When is your self-employed consultant actually an employee?

Even before Covid-19, the nature of work had for some time been changing. Gone were the days when having a job necessarily meant working for a company on a long-term basis, on a fixed schedule and under a contract of employment. It is now quite the opposite. Over the past decade, there has been a considerable rise in the number of self-employed workers (of which as of February 2020 numbered 5.3 million according the Office of National Statistics). The Covid-19 Pandemic is likely to see a steep rise in self-employment and flexible working.

Covid-19 has had and will continue to have profound effects on how we all work from the nature of engagements to the way on which work is carried out as organisations seek to transition out of lockdown into a socially distanced model.

Traditionally in the arts sector there has always been a pool of highly skilled individuals who work for themselves (providing technical, design, production skills etc) but who do not employ others. This was often necessary to fill gaps of over-demand or to carry out specific projects. This has now expanded to include what has been called the ‘gig economy’ where core services are delivered by self-employed contractors engaged on a short term basis or ‘gig’, often for a particular task only.

As the self-employed and flexible / ‘gig’ economy grows, so does the traditional divide between self-employed / employed blur.

Depending on the factors set out below, it could be that an organisation considers that they have engaged a self-employed consultant when in fact what they have done is taken on an employee with all the obligations and costs that arise from that. This is not an insubstantial issue. For example, a report produced by the Citizen’s Advice Bureau in 2015 estimated that 460,000 self-employed consultants were wrongly classified and were collectively owed £6 million in holiday pay.

Further, the complex task of correctly classifying workers and interpreting traditional employment laws to fit pioneering working arrangements has been highlighted though a range of high profile Employment Tribunal cases including that brought by Uber drivers against the taxi app service who contest that they are not self-employed contractors but rather ‘workers’ and therefore entitled to holiday pay and the national minimum wage.

Employed v Self Employed

A worker can fall within one of three categories:

• employed (with the full spectrum of employment rights including paid holidays, pension, sick pay, national minimum wage, the right not to be unfairly dismissed after a qualifying period etc.)
• self-employed (in which there are very few employment protections) or
• an intermediate class of ‘worker’ (who are entitled to some elements of the employment protection e.g. paid holidays, rest breaks and the national minimum wage)

There are a range of factors that are taken into account by the Employment Tribunals and HMRC when determining which category a worker falls within. It is not always a straightforward question and there can be many grey areas. For example, in one well known case, the Supreme Court and HMRC, applying the same test, came to different conclusions as to the employment status of workers (Autoclenz Ltd v Belcher and others [2011] IRLR 820 (SC)).

The main factors that are taken into account when deciding the issue are:

1. Personal Service and
2. Control

Personal Service & Mutuality of Obligation

In its most simple terms, an employee or worker personally serves their employer. The employer has an obligation to provide work to the employee and the employee is obliged to personally carry that work out. In contrast, someone who is self-employed and running their own business provides services to a client or customer and that self-employed consultant is normally free to send a substitute to carry out those services.

Control

This includes the power of deciding the task to be completed, the way in which it shall be done, the time it will take and the place where it shall be undertaken. A high level of control is a factor that points towards the relationship being one of employment. As most highly skilled employees will have considerable autonomy over how and when they carry out their duties, the cases have tended to focus on the extent to which the individual is controlled during their engagement. As a result the extent to which the worker is subject to company processes such as appraisals and disciplinary processes will be important.

Other Factors

In a self-employed / freelance situation, there must be no obligation on the freelance to undertake the work and, for the company, no obligation to provide any work. The less interdependent, the less likely it is that an Employment Tribunal will find it to be an employer-employee relationship. Organisations should also keep in mind other considerations such as length of contract and benefits offered. The longer (and more exclusive) the contract and the more integrated into the company the individual is, the greater the likelihood of a tribunal finding them to be an employee. In any event, it will also be easier for a freelancer to argue that there was a mutuality of obligation when a contract (particularly an exclusive one) spans several years. The extent to which there is a financial risk on the worker is also a relevant factor and so while a self-employed contractor will make profit (or not) depending on how they have priced the work and undertaken it, an employee is usually entitled to a set rate of pay.

The consequences of getting this wrong can be substantial. An organisation can face claims from self-employed consultants contending that they are due holiday pay, national minimum wage or if engagement has lasted more than two years, claims for unfair dismissal or redundancy. The distinction is also important from a tax perspective as an organisation is required to pay PAYE income tax and national insurance in respect to all employment income. If a self-employed consultant is in fact an employee, HMRC will look to the hiring organisation rather than the self-employed consultant for back tax and the payment of penalties.

Intellectual Property

Another important factor is in relation to who owns the intellectual property created. As a general rule an employer will own the intellectual property created by an employee during the course of their employment (and it’s always important to have properly scoped Employment Contracts to ensure there are no arguments about what intellectual property was created “in the course of their duties”). On the other hand a freelancer as a self-employed consultant will (unless there are contractual agreements providing otherwise) own the intellectual property of their work. So for example, if an arts organisation employs an in-house photographer then the copyright in the photographs taken as part of the photographer’s job will belong to the employer. This will not be the case for a freelance photographer. Organisations that engage freelance consultants would be well advised to consider whether they will need the freelancer to assign the intellectual property to them, or whether a licence will suffice.

Government Support

The nature of support currently available from the government as a result of the Covid-19 Pandemic will also depend on worker status. Broadly speaking and so long as certain conditions are met those workers who are paid through the real time payroll (being both employees and workers) may be able to furloughed with the employer/engager reclaiming 80 % of the workers’ pay up to a maximum of £2,500 per month. However that support is not available to the self-employed who instead are required to apply though a similar scheme for a grant.

Conclusion

When engaging self-employed consultants it is important to weigh up these factors so that organisations can be satisfied that the engagement is genuinely one of a self-employed nature and therefore minimise the risk of that arrangement later being classified as one of employment or the intermediary category of worker. It is important to document the arrangement in a properly drafted Consultancy Agreement. Nonetheless, bear in mind that the contract by itself will not determine the status and if a dispute arises, an Employment Tribunal will look at the actual circumstances of the relationship to determine the individual’s employment status.

Developments on the Horizon

Uber appealed the finding that its drivers are workers to the Supreme Court. This is due to be held in July 2020 and may provide more clarity on the test to be applied. Further there are a number of government reviews ongoing into modern working practices which may lead to new rules and legislation in this fast moving area.

We’re here to help

Anderson Strathern has a team of specialists, who handle all areas of employment law for both employers and employees. Our lawyers are alert to the evolving business needs through the current Covid-19 pandemic.

A version of this article was included in The Scotsman, which you can view here.

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