Risk assessing relationships: Time to review employment contracts

With major changes to employment status likely on the horizon and a growing proportion of the workforce operating within the gig economy, employers must ensure that they risk assess their relationships sooner rather than later. Michael Hibbs explains.

Recent regulatory and case law developments mean businesses should take time now to review their existing employment contracts and ensure that they accurately reflect the roles and job descriptions of their workers.

Ideally, these reviews should be undertaken during the initial recruitment process and before any job is posted, decisions should be made by the organisation as to the type of individual they wish to employ and in what capacity they would like them to work. The earlier that these decisions can be made, the better, helping to mitigate against problems further down the line.

The changing landscape around employment status along with the removal of employment tribunal fees have both increased the likelihood of employee disputes. However, one of the best ways to reduce the risk of a dispute arising is by having up-to-date, signed and accurate employment contracts in place.

In recent months, there have been a number of high profile cases where the courts have found that individuals seemingly engaged as self-employed contractors, are in fact “workers” entitling them to the full range of employed benefits, including the national minimum wage and holiday pay.

Backdated claims

One of the most prominent cases being that of King v The Sash Window Workshop Ltd, in which the European Court of Justice (CJEU) gave a judgment which will have significant implications for employers who engage people on a self-employed or contractor basis. They may now find themselves liable for significant sums in backdated holiday pay claims.

The CJEU has maintained that anyone deemed to have “worker” status must be able to carry over paid annual leave, whether they had the opportunity to take it or not. And, further, the claim can go back to the start of the engagement many years before.

The case will now go back to the Court of Appeal for a ruling on the appeal from the employment appeal tribunal. This decision will be incredibly significant for all employers who use self-employed or contracted workers and should act as a prompt to review employment contracts in place now.

With all this in mind, there are several points for employers to think about when looking to review employee contracts. Cases such as King v The Sash Window Workshop Ltd illustrate the need to undertake a risk assessment as soon as possible, as any further disputes will only be valid on the time accrued until that point, as opposed to the whole employment period.

When it comes to checking existing contracts, it is imperative that workers are correctly classified. This can be a tricky task, however the economic reality test can help determine employment status through the following six factors:

  • how integral the work is to the business;
  • the permanency of the worker’s relationship with the company;
  • the worker’s and employer’s investment in tools and equipment;
  • how much control the worker has;
  • the worker’s opportunity for profit, and;
  • loss and how much skill is required to do the job.

Matching the job role to the correct type of employment not only prevents ambiguity between parties but also lessens the risk of disputes further down the line.”

Furthermore, it is vital that any paperwork accurately reflects the reality of the role a worker is in. Even though recent case law has made it clear that the courts will focus on the reality of the working relationship over what the contract states, it is important that all documentation matches up as best as possible.

New recruits

Likewise, when considering taking on new recruits, businesses should decide the role they wish to fill before the position is advertised, with particular emphasis on what the role will entail. It is best to start by considering the needs of the business and the tasks the new workers will be asked to undertake, after doing this a decision can be made as to whether to engage an employee, self-employed individual or perhaps a worker on a fixed term contract.

Matching the job role to the correct type of employment not only prevents ambiguity between parties but also lessens the risk of disputes further down the line. Additionally, when creating a new position, it is important to consider the employment rights afforded to each type of status. This is significant as employers will be liable to provide or pay for the majority of employment rights if those working for them are employees rather than self-employed.

Risk assessments can be done at any stage and should be handled with extreme care. In fact, many businesses are now choosing to go through a full audit of their workforce, flagging any discrepancies and taking steps to correct them as necessary.

Whilst there are risks to reviewing contracts and changing work practices, the benefits to the business do outweigh the costs. After all, while a business may choose not to think about its employees’ status, the employees themselves might. With the risk of significant losses to both resource and capital, through potential settlement agreements and possible penalties from HMRC, the stakes are high.

Michael Hibbs

About Michael Hibbs

Michael Hibbs is head of employment law at Shakespeare Martineau.
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