What is the difference between employee, worker, and self-employed?

Those two terms have no meaning in law and neither do the commonly used terms of “temp”, “freelancer”, “contractor”, “casual” “zero hours” or “bank staff”.  But there are terms that do, such as “employee”, “worker”, “fixed term” “agency worker” and “self-employed”, and any person, business or organisation that pays someone to do something, must understand the differences.

If you don’t understand the make up of your workforce, and you classify people into the wrong status, it can be extremely costly, as Uber and others have found out. Uber incorrectly classified their drivers as “self-employed”, whereas once challenged, the courts classified them as “workers”.

So, what’s the difference? Workers have rights that self-employed businesspeople do not, such as minimum wage, pension, and paid holiday. Because Uber classified the workforce incorrectly from day one, they were liable for holiday pay, pension, and any minimum wage shortfall, going back to when they first engaged each driver.

So how do you avoid such a disaster?

Firstly, you need to understand the true status of your workforce, not necessarily what was convenient for one or both parties at the beginning of the relationship. Only the courts can decide on status, it’s not something you can impose or agree between yourselves.

Let’s go through them in turn:-

“Employees” are the most common. They work under a contract of employment and must be provided with a statement of terms (often called an employment contract), in writing, including some mandatory information, by the first day of employment at the latest. However, the absence of the written statement, although unlawful, does not mean that a contract of employment does not exist. A contract is formed when an offer of employment is made, even if verbal, and it is accepted.

Also, a statement of terms that has become out of date may not be worth the paper it is written on, if the reality has changed. Once offer and acceptance has taken place to make a contract, the law then affirms and fills in the gaps by looking at the reality of the working relationship.

An employment relationship requires that the employee does the work personally and that there is “mutuality of obligation”. This means an obligation on the employer to provide work and an obligation on the employee to do the work offered, within the boundaries of their employment contract. In return the employee is paid and has many statutory rights such as paid holiday, pension contributions, statutory sick pay, family friendly pay and leave, and after 2 years’ service the right to NOT be unfairly dismissed.

Employees can either be permanent or “fixed term”, sometimes called “temps”, but not to be confused with “agency temps” who you “rent” from an agency who employs them and pays their wages. Fixed-term employees are employed directly under an employment contract. They will have the same statutory rights as permanent employees, proportionate to their length of contract, and can make a claim under the Fixed Term Worker Regulations if they are treated less favourably than a permanent employee without an objective reason. For example, if you restructure your workforce, you cannot make fixed-term workers redundant ahead of permanent employees, simply because you would rather retain the permanent staff. You would need to select the best candidate using an objective set of criteria. From a business perspective this makes perfect sense to retain the best person.

“Workers”, who are sometimes called “casual workers” or “zero hours workers”, neither term having any legal standing, must also carry out work personally. However, there is no “mutuality of obligation” between a “worker” and the organisation engaging them. That means there is no obligation to provide work, and no obligation to accept any work offered. What’s the point, you may ask? “Workers” are often kept on a list in case the organisation needs them, hence often known as “casual” or “bank” workers. It means that the organisation can use workers to deal with peaks in activity, without any commitment to engage the individuals when the work is not there.

These arrangements, sometimes called Zero Hours “contracts”, have been given bad press because they give no security to the worker. As a result, a law was passed banning “exclusivity” clauses that forbid the worker to work for other organisations. Workers can now insist on being able to work for multiple organisations.

However, I think the calls to ban Zero Hours arrangements, are unnecessary, so long as those entering into the arrangements do so with their eyes open. Some people at certain points in their life value the option to take some work when they choose, without commitment.

Again, you are required to provide a “worker” with a written agreement before they start their first assignment, but this is not an employment contract guaranteeing work. It is a framework agreement to state what the terms will be if any work is offered.

You can also have a “Zero Hours” employment contract. It is commonly used in the hospitality sector where although there is an intention to offer shifts, the employer cannot guarantee what hours, if any, can be offered in a particular period. However, when the shifts are offered, if they are within the bounds of the employment contract, they must be accepted and worked, if the employee is fit to do so. Because it is an employment contract there is an expectation that some shifts will be offered.

“Self-employed” individuals are those who are in business and provide a service to another business, under a “contract for services”. They may also provide services to individual customers.  Confusion can occur, particularly where the self-employed service provider is one individual, and they spend all or most of their time working for a single client. This can be either as a sole trader, or by setting themselves up as a limited company, usually for tax reasons.

If a self-employed person is engaged in work and managed in the same way as an employee, then the law may well see this as “disguised employment”. This could have serious consequences for both the “self-employed” person and the employer in terms of unpaid tax, national insurance, pension contributions, holiday pay etc. It could also result in the “self-employed” person claiming employee status, particularly if they have been working for a single “client” / employer for over 2 years, which is not uncommon in the IT sector. The result then could be an unfair dismissal claim and the right to a redundancy payment if the individual is simply cut adrift when there is no more work for them.

Employment status is a complex minefield that many high-profile employers have stepped into, and you should not be embarrassed if you need to go back and read the article again!

There are some common factors that decide status, such as mutuality of obligation, control of the worker, and whether you have to carry out work personally. We have drawn up a checklist to help unravel the correct status, and there is also a tool on the government website that will give an indication of status for tax purposes.

If you have any doubts about the correct status of your staff or would like some help to audit your contractual arrangements, then please get in touch.