As a start-up, Ergo Law has been pleased to meet other businesses in the early stages of their journey. We recently spent time on the Start Up Britain bus tour advising fellow entrepreneurs and meeting others involved in initiatives to support and grow SMEs in the UK.
It's all about employment status
A common question that we have encountered from new business owners surrounds employment status. This is the question of whether people working for that business are self-employed contractors or employees and how to ensure that contracts and arrangements are appropriate in either circumstance.
Self-employed or employee- why does it matter?
Determining the employment status of an individual who is engaged by a business is important for a number of reasons in addition to the tax treatment of remuneration. Contracts of employment have several implied terms which will be incorporated by the law, regardless of whether or not they are in the written contract but these implied terms will not be incorporated into a contract which is one of self-employment.
Protection from unfair dismissal is only for employees.
In addition, employees (as opposed to the self-employed) have greater protection under the law for example protection from unfair dismissal and the right to transfer in the event of a business sale under TUPE. Some individuals may find that they occupy the status of ‘worker’ which is distinct from that of employee and self-employed and carries some protection under law though not all of the protection afforded to employees.
Employment law and the contract
Although parties may agree that a self-employed arrangement suits them both, on occasion the law may disagree. It can be problematic to find out that an arrangement which on paper says ‘self-employed’ is viewed by HMRC or by a disgruntled former member of staff to be genuinely one of employment.
How do employment tribunals decide status?
When determining employment status an employment tribunal and HMRC will look at all aspects of the relationship and may look beyond what is written on paper. There are several factors which would point towards an individual having the status of employee and these will all be taken into account.
Mutuality of obligation
The level of mutuality of obligation is one such factor- in other words, is the ‘employee’ obliged to perform the work which the ‘employer’ is obliged to provide?
Factors distinguishing self-employed from employees
The degree of control held over the work, how it is performed and when the duties are fulfilled would also be considered- the greater the level of control the more likely a relationship of employment exists. The level of financial risk assumed by the individual and the mode of payment are also relevant.
What do employment law cases say?
The nature of the case law is that there is no one determinative factor (out of a long list) to establish simply whether an individual is an employee or not. A detailed consideration of all the factors and the practical reality of the arrangement is critical. It is important for individuals to be clear on their employment status in order to determine their rights and it is crucial that businesses get it correct from the beginning. That way, contracts regulating the relationship between the individual and the business can be accurate and appropriate and everyone knows where they stand.
How do I make sure my contracts are correct?
If you are a business owner wondering whether you’ve got employment status right, we will assess your situation and provide you with guidance. We can also draft your contracts to reflect the practicalities of what you do and provide you with reassurance on your rights and obligations.