Distinction between employees and self-employed

The question pertaining to the distinction between employees and self-employed is important in employment law. It is important to know whether a person is an employee or self-employed, for the purposes of determining their entitlements such as redundancy pay, notice period, health and safety issues, liability issues, tax reasons and so on. It has been difficult in practice to distinguish between employees and self-employed as the question of employment status is generally a question of fact rather than law. To determine employment status the courts have developed over the years a number of tests to determine employment status together with the circumstances of the case. The four common test developed is the control test; which was introduced in the 19th century known as the ‘master servant ‘ look at how much control the employer possesses over the employee as seen in Narich Pty Ltd v Payroll Tax commission 1984 ICR 286. The integration or multiple test which is also from the 19th century enquires if the individual is integrated into the company unlike the control test that measures the control the employer has over to the employee. The mixed multiply or economic reality test, this asses all the factors and the relationship between both parties basically how all the work was done. The mutuality of obligation test where there must be an obligation on the employer to provide work and on the employee to accept it as seen in Montgomery v Johnson Underwood Ltd 2001 EWCA CIV 318.

Employee defined in section 230(1) of the Employment Rights Act 1996 “ as an individual who has entered into or works under ( or, where the employment has ceased, worked under ) a contract of employment; definition of a worker is in Section 296 of Trade Union and Labour Relations Act 1992, and states that “a worker is a person who works, or seeks to work under a contract of employment, or works under anybody whereby he or she to undergo work personally, for a client in a professional way”. There are other legislation which defines workers such the Discrimination Acts, Working Time Regulation 1998 and the National Minimum Wage Act 1998 which also include self-employed. Employees also enjoy right like Unfair Dismissal and self-employed workers enjoy Wrongful Dismissal. For the courts to be able to conclude if a worker is an employee in a contract of service, three conditions have to be fulfilled:

  • There has to be sufficient control between both parties,

  • Mutuality of obligation and

  • A degree of service from the employee to the employer.

However, when questions' regarding the employment status of an individual, decision is mainly based on facts and not law as stated in Lee v Chung 1990 ICR 209 PC by Lord Griffiths. This approach applied in Ready Mixed Concrete Ltd v Ministry of Pensions and National Insurance 1968 2QB 497 where the lorry drivers were seen to be self-employed rather than being employees because they could work when they chose. They also had the opportunity to hire people in their own discretion to work if they personally could not.

The control test was introduced as the master servant relationship where the only determining factor was the degree of control the employer had over the employee. It was established by the courts the degree of which the employer has, whether he could control not only what was done but also the manner in which it was done. As stated in the case of Yewens v Noakes 1880 6 QBD 530 by Lord Justice Bramwell, the servant is subject to the orders of his master to the manner in which shall do his work. However, it was derived that these individuals who are victims to very close monitoring and invigilation are rated as employees. The control test hence faced criticism when skilled employees could not be seen to fall into the direct control of the employer such as pilots, surgeons, etc doing their work programme. For this case to support this is that of Hitchcock v Post Office 1980 ICR 100 were the claimant was managing a sub-post office which was attached to his own shop. The claimant was under a certain amount of control on the management of the post office as the employer was in control of just the financial, security etc of the post office. It was held that the claimant did not have enough control over him by the defendant and was seen to be self-employed, the test is still important in considering the employment status of a worker. It control test proved to be inadequate and was replaced by the integration test.

The second test used by the court was the integration also know as the organizational test. In this test the courts seek if the work done by the individual is an integral part of the organisation or business. However, under a contract for service the individual's job, is done for the organisation, is not integrated into the business but is only an accessory to it. This was seen in Stevenson, Jordan and Harrison Ltd v Macdonald and Evans 1952 1 TLR 101. The integration test was seen as a straight forward test, which could be well distinguished from the control test where it measured just control as seen in the case of Whittaker v Ministry of Pensions and National Insurance 1967 1 QB 156, where the artiste's job was seen to be an integral part of the circus business and was seen to be an employee. Examples of employees that fall under this categories are surgeons, pilots etc whose work is an integral part of the business. However, this test was limited in use as in asking whether individual is an integral part of a business. This was confusing as to integration into a business and when the boundary of the business is unclear as in the case of agency labour.

As time progressed the courts moved from using one determining factor to distinguish the employment status of an employee to a more flexible test as the multiple test. The courts will look at all the factors in the employment relationship. Specifically the courts seek for which terms imply that an employment relationship exists. The multiple test derived from the case of Ready Mixed Concrete (South East) Ltd v Ministry of Pensions and National Insurance 1968 by Justice McKenna. RMC employed several lorry drivers, and the company dismissed the drivers and allowed them to purchase their Lorries. However, the contract between the defendant and the claimant applied that they were independent contractors. As the courts looked at the terms of the contract such as when the claimant was wearing the defendants' uniforms plus more and could tell the claimant when and where to make deliveries and most importantly, the claimant could find someone else to drive the lorry when he couldn't. Then the courts decided that the claimants were self-employed because employees are not usually asked to find a replacement for their post if they cannot work. Nevertheless, Mackenna J outlined three requirements for a contract of service to exist;

  • The employer agrees to provide work in return for remuneration

  • The employee agrees to control of the employer on him or her and

  • The other terms of the contract are consistent with it being one of service.

As there is not a determining factor the courts will have to look at many things like the payment of wages, tax, holiday pay and so on. The multiple test was also applied in Market Investigations Ltd v Minister of Social Security 1969 2QB where it was stated by Judge Cooke that “if the person who has affianced him or herself these services, performing them as an individual in business on his or her own account?”. As control is also not a determining factor alone as other factors are important like the degree of financial risk, financial responsibility for the business, management responsibilities. The multiple test has a clear advantage of being more flexible than the organisational and control test. The multiple test is also opened to changes as the society also changes. It however has a problem of dealing with workers who do not fit into usual category of employment like casual and seasonal workers.

In mutuality of obligation test this basically looks at the relationship between the employer and the employee. For there to be mutuality the employer has the obligation to provide work and the employee to provide services in return for remuneration. When there is an absence of mutuality of obligation the claimant is concluded to be self-employed person in relation to payment of income tax and national insurance contribution as seen in the case of Parade Park Hotel v Comrs of HM Revenue and Customs 2007 S.T.C (S.C.D.) 430 where R May had no obligation to carry out work for Parade Park Hotel, and Parade Park Hotel under no obligation to offer work to Mr May. As mutuality of obligation was part of the irreducible minimum of a contract of employment it followed that the relationship between Parade Park Hotel and Mr May could not amount to a contract of employment. There also has to be an irreducible amount of personal service to claim self-employed persons.

In conclusion, when considering the question regarding the employment status of an individual all factors must be considered by employing the various test developed by the court, the degree of formalities in the relationship between the employee and the self-employed. To determine the employment status of the worker the courts created a series of tests which aided them in determining the status. The control test as used by the courts is important in determining the control in employment of a worker, the integration test which looks at how important the worker is in the business to stand out. The control and the integration test was merged together to form the multiple test where all the factors are considered into making the decision of who an employee is. Mutuality of obligation, for the employer to provide work and the employee to accept it. The main reason for the distinction is to ascertain who is entitled to employment and statutory rights.