How to work out if you are employed or self-employed

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Self-employed or Employed?

Whether you are employed or self-employed has a significant impact on your obligations for tax , national insurance contributions, liability for negligence and employment law rights.

There isn’t really a definition of what makes a person employed or self-employed. Some unscrupulous companies try to take advantage of this by treating you as self-employed when you are in fact an employee, in order to avoid their Pay As You Earn (PAYE) obligations. The PAYE system is how you pay income tax and national insurance contributions. If you are an employee, your employer takes your tax and national insurance contributions from your wages and sends it to HMRC on your behalf. If you are self-employed you do your own PAYE.

Even though there is no definition of what makes you employed or self-employed, court decisions have developed into established principles known as status tests. This page takes you through some of the main principles, but you should contact HMRC for clarity.

According to section 230(1) of the Employment Rights Act 1996, an employee is someone who works under a contract of employment. This, however, is not defined by statute so the courts have constructed a number of tests to help them decide whether someone is an employee.

Although each case is decided on its own merits, there are some essential elements that must be satisfied:
grey bullet marking index itemThe individual has to have a contract with the employer
grey bullet marking index itemThe individual has to carry out the work personally
grey bullet marking index itemThere has to be “mutuality of obligation” between the two parties
grey bullet marking index itemThe employer has to have “control” over the work that the employee does

 

Working through an umbrella company

If you are working through an umbrella company, you are treated as an employee of that umbrella company. An umbrella company is an employment business that acts as an ongoing employer to agency contractors. The umbrella company invoices the recruitment agency, and then pays the contractor under PAYE. The umbrella company is responsible for calculating your tax and national insurance contributions but if they get it wrong you could get in trouble with HMRC. It is important to be vigilant where you are working through an umbrella company. Check the tax and national insurance policy with the umbrella company and have a chat with HMRC about your particular situation.

 

The Status Tests

1. Are you in business on your own account?

In Market Investigations Ltd v The Minister of Social Security [1969] the court said that if you are running your own business, and are responsible for the business premises and equipment, market your business and have clients then you are self-employed.

 

2. Do you hire your own staff?

HMRC manual ESM0539 says that if you have your own employees or sub-contractors, then you are most likely to be on business on your own account – Narich Pty Ltd v Pay-Roll Tax Commissioner [1984] 

 

3. Can you send someone else to do the job for you?

If you don’t have to do the job personally and can substitute someone else then you are self employed. This is because personal service is a fundamental requirement of an employment contract. In the case of Express and Echo Publications Ltd v Tanton [1999] the Court of Appeal held that because the driver’s contract said he did not have to do the work personally, it could not be a contract of employment.

Even if your right to sub-contract is limited or allowed only occasionally, then you may be seen as an employee. In MacFarlane and anor v Glasgow City Council [2001] the Employment Appeal Tribunal said that just because a gymnastic instructor could arrange a replacement from a register maintained by the council, if she was unable to attend, did not mean she could not be an employee. HMRC Manuals ESM0530 and ESM0538 provide further guidance on personal service.

 

4. Do you have to bring your own equipment to the job?

HMRC manual ESM0540 says that if you are provided with the necessary equipment to do the job, this fact would point to the existence of an employment contract. If you provide significant equipment which is essential to carry out the task, then you would likely be deemed to be self employed. See Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] and Humberstone v Northern Timber Mills [1949] 

 

5. Do you take any financial risks and can you profit from the business?

HMRC says in ESM0541 that “…..the greater the financial risk the stronger the pointer towards self-employment. Individuals who risk their own money by, for example, buying assets, bearing their running costs, paying for overheads and materials are likely to be self-employed”.

In Global Plant Ltd v Secretary of State for Social Security [1971], Lord Widgery said that if a person is paid on a fixed fee basis rather than an hourly rate, so he can make more money if he carries out his task quickly, and stands to lose money if he takes longer than expected, he is almost certainly self-employed. However, if a person is paid an hourly rate, it does not mean that the person is automatically an employee. There are self-employed people like consultants, and accountants who are paid per hour. If you are paid per hour and can negotiate the terms on which you carry out work, then you are probably self-employed because employed people can’t really negotiate the terms of their contracts. They have to take it or leave it. In addition, if you are paid only after sending an invoice then you are most likely self employed. In the case of Hall v Lorimer [1993],  the Special Commissioner said that Mr Lorimer was self-employed because by being paid on invoice, he “…..bears his own financial risk which is greater than that of one who is an employee, accepting the risk of bad debts and outstanding invoices and of no or an insufficient number of engagements”.

 

6. What control do you have over the way you do the job?

In Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968], the court said that if a person is under the control of the person he is working for “in a sufficient degree to make that other master“, then that person is an employee. . It also says that rights of control are divided into control as to how, when, where and what is done – and all these may need to be considered. HMRC Manual ESM0516 gives an overview of the Control Test. The other HMRC manuals of relevance to the control test are ESM0517 to ESM0529.

 

7. Is there mutuality of obligation?

Mutuality of obligation is the obligation on an employer to provide work and the obligation on the individual to accept that work. It is the essence of an employment contract. For there to be a contract of employment, the employer is obliged to pay and the employee is obliged to do the work. There is no mutuality of obligation in zero hours contracts. If you are on a zero hours contract, you are not an employee. In the case of Quashie v Stringfellows Restaurants Limited [2012] the Court of Appeal said that the most important question was the nature of these mutual obligations so the relationship between the two parties must be examined. In this case, there was no mutuality of obligation because even though Miss Quarshie had agreed to work, Stringfellows was not obliged to give her work or pay her. In Carmichael and Another v National Power [1999] there was no mutuality of obligation because Mrs Carmichael did not have to turn up for work, and National Power was not obliged to offer work even if work was available.

If there is no mutuality of obligation then you are personally responsible for paying tax and national insurance contributions. When there is an absence of mutuality of obligation the claimant is concluded to be self-employed person in relation to payment of income tax and national insurance contribution as seen in the case of Parade Park Hotel and Another v HMRC [2007].  HMRC Manual ESM0543 gives a good overview of mutuality of obligation.

 

8. Are you part and parcel of the organisation?

HMRC Manual ESM0545 says that if you are integrated into the organisation, then you are likely to be regarded as en employee. The “part and parcel of the organisation” test investigates things like whether employees report to you, you carry out performance management activities activities or attend employee functions as occurred in Future Online Ltd v Faulds [2004] 

 

9. Do you have many clients?

If you have lots of clients that you carry out freelance work for you can’t pick one employer and say that you are employed by them. You are likely to be seen as self-employed as was the case in Hall v Lorimer [1993].  Mr Lorimer was a vision-mixer (the person who decides which of a number of different TV camera feeds actually appears on the screen). In 1985, he left his job and went freelance. He worked for five production companies in his first year and by the third year he had more than 20 clients. All the work was done at studios owned or rented by the production company on equipment owned or supplied by the studio company. His bookings were usually made on his home phone and he would confirm the bookings by letter giving dates, rate of pay etc. but he had no formal written conditions of engagement. The judge said that the number of clients that Mr Lorimer had was the most outstanding feature of the case. The Court said that Mr Lorimer was self-employed even though he did not own the equipment used for his work. HMRC has explained how cases like Hall v Lorimer will be addressed in ESM0551.

 

 

10. What intentions do you and the other party have?

What the parties intended to do is very important as well. In Massey v Crown Life Insurance [1978], Lord Denning said that when the situation is in doubt or ambiguous as to whether the person is employed or self employed, the parties could agree as to what their legal relationship should be. This was an unfair dismissal case, and Mr Massey could only bring his case for unfair dismissal if he was an employee, so Crown Life Insurance said he wasn’t.  Mr Massey was the manager of a branch of the Crown Life Insurance Company of Canada from 1971 until 1973. In 1973, there was an agreement that Mr Massey should become self-employed. His duties under this new agreement were almost identical to those under his previous contract of service. The only real differences were that he no longer made pension contributions and the company paid him gross without any deductions for tax etc. This arrangement continued until 1975 when the company dismissed him. The Court of Appeal said he could not claim unfair dismissal because he had agreed in 1973 to no longer be an employee.

 

Resources available

How to Write a Grievance About Unauthorised Deductions from Your Wages or Salary

How to Write a Grievance That Gets You What You Want

How to Write a Grievance About Bullying and Harassment at Work

How to Write a Grievance About Changes to Your Employment Contract

How to Write a Grievance About the Behaviour of a Colleague, Manager or Supervisor

How to write a Grievance about discrimination at work

Disciplinary action and capability

Discrimination at work

Surviving a workplace suspension

Health and Safety Dismissal

How to fight dismissal on Probation

How to survive a criminal charge, conviction or caution at work

Social Media and Unfair Dismissal

Surviving a disciplinary investigation at work

Surviving Capability and Performance Management

The Disciplinary Hearing

ET1: Breach of Contract

ET1: Non-Payment of Holiday Pay on Termination

ET1: Non-Payment of Holiday Pay whilst still employed

DOCUMENTS, FORMS AND LETTER TEMPLATES

 

 

Best of the web

GOV.UK – Employment status indicator tool

Employment Status

Employment status; employed or self-employed

CAB – The Pay as you earn system (PAYE)

 

 

Disclaimer

Please note that the information on these pages are intended to guide you. Although they are kept under constant review and continuously updated, they are a summary of the law only and not a complete guide. Before taking any action based on this information you are strongly advised to take legal advice. Whilst every effort has been made to ensure that the information contained on this page is up to date and accurate, no guarantee can be given to this effect.

Case Study

In the Scottish case of Collins v First Quench Retailing Ltd [2003], Ms Jacqueline Collins was awarded £179,000 from her employers when the off-license she managed was robbed. Ms Collins had been the manager of Victoria Wine, run by First Quench Retailing, for about ten years. When Mrs Collins started in the shop she had been concerned about security and raised this with management. Since 1977 there had been 13 reported crimes at the shop, including five thefts, one minor assault, one serious assault and one assault with intent to rob. There were two armed robberies in 1994 and four... Read More
Ms Jacqueline Collins was awarded £179,000 from her employers when the off-license she managed was robbed.Collins v First Quench Retailing Ltd
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