Master or servant?

Many employers engage all kinds of workers under agreements other than
contracts of employment. But assuming this will avoid employer obligations
could lead to messy, and costly, legal wrangles, by Linda Goldman &Joan
Lewis

In the days of downsizing, upgrading and outsourcing, an increasing number
of OH professionals are setting up in business on their own and providing a
wide range of services as independent contractors or sub-contractors.

The flavour of independence is sweet to some, but there are times when
employment status is not quite clear. Many employers engage all kinds of
workers under agreements other than contracts of employment, sometimes thinking
this will avoid employer obligations. This can lead to legal battles when
problems such as those related to workplace health or accidents arise.

The illusion of freedom

OH professionals in business on their own can, in theory, come and go as
they please, send in locums and, within commercial reason, charge what they
like.

If the business passes muster, there are sometimes tax allowances that
enable the self-employed person to pay income tax yearly on a Schedule D basis
and charge his or her equipment, travel, uniform and training to the company.

However, the Inland Revenue may be interested in those schemes designed to
avoid paying taxes – in most one-person businesses, even if the business is a
limited company, the single fee-earner will be treated as an employee with all
the income taxed. In practical terms, that means there may not be any tax
advantages to running a small business after all.

Running a bigger business may not necessarily be the answer either, as even
a company director is likely to be an employee. Nevertheless, there are many
people who work to what the law calls ‘contracts for services’. These are
useful if the freelance operator has several contracts running in series or in
parallel. Their main characteristic is the minimal degree of an employment
relationship on the parties involved. For a person to be genuinely free of the
master-servant relationship, there must be no mutuality of obligation, either
for the provision of work or the doing of work.

Perks of the job

So why not just work as an employee on a nice contract of service? There are
a lot of perks to a job, such as regular wages, paid leave and lots of
employment rights, including the right not to be unfairly dismissed or suffer
any detriment as a result of anti-discrimination legislation.

The attractions of being an employee are often heightened when a contract
for the provision of services ends short of the intended term in a less than
amicable way. It is increasingly common for the outgoing, and aggrieved,
contractor to look carefully at the way he worked to see if an employment
tribunal might consider that he was an employee after all.

There is also some advantage in being a ‘worker’, a term that covers people
who provide temporary services, often through an external agency or ‘bank’.
Workers are entitled to paid leave, protection under the Part-Time Workers
(Prevention of Less Favourable Treatment) Regulations and protection from
discrimination.

If the person is not identifiable as an employee or a worker, there can be
no consolation in the tribunals for the ending of a contract, so it becomes
increasingly important for the tribunals to test the issue of employment
status.

If a person is deemed to be an employee by the courts, then tax implications
can ensue: a company buying services will be paying fees net of tax. If the
person is deemed to be an employee, tax will be due on the basis that the
salary was paid net so the [now] employer will not only have a bigger tax bill
to settle but may also be at risk of prosecution for evasion of tax liabilities
under the Proceeds of Crime Act 2002.

A curious feature of the tax question is that, if the contract was designed to
evade income tax, it is inherently unlawful, so the person attempting to be an
employee may not have the right to bring a claim to assert employment rights.

The law

If an applicant to an employment tribunal is not employed, the tribunal does
not have jurisdiction to hear the claim, which will usually be for unfair
dismissal. Accordingly, the application is likely to be misconceived and should
be dismissed.

The Employment Rights Act 1996 defines an employee as ‘an individual who has
entered into or works under a contract of employment’ whether or not the
contract is in writing. The purpose of the definition is to distinguish between
individuals who are dependent on an employer for their livelihood and
self-employed individuals, contractors or persons in business on their own
account who are not so reliant.

The case of Sega Europe Ltd v Michitsch EAT/0616/01 sets out what appears to
be the obvious: that the first step in deciding these cases is to decide
whether there was a contract of employment between the parties. Accordingly,
the tribunal will consider whether the putative employer exerts any control
over the applicant. One of the famous cases on control is Montgomery v Johnson
Underwood Ltd [2001] IRLR 269, where it was held that control is an inescapable
prerequisite for a contract of employment.

Most of the cases rely on guidance set out long ago in Ready-Mixed Concrete
(South East) Ltd v Ministry of Pensions and National Insurance [1968] 2 QB 497.
The ministry was concerned about the level of social security contributions
paid by the taxpayer who was buying a lorry from the employer on hire purchase.
He wore a company uniform and the lorry bore the company logo. He had to drive
the lorry exclusively for the company and agreed to submit to all reasonable
orders ‘as if he were an employee’.

The court concluded that he was an independent contractor, as he was not
required to drive the lorry himself, but could pay and employ a substitute
driver.

Other factors that may be considered include whether the so-called employer
is responsible for determining "the thing to be done, the way in which it
shall be done, the means to be employed in doing it, the time and place where
it shall be done" – a feature of the Motorola case.

Motorola Ltd v Davidson and Melville Craig Group Ltd [2001] IRLR4 is one of
the legal tests for determining who is an employee and, if appropriate, who
then is the employer when an agency is involved. The Motorola case tested
specifically the issue of the ‘control’ test: the greater the control and
direction over a worker, the more likely he or she is to be classified as an
employee of the party with that control over their work.

No one factor is determinative. In Hall (Inspector of Taxes) v Lorimer
[1994] IRLR 171, the Court of Appeal said that it is necessary to consider many
different aspects of a person’s work activity in determining whether he was in
business on his own: that is, the picture is to be painted from an accumulation
of detail.

In a recent employment tribunal case, the applicant, who wanted to be held
to be an employee, was denied because he charged fees by invoice to the
respondent for work that he did from time to time; used and paid for their
premises to deal with his own clients without accounting to the respondent for
any of the monies taken; and when he was not fit to work, sent in a locum. If
he had succeeded, he would have been claiming a substantial amount of money for
loss of earnings and the respondent would have had a monumental tax bill to
pay.

From a health and safety and injury claim perspective, the courts take a
much wider view of who is the ’employer’, and is therefore responsible for
paying for damages suffered to workers.

It is important to have a clearly drawn contract. If you want to be
self-employed, make sure that you do not have to provide the services yourself
at all times. Also make sure you have a good accountant who knows about
self-employment and IR35. Finally, make sure there’s enough cash in the bank to
pay the taxman.

Linda Goldman BDS,LLB is a barrister at 7 New Square, Lincoln’s Inn. She
is head of training and education for Advisory, Consulting & Training (ACT)
Associates & Virtual Personnel. Joan Lewis MCIPD, MA (Law & Employment
Relations) is the senior consultant and director of ACT Associates and Virtual
Personnel, employment law and advisory service consultancies, and licensed by
the General Council of the Bar under BarDirect.  Tel: 020 8943 0393

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