood’s client or customer. The patients were customers of HMG and Dr Westwood was paid a percentage fee for each treatment performed. Accordingly the ET held that Dr Westwood was a “worker” within the meaning of section 230(3)(b) ERA.

On appeal by HMG to the EAT, Judge Peter Clark considered the decision of the ET to be “plainly and unarguably right”. He stressed that the work performed by Dr. Westwood for HMG was wholly separate from any other work he did and the services were being provided exclusively to HMG.

At the Court of Appeal, HMG submitted that it was Dr Westwood’s client or customer and that Dr Westwood’s activities (as a GP and another consulting post he held) were all part of the same business. The Court of Appeal rejected this and thought these were three distinct businesses that required different skills and were unrelated to each other.

The Court of Appeal identified a need to distinguish between an individual who markets his services as an independent person to the world in general (who will have clients or customers), and one who is recruited by the principal to work as an integral part of the principal's operations. Counsel for HMG had argued that Dr Westwood was engaged in one business, which included the work that he did for HMG. This argument was rejected by the Court of Appeal and it was also held to be counter-intuitive to see HMG as Dr Westwood’s client or customer. In the judgment it was noted that HMG was not just another purchaser of Dr Westwood’s various medical skills. HMG had specifically recruited Dr Westwood to carry out surgical procedures on its behalf and referred to him in its marketing materials as "one of our surgeons". Dr Westwood was clearly an integral part of HMG's undertaking and was providing services even though he was in business on his own account.

The Court of Appeal decision in Westwood stresses the need for employers to consider carefully whether anyone they employ as a contractor may have a claim as a “worker”. The guidance is still limited but a court will consider the extent to which an employee has been integrated into the business in determining whether he is a worker or truly self-employed. It is important to be aware as an employer that referring to an employee in a contract as “self-employed” will not safeguard against a claim that he is in fact a worker. In Westwood for example, the contract between HMG and Dr Westwood referred to Dr Westwood as a self-employed, independent contractor but the Court of Appeal looked beyond the contract and considered Dr Westwood to be a worker.

From previous case law factors which would indicate that an individual is self-employed rather than a worker would be if the individual:

• Is not involved in any company procedures, such as appraisals;
• Has the freedom to determine how and when work is carried out subject to health and safety legislation and deadlines;
• Has an unfettered right to provide a substitute to carry out work if he is unable or unwilling to carry out that work;
• Is not paid when not working for the company; and
• Provides work to other clients or customers.

If an individual is a worker then he will be entitled to certain rights under English law such as the right to paid annual leave and the protection against unlawful deductions from wages. In light of this employers should be alert to these issues when taking on future “self-employed” workers and may want to adapt their consultancy agreements accordingly to take account of these rights. Employers should also be conscious that any “self-employed” workers they currently use may not be considered as such if the question ever went to court and may want to analyse carefully how fully integrated into the business their current ones are. The difficulty is that often the distinction between a self-employed individual and a worker is a very fine one.