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Consultants, workers and employees

Most growing businesses need other people to carry out work for them at some point. It is important that you clarify the nature of relationships you have with these workers: should they be classified as 'employees', 'workers' or 'consultants'? Understanding the difference between these statuses is crucial for meeting your employment law and tax obligations.
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The traditional and most formal working relationship is that of employer and employee. Employees generally work under an Employment contract and are afforded the full protection of employment law rights, such as:

As well as fulfilling their employment law obligations, employers also need to handle the tax arrangements for their employees through PAYE.

Although workers do not work under a contract of employment, they do generally work under some type of contract or fixed working arrangement (eg a Zero hours contract). They need to be available to work for the duration of the contract and generally need to do the work themselves (as opposed to sub-contracting it). Workers are entitled to many of the core employment law rights, such as minimum wage and holiday pay, but are usually not entitled to:

  • unfair dismissal protection

  • right to request flexible working

  • statutory redundancy pay

  • minimum notice periods, and

  • time off for emergencies

People who are self-employed are often referred to as consultants, contractors or freelancers. These terms are generally interchangeable, although a consultant is ostensibly selling their advice as opposed to a contractor who will normally carry out the actual (often physical) work. Self-employed workers are generally not covered by employment law and are not paid through PAYE; instead they are sole traders or run their own business and they need to arrange their own tax affairs.

For more information, read Using consultants.

Ensuring that the correct documentation is used to formalise a contractual relationship - be that an employment contract or a different contract which explicitly specifies the status of the worker - can go some way towards clarifying their status. However, a court may also take into account other factors such as:

  • whether invoices are submitted or if there is a regular payment

  • is the worker under direct supervision and do they need to complete work in a given place during set times

  • is the worker allowed to work for other companies

  • is the worker obliged to accept work

  • are materials, equipment and tools supplied by the worker or the business, and

  • is the worker paid for a minimum number of hours spent working?

It’s vital that a business understands the status of any of its workers, to ensure that they are aware of any employment law obligations relating to these workers. Furthermore, if they are not paying an employee through PAYE because they mistakenly believe them to be self-employed, this can lead to substantial penalties (eg see IR35 below).

For more information about determining the status of a worker, see the GOV.UK website.

IR35, also known as ‘intermediaries legislation’, is a set of tax rules which essentially aims to prevent workers who are deemed to be ‘employees’ from being classified as ‘self-employed’ for purposes of tax avoidance. Falling foul of the IR35 rules can lead to significant penalties for both the business and the worker.

For more information, read IR35 and the GOV.UK website.

In 2016 an Employment Tribunal ruled that Uber drivers should be classed as ‘workers’ as opposed to ‘self-employed contractors’. This was upheld on appeal by the UK Supreme Court in February 2021. The drivers were held to be workers as:

  • Uber set the fares, meaning that they dictated how much drivers could earn
  • the contract terms were set by Uber, with the drivers having no say
  • ride requests were constrained by Uber, meaning that Uber could penalise drivers for rejecting rides
  • Uber monitored drivers' services through a rating system, with the capacity to terminate a driver if their service did not improve after repeated warnings

Being classes as ‘workers’ entitles the drivers to many of the core employment law rights, such as minimum wage and holiday pay. For more information, see the section above entitled ‘What is a worker?’.

Although this particular decision was dependent on the specific facts of the case (especially with Uber providing its services through an app), it has the potential to affect many of the so-called ‘gig economy’ workers who are currently classed as self-employed. Other businesses which use a sharing economy model or who use self-employed drivers will need to reassess their relationship with their workforce.

Another case, Pimlico Plumbers v Smith, ruled in favour of Smith (a plumber providing services for Pimlico Plumbers). He was classed as a 'worker' based on his lack of control over his work (eg he was contractually obliged to do a minimum number of hours per week and could only delegate work to other Pimlico Plumber workers). He wore a uniform, drove a company van and therefore provided personal services to Pimlico Plumbers.

Another case involving a group of delivery couriers at Hermes, the delivery company, won their case at the Employment Tribunal to be classed as workers rather than self-employed contractors. Similar to the Pimlico Plumbers case, the Hermes delivery couriers are now entitled to benefits such as minimum wage and holiday pay. The couriers were not deemed to be self-employed because they are obliged to perform services for Hermes rather than their own business interests. There is a dependent working relationship such that they are not truly self-employed.

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