a. Laws and Guiding Principles
It is essential that the parties clearly define their relationship in writing to establish the individual’s status – whether that be the status of an employee, worker or self-employed contractor/consultant. The written terms will usually determine the true legal relation-ship between the parties. Nevertheless, if it is alleged that the written terms do not reflect the reality of the relationship, the tribunals will investigate allegations that the written terms are not representative of the actual terms agreed, and will determine the actual nature of the relationship between the parties.
The tribunal will examine evidence of how the parties conducted themselves and what their expectations of each other were. The tribunal will ignore express contractual terms, which are inconsistent with the reality of the relationship between the parties. Further-more, it does not matter that the parties did not intend to misrepresent the true nature of their relationship if it transpires that certain contractual terms were a sham. For exam-ple, in the leading case of Autoclenz v Belcher and others  UKSC 41, workers who provided car valeting services under contract for a single client all signed agreements which expressly said they could provide substitutes and could refuse work. On the face of it, these clauses indicated self-employment, but evidence showed that these clau-ses were never invoked. The tribunal examined the evidence and found that the actual legal obligations of the parties should be determined from all the evidence including the parties’ conduct and any written terms, and found that the individuals were in fact employees.
In practice, as mentioned above, an individual’s employment status can influence their tax status. However, as self-employment comes with considerable tax benefits to the individual, an individual’s decision as to whether to bring a claim for employment status in an employment tribunal should be considered carefully in light of this risk.
b. The Legal Consequences of a Re-Characterisation
As mentioned above, companies are only obliged to provide the majority of statutory protections and benefits to those who they employ as employees and workers. However, where an individual is engaged as an independent contractor, but in reality the true legal relationship is more akin to employment, the individual will actually be entitled to all the statutory protections and benefits that normally accrue to an employee or worker (as appropriate). In some cases, the employee will seek to backdate their claim to cover the period over which the employment relationship is deemed to have existed.
A particularly thorny issue in these cases concerns accrued holidays. An independent contractor successfully claiming worker status will be entitled to paid holidays going forward and may be entitled to take some accrued holiday. Workers are entitled to a mi-nimum of 5.6 weeks’ paid holiday per year (pro-rated for part time workers). As a general rule, untaken holiday cannot be carried forward to the next holiday year, except where the worker is “unable or unwilling” to take holiday because they are on sick leave, and, as
a consequence, do not exercise their right to annual leave. The recent case of The Sash Window Workshop (1) Dollar (2) v King  UKEAT 0057_14_0112 considered this
point in relation to a worker who had been wrongly classified as an independent contrac-tor. The Employment Appeal Tribunal (EAT) decided that if a worker is prevented from taking annual leave during a leave year for any reason beyond their control, i.e. not just because of long-term sick leave, then arguably that annual leave can be carried forward to the next leave year and is not lost. This point was referred to the Court of Justice of the European Union (ECJ) in April 2016 and is currently awaiting a hearing date.
Where the worker’s contract or employment has ended and there is accrued holiday outstanding, the worker may be able to make a claim under the Working Time Regula-tions 1998 for a payment in lieu of accrued unused holiday for the holiday year in which the contract ends. The worker may also be entitled to payment for accrued leave carried over from earlier leave years, although for workers who had been wrongly classified as independent contractors the position is not entirely clear and is awaiting consideration by the ECJ in Sash Windows (see above). A claim must be brought within three months of termination of the worker’s contract or employment, and there is a two year limit on the amount of back pay that can be claimed in most cases.
If an individual is deemed by HMRC (or a tax tribunal) to be an employee for tax purpo-ses, it will have the following consequences –
- the individual’s fees will be subject to income tax as “earnings”;
- the fees will be subject to class 1 National Insurance Contributions (NICs):
- primary class 1 NICs will be due from the individual;
- secondary class 1 NICs will be due from the employer;
- the employer must deduct tax and NICs at source from the individual’s earnings under the system known as Pay As You Earn (PAYE).
c. Judicial Remedies Available to Persons Seeking ‘Employee’ Status
The remedy available to persons seeking employee status will depend on the rights and benefits sought. Most commonly, a so-called independent contractor might seek employment status when faced with termination of their contract by their “client”. A claim for unfair dismissal and/or a redundancy payment in the employment tribunal will be the most usual form of claim. Another common type of claim in the employment tribunal is for holiday pay and national minimum wage. Given the rights available to both employe-es and workers, the tribunals have seen claims by large groups of casual workers such as so-called zero hours workers, and other individuals such as drivers and couriers working in the Gig economy, who have been characterised as independent contractors but who consider themselves “workers” (see below).
d. Legal or Administrative Penalties or Damages for the Employers in the Event of Re-Cha-racterisation
Where the individual’s contract has been terminated and the tribunal determines them to be an employee, the usual remedy will be an award of compensation against the employer in the form of a basic award for unfair dismissal or a statutory redundancy pay-ment. Both these awards are calculated in the same way and are dependent on weekly pay, age and length of service (maximum £14,370 from 6 April 2016). For unfair dismissal claims, there is also commonly a compensatory award (maximum £78,962 from 6 April 2016). Less common remedies for unfair dismissal include reinstatement or re-engagement, and, in very limited circumstances, an additional award. Where the contract has been re-characterised to “worker status“, the individual may have a range of claims such as: accrued holidays or, if the worker’s contract is terminated, accrued holiday pay (see 3.2 above), back pay where the worker has not received National Minimum Wage, and compensation for breach of working time rules (such as failure to give appropriate rest breaks).
The Pensions Regulator is charged with ensuring employers comply with legislation re-quiring employers to automatically enrol “job holders” into pension schemes. The defi-nition of jobholder in the pensions legislation is the same as the definition of “worker” used in the employment legislation such as the Employment Rights Act 1996 (see para-graph 2.1 above). Where a self-employed contractor is re-characterised as a worker or a job holder, it could find itself facing substantial back payments of pensions contributions, including interest payments.
If HMRC or a tax tribunal deems an individual to be an employee for tax purpose and there is any underpayment of tax, HMRC will pursue the employer in the first instance for under-deducted tax, employer’s NICs and also any penalties owing and interest accrued on the sums.
The employer may seek a direction from HMRC that:
- limits the employer’s liability to the amount outstanding if some or all of the tax in question has been paid by the employee;
- the employee should pay the unpaid tax. This will only succeed if HMRC is satisfied that:
- the employer took reasonable care and the failure to deduct was made in good faith, or
- the employee knew that the employer “willfully failed” to deduct tax.
In more limited circumstances, the unpaid employer’s NICs can be recovered directly from the employee. This will apply where the failure to deduct NICs is due to an act or default of the employee and not to any negligence on the part of the employer or the employee knew that the employer “willfully failed” to deduct employee NICs and has not recovered them from the employee. In practice, this requirement is rarely met so recovery of NICs is almost always from the employer.