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Title: Defining the employee and the genuinely self- employed: Are we ever going to get these definitions right?
Industrial Law Society Annual Conference, 2002, OxfordBACKGROUND PAPER FOR WORKSHOP
Introduction
The question of employment status has been one of the "running sores" of employment law and has taxed lawyers and law teachers over many decades. This paper aims to provide an overview and analysis of the current legal mechanisms for differentiating the employee from the self-employed. It sets the issues into various contexts, including the EU, and examines the key features of the government’s current consultation on employment status and its possible contribution (DTI, 2002).Although, clearly, the question of employment status impacts on a range of matters from tax and social security through to health and safety the main focus will be on employment protective rights and the ability or otherwise of individuals to claim them.
Why is this an important topic?
It appears that, currently, within the UK around 13% of the workforce are self employed. When at work they have access to only certain employment rights (the wider social rights concerned with equal opportunities and health and safety and if "workers" to rights, in particular, relating to working time, minimum wages and security of earnings) but are, broadly, excluded from social security protections including the Job Seekers Allowance and Statutory Sick Pay. They have limited access to state pensions, a matter which is especially critical given the prominence of current debates on pensions and the fact that very few self-employed people make private provision for their retirement.
These are some of the "golden oldie" implications and possible problems of being categorised as self employed. Where the individual is genuinely an entrepreneur and, as a self employed person, making appropriate financial and other provisions for themselves there are likely to be few problems. However, where, as appears from recent research (DTI,1999) up to 30% of the workforce may be, at best, ambiguously categorised as, say, self employed, and at worst, wrongly categorised, problems are major. There is also research clearly indicating that advisors of all types(CABx, .Advice Centres, lawyers, accountant etc find the topic difficult to provide accurate information on (Leighton and Rayner, l995)
These difficulties are compounded by the changes in the labour market towards more frequent job change, more varied work patterns, for example, to working at home or for an agency and generally towards the so-called portfolio career. This assumes change over a working life from, say, standard employee status to flexible working and to, perhaps, freelance work, possibly interspersed by periods of unemployment or training. The evidence for major shifts towards portfolio working is as yet limited but the expectation must be, with global labour markets and increasingly sophisticated technology it will grow and impact on a far wider range of occupations than the traditional ones of IT, journalism, design, marketing etc.
The need for regulatory systems to facilitate these important likely changes is beyond the scope of this paper. Nonetheless, the legal and practical implications of employment status for individuals across virtually all developed economies are many and varied .
Why else is employment status important?
All developed economies consider it important to differentiate the employee/standard worker from the self employed (and other groups such as office holders, members of certain professional bodies). All have struggled to find legal tests to efficiently and appropriately differentiate them. This process is often made more difficult because the reasons for the need to differentiate are not always clear or articulated. This is a relevant issue because it can be argued (but not necessarily proved) one of the major drivers of the legal agenda in devising legal tests is the spectre of the "hidden economy" but is also what is sometimes referred to as phoney or 'psuedo' self- employment. This is a complex matter because these ideas combine fears of people asserting self employed status so as to avoid tax liability etc with concerns that employers contract on a self- employed basis so as to themselves avoid employment law and social security and other obligations associated with employing employees.
The recognition of the important role of flexible employment practices, also considered vital by the EU to promote competitiveness, is an important backdrop to current issues. Indeed, the government’s consultation on employment status places considerable emphasis on these matters. It asks, "whether the current (legal) framework encourages participation in the labour market, especially in flexible forms of work and whether it promotes a wide range and diversity of employment opportunities" The government states that it is," working towards full employment and high productivity and high performance workplaces" (DTI,2002.p 5) It appears that the long running debate on flexibility, the availability and costs of protective rights and economic efficiency continues. The legal tests for determining employment status are clearly relevant to this debate.
At the same time as there is a perceived need to ensure labour markets and employing organisations remain flexible another policy strand needs to be commented on. This is also taken from the EU and concerns the Entrepreneurism "pillar" of the Employment Guidelines. These Guidelines have been operative in the EU since 1998 and require member states in their National Actions Plans to address any obstacles to the growth in genuine self-employment in their response to the Guidelines. (Leighton,2000) Entrepreneurism is seen as critical to successful economies due to the fact that most new jobs are created by small businesses. This is another imperative for finding an efficient legal strategy on employment status.
Why now?
Although, as will be seen later, there has been some recent and contentious case law, there are some parallel legal developments that need to be kept in mind when considering employment status. Given the type of work and type of workers that have traditionally posed some of the major problems for the legal tests (casuals, agency temps. and, say, home-workers), the key current parallel legal issues are:
The Fixed Term Employees (No Less Favourable Treatment) Regulations, 2002
The Part-time Workers (No Less Favourable Treatment) Regulations,2000
The draft directive on Temporary Agency Work,2002 and
Consultation
All of these measures aim to ensure basic protections and non-discrimination for these types of atypical/flexible workers. The different coverage of the UK measures (employees or workers) as between the part-time and fixed term regulations is worthy of note. The reasons for this different treatment may partially reflect the UK government’s intention, signalled by S.23, Employment Act 1999 to examine the scope of employment protections and the need to await the outcome of the current consultation. However, it should be noted that the above UK regulations to implement directives are concerned with contractual rights rather than statutory rights.
What about the Workers?
Until the last few years we only had two major employment categories-employee or self-employed, the latter often referred to as independent contractors. "Worker" can be seen as a European construct that extended many European employment rights beyond the employee. However, the worker had surfaced in the UK in the "home grown" Wages Act, l986 that provided protections for earnings for workers as well as employees. Other legislation, notably the Statutory Minimum Wage, l997 and the Working Time Regulations, l998, apply to workers. Indeed, the right to paid holidays has been successfully claimed by various groups of atypical and (for other legal purposes) self- employed people. A "worker" includes all employees but also some self-employed people, providing they are not genuine entrepreneurs. But what, precisely, is a "worker?" Until very recently we had little guidance on what differentiated the "real" self-employed from the self-employed who is also a worker. (See later). This case law needs careful analysis.
The "rise" of the worker is very important as some urge that a simple way to extend protections to deserving groups would be to extend certain, if not all, key statutory rights to "workers". Leaving aside arguments about cost, "red tape" and the like on the part of employers this would put extra pressure on tribunals and courts to develop workable and appropriate case law on how you decide who is a worker. This may prove just as difficult as differentiating the employee from the self-employed! It would mean, though, fewer hard fought cases to establish employee status.
What is the scale of the problem?
It was stated earlier that it is thought that around 13% of the workforce is self-employed. However, official statistics rely on self-definition by respondents. If individuals are replying they will tend to report on the basis of, first, what they have been told by their employer and, second, what they feel to be their status.
The DTI major study (l999) concluded that although 13% of their respondents, in line with Labour Force Surveys, reported themselves o be self-employed, the researchers concluded that up to 30% had an employment status that was unclear or ambiguous. Sometimes, it was people who recorded themselves as employees (often fixed term, casual or agency workers) who might not be so classified by a court; sometimes people believing themselves to be self-employed being agents, consultants and the like would likely be classified as employees by a court.
This recent research is one of the most important empirical studies of employment status (For others see, Leighton, 1983, 1984,1998; Leighton and Rayner, 1995,Cave, l997). It illustrates just how important are the perceptions of individuals on the issue of employment status. These perceptions are often conditioned by matters which to a court are not very important, such as whether their earning are below the LEL (if they are they tend to record themselves as self employed) and the length of an employment relationship, even if it is intermittent. A casual/ standby worker for an employing organisation may still refer to themselves as employees and the organisation, "my employer" despite being told otherwise. Considerable importance might well be attached to the provision of a uniform or a badge and access to the canteen or car park.
The importance of perception and psychological factors are well recognised in management literature, where the psychological contract is seen as important in cementing as well as elaborating the mutual expectations of the parties to an employment contract. It is axiomatic that many of the so-called casual, zero-hours and stand-by workers appear to have high levels of loyalty and commitment to an employer (indeed, the zero-hours and similar patterns are only effective for employers if there are high levels of loyalty) and long, overall periods of employment. These are the groups referred to in some publications as "economically dependent" workers and are the ones whom many commentators feel are the most hard done-by in the application of current legal tests. (Supiot Report,1998; European Foundation, 2002)
The imperatives for finding a better way to determine employment status, and qualification for key employment rights was summed up in the DTI Report, 1999, as follows.
"While some degree of uncertainty in the operation of the law is this area is probably unavoidable, a situation in which a substantial proportion of the workforce is unsure as to its legal position would give rise to concern", "there may be many individuals who have employment rights without being aware of them…" And, "some employers may avoid their obligations by a number of means, including exploiting their workers’ lack of awareness about their entitlements" (DTI, 1999, p 2)
The legal tests: How do they work?
In the light of the fact that there are some excellent contemporary accounts of both the main tests and case law, this section does not propose to deal with this in detail. Rather, it aims to provide a commentary on the law’s approach to its task and some of the practical implications.
Employment status is tested for a number of reasons. It appears that the different reasons can materially affect a court’s approach to the task. For example, an individual, considered self employed, may need to establish employee status to obtain compensation following an accident falling off a ladder; there may be a request from a casual or agency temp for a statement of terms of work or itemised pay statement; a homeworker who has worked for many years full time for a company though described as a "contractor" may seek parental or other statutory leave. From case law it seems far more difficult to achieve employee status when asserting "non-core" rights than when, say, injured or suffering some other major loss. In particular, the courts are sometimes willing here to set aside documents purporting to declare self- employed status.(Lane v Shire Roofing Ltd. (l995) IRLR 493)
The classic "tests" have evolved in a somewhat haphazard way for well over a hundred years. They have been applied to two, basic types of situation where there appears a possibly ambiguity in employment status.
The first is where an individual, from a range of occupations, including construction, IT, media work, driving and taxi work, insurance and other aspects of financial services works for one employer at any given time. The individual works, typically, regularly and full time but sometimes has a high level of autonomy. They are sometimes former employees whose employment status, for various reasons has been "changed" to one of, say, consultant, freelance or agent.
The second situation, and more problematic, is where the relationship is intermittent. Work might be seasonal, fluctuating or on an "as and when" basis. Over the last two decades these work patterns have become more prevalent, along with the growth in employment agency work. The case law around these work patterns has been the most controversial.
Some preliminary points
Before turning to the application of the tests to these two basic situations a few preliminary points are made.
First, there is the question of whether there are any underlying principles for the categorisation of people at work, especially regarding their access to or denial of statutory rights. Is it the case that the philosophy of entrepreneurism and risk tolerance has led law to see a conceptual difference between the risk averse employee compared with the self- employed person for whom normal commercial legal rules are best suited to regulate their employment as well as trading activities? Have these ideas been articulated in legislation or case law? Or, is the essential difference one of structural factors relating to the nature of employing organisations where questions of autonomy, discretion and power dictate whether an individual is deemed an employee or self-employed.
Indeed, is it possible to detect a coherent legal strategy that, for example, concentrates on relationships within organisations, or on the perceptions and understandings of the parties or on the documents used when decisions are made? Or, as in some other jurisdictions, is it the notion of subordination or dependency that characterises the employee?
In terms of statutory rights, is it possible to detect the rationale for some rights being available to most in the workforce so long as they are "workers". Health and safety protections, anti-discrimination law and some of the more recent rights derived from European directives are examples. What links these rights? Other rights, notably job security rights and the major maternity rights are only available to employees with a prescribed period of continuous employment. Why is this? It is very difficult to detect from legislation what the reasons are for a hierarchy of rights. Are the core rights to be earned and dependent on proven loyalty? Are non-employees-including casuals, homeworkers and agency temps feckless and undeserving of even very basic rights such as statements of terms of work and pay?
Second, is there a clear judicial policy on its own role? Should people be free to negotiate their own employment relationship, so long as there is no evidence of, say, duress or illegality or unfair practices? We know from recent case law from the House of Lords that decisions of ETs on the facts leading to a decision on employment status should not normally be interfered with providing the right legal test was applied (Carmichael v National Power, 2000 IRLR 43) but what of wider questions of whether courts should interfere when the "label" does not equate with the workplace reality. There have been just a few cases where this has been a key issue. (Young v Woods and West, l980 IRLR 201) and explicit written statements relating to employment status have been overridden, on policy as opposed to any technical legal ground. On the other hand, courts have not been pro-active in challenging oppressive or unfair employment contracts.
A third and related issue is an increasingly topical one. This concerns the role of written documentation more generally. Is there a coherent and consistent approach to contract documentation, especially where, again, the workplace realities appear at variance. Such an issue goes to the heart of the law of employment relationships, specifically the role of courts in regulating an essentially private contractual matter. There is considerable tension over this issue and differing judicial views prevail at different times. At present, with a few exceptions, judges are leaving it more and more to the parties to determine not only employment status but also the other elements of the relationship. The cases of Fuller v Haulage and Stevedoring Services (2001 IRLR 627) and White v Bristol Rugby Club (2002 IRLR ) are illustrative. In the first case, which involved a previous employee who moved to an "as and when " contract that clearly stated that he was not an employee, the document was sufficient to confirm self-employed status despite many contrary indicators from his pattern of working. It was also sufficient to displace any notion of a "mutuality of obligation" to provide and undertake work, again despite evidence of dependency and reliability.
In White, a case, which did not primarily concern an issue of employment status, a written contract that stated that it contained all the terms of the contract was held capable of excluding any evidence that would either expand or challenge the document. Both cases have brought some certainty to the law, in that written contracts do now appear, broadly capable of determining status.
Fourthly, it has to be observed that the legal tests themselves- control, integration, economic realities and mutuality of obligation, are complex. They examine employment relationships in a detailed rather than a conceptual way. Many complain of inconsistencies and of the "ebb and flow" of judicial preferences. In the l980s there seemed a greater willingness to give weight to the workplace realities; today, the presumed intentions of the parties and the documentation that expresses them appear to dominate.
Overall, there seems greater clarity in law, though it remains the case that predicting the outcome of the application of the tests can still be an uncertain art form, especially where there is not written contract. Legislation dealing with tax, including the Finance Act 2000 which, in effect, deducts PAYE from those probably correctly determined to be self- employed has confused the matter, possibly regarding how people perceive their own employment status. Where people have the same tax laibilities as employees they may well be surprised when a document adequate to determine employment status for employment law purposes is not seen as relevant by the tax authorities.
The legal tests
This brief overview focuses on the two "problematic" groups of workers-those who work regularly for an organisation, generally in a professional or skilled occupation, and those with more intermittent or uneven work patterns such as agency temps, casuals and zero hours workers. Office holders and the clergy, as examples of other problematic groups are not considered, though clearly they present important issues for employment law.
The control test emerged in the nineteenth century and has been summed up as asking whether an employer could tell an individual not only what to do but how to do it. If the employer could do this then employee status was the likely outcome. Today, the test still has a role and the concept of "control" has evolved so as to be less "hands on" and more to do with supervisory and disciplinery matters. It is not the sole test in case law, but can have a role to play when combined with other tests (Lane and Shire Roofing, 1995) The integration test emerged in the l950s as a response to the growing size of organisations and the sophistication of skills such that simple notions of "control" no longer appeared appropriate. The question of whether an individual was sufficiently integrated into an organisation and its managerial practices was an interesting one, in that it focused on the relationship between organisations and the people working for it. It would have probably fitted well with modern ideas of business organisational behaviour and HRM. It was probably too complex and hard to apply to be useful for the day to day work of tribunals and courts. They were probably more at ease with the more individualistic approach of employment contract law itself, an approach that infuses the other legal tests.
The economic reality test, used widely since the 1960s, has been the dominant test for the first problematic group of individuals and was the one consistent with those adopted by tax and social security inspectors. This test looks for economic dependency, perhaps best established by the fact that the employer is the only or overwhelming source of income for a particular individual. Where an individual, though currently working on a regular basis for one organisation they will not likely be seen as a dependent employee where, as a matter of fact, they have had or have other clients (Hall v Lorrimer,1994 IRLR 171). Ideas of risk, business opportunity and the ability to exploit skills that characterise the genuinely self-employed underpin this test. When the test is applied in a manner that avoids undue attention to minutae it is a very useful test.
If the economic reality test has proved quite robust in its application to many workplace situations it has not been helpful when applied to the various precarious or intermittent categories of work. Many of the casual, zero-hours and similar workers do not, in reality exhibit any of the indicators of either entrepreneurism or economic independence. They may work part-time, or have gaps in their periods of employment but very often a particular company or public sector employer is their only source of income. This is especially true for "bank" nurse and teachers and others supplied to the education sector. Where this is the case, their claims for employee status are generally defeated by the lack of mutuality of obligation in the employment relationship.
This legal test is unusual,in that it focuses on times when an individual is not actually working and asks questions about what will happen in the future. Where there is no obligation to provide any specific work and no obligation to undertake it on the part of the individual, employee status will be denied. Where this arrangement is written down the problems facing such individual appear unsurmountable. Carmichael and Fuller are clear examples. The situation facing agency temps has proved so complex that courts have declared their employment relationship to be one that is sui generis. (Wickens v Champion Employment (l984) ICR 365) In the light of EU efforts to provide improved (as they see it) protections for agency temps the failure of law to determine their legal status is a matter of major concern. Problems may also face casual workers in asserting their rights under the fixed term work regulations.
What might be done?
The legal test have evolved in an incremental and, some might argue, ad hoc way. The position of the various categories of precarious work remain poor and arguably getting worse. This is especially so where the work is low paid and semi- or unskilled. Where an individual is in a managerial or is, say, the controlling shareholder in a company the courts appear more sympathetic when employee status is sought.(Connolly v Sellers Mediascene Ltd (2001) ICR 760).
As have been referred to earlier, worker status gives access to some employment rights and other legislation could be amended to cover workers. The worker category is intended to exclude the genuine entrepreneur/person running their own business .Are their helpful cases on the definition of workers? We have very few at present but the recent case of Byrne Bros. v Baird (2002 IRLR 96) indicates that although in a case involving construction workers the EAT was prepared to accept that the ability to provide a substitute, albeit with the employer’s approval was not a barrier to worker status, there was still a need for mutuality of obligation! Many of our precarious workers might still, therefore, fall outside some basic statutory rights!
This raises the important question of whether extending more rights to workers would help those currently disadvantaged groups. This also raises the other important question of whether certain of the statutory rights would be welcomed by such workers. Do they have their own "balance sheet" whereby they are prepared to forfeit job security and other protective rights in return for having a higher level of discretion and improved work-life balance or in some occupations, high pay? Or, is, generally, the balance sheet so one- sided that law should intervene anyway to provide increased protections.?
The consultation document
The document, which seeks views by December 11 2002 does not seek views on the legal tests. Rather, it recognises the problems concerning access to employment rights, many of which have been referred to in this paper. It raises some of the broader employment and economic issues which bringing about change might have implications for. It picks up the "flexibility agenda" and appreciates that any extension of legal protections could have major implications for SMEs, especially perhaps, newly established businesses. It explores the question of the relationship between legal protections and the willingness of employers to offer work on a flexible basis and the willingness of workers to accept flexible work. The link made between provision of protections and the enhancement of flexible work that would attract high calibre workers reflects much of the European discourse on flexible working
Some questions
Selecting some of the questions in the consultation document, they are as follows:
(Questions are paraphrased in the interests of simplicity)
1 Whether there are any currently excluded groups that would benefit from statutory rights?
2 If rights were extended what might be the effect on the employment relationships?
3 Does the current coverage of employment rights support a diverse workforce?
4 Would more rights act as a disincentive to employers’ willingness to offer atypical employment?
5 What rights might be extended and what categories of employment covered? Should new rights be treated in this way or should there be a review of current legislation as well?
6 Would any workers be disadvantaged by the extension of rights to them?
7 Should there be a review of the whole question of employment status to include the tax and social security authorities as well so as to arrive at a consistent approach to employment status?
Sources
Cave, K. 1997 "Zero-hours contracts-A Report into the incidence and implications of such contracts" University of Huddersfield
DTI, 1999 Burchell,B,Deakin, S. and Honey, S. "The Employment Status of Individuals in Non-standard Employment." Department of Trade and Industry
DTI, 2002 "Discussion document on employment status in relation to statutory employment rights" URN 02/1058 Department of Trade and Industry
European Foundation, 2002 "Economically dependent workers:Employment law and industrial relations" European Foundation for the Improvement in Living and Working Conditions, Dublin
Leighton, P. 1983 "Contractual arrangements in selected industries" Department of Employment Research Paper No 39.Department of Employment
Leighton, P. 1984 "Observing employment contracts" Industrial Law Journal, 13:86-106
Leighton, P. 1998 "The UK Report" to DGV Report "Obstacles to the creation of very small Businesses"
Leighton, P. 2000 "The European Gudelines, entrepreneurism and the continuing problem of defining the genuinely self-employed" in Collins,H, Davies,P and Rideout, R. The Employment Relation Kluwer Law
Leighton, P. and Rayner,C. 1995 "How good are your employment contract practices?" CCH Editions
Supiot Report, 1998 Supiot, A. (ed) "Report on transformation of labour and labour law in Europe" V/98/77.6 OOPEC