Guide
Employment status: employee, worker, or self-employed
How to correctly determine whether someone is an employee, worker, or self-employed. Covers the key legal tests, IR35 implications for contractors, and how to use HMRC's CEST tool. Essential reading before engaging any worker.
Getting employment status wrong can be extremely costly. If you incorrectly classify someone as self-employed when they should be an employee, you face:
- HMRC penalties: Back-payment of tax and National Insurance, plus interest and penalties
- Employment tribunal claims: Claims for holiday pay, sick pay, redundancy pay, and unfair dismissal
- Reputational damage: High-profile cases like Uber and Deliveroo show the public scrutiny misclassification attracts
Employment status is determined by the reality of the working relationship, not what's written in the contract. A contract calling someone "self-employed" means nothing if they work like an employee.
The three status categories
UK law recognises three main employment status categories, each with different rights and tax treatment:
Key tests for determining status
Courts and tribunals use several established tests to determine true employment status. No single factor is decisive - they look at the whole picture.
1. Control
How much control does the hirer have over:
- What work is done: Do you assign specific tasks or just the end result?
- How work is done: Do you dictate methods, or is the worker free to use their own approach?
- When work is done: Do you set hours, or can they work when they choose?
- Where work is done: Must they work at your premises, or can they work anywhere?
Employee indicators: You control all aspects of how, when, and where work is performed.
Self-employed indicators: You specify the outcome required but they control how to achieve it.
2. Substitution
Can the worker send someone else to do the work in their place?
- Employee indicators: Personal service is required - they must do the work themselves
- Self-employed indicators: A genuine, unfettered right to send a substitute. The substitute doesn't need your approval, and you pay the substitute directly or the worker pays them from their fee
Warning: A substitution clause in the contract is worthless if it's never exercised in practice, or if there are so many conditions that it's not genuinely available.
3. Mutuality of obligation
Is there an ongoing obligation for you to provide work and for them to accept it?
- Employee indicators: You guarantee minimum hours, they're expected to accept work offered
- Self-employed indicators: No obligation on either side between engagements - each project is a separate arrangement
4. Financial risk
Does the worker bear financial risk in the arrangement?
- Employee indicators: No financial risk - paid regardless of business performance
- Self-employed indicators: Risk of loss, investment in equipment, liability for mistakes at own cost
5. Integration
Is the worker part of your organisation or running their own business?
- Employee indicators: Integrated into your team, using your equipment, email address, appearing as staff
- Self-employed indicators: Has their own business identity, works for multiple clients, markets their services independently
Recent case law: what Uber and Deliveroo mean for you
High-profile tribunal and Supreme Court cases have significantly clarified employment status law:
Uber v Aslam (2021) - Supreme Court
The Supreme Court ruled Uber drivers were workers (not self-employed), entitled to minimum wage and holiday pay. Key factors:
- Uber set the fare - drivers had no control over price
- Uber controlled the terms of engagement
- Drivers couldn't build their own customer relationships
- The contract language calling them "partners" was irrelevant - the reality was what mattered
Implication: If you control pay rates and terms, and workers can't genuinely negotiate or build independent client relationships, they're likely workers.
Deliveroo riders (2023) - Supreme Court
The Supreme Court ruled Deliveroo riders were genuinely self-employed, not workers. Key factors:
- Riders had a genuine, unrestricted right to substitute - they could send someone else without approval
- No obligation to accept work - they could log on and off at will with no consequences
- No mutuality of obligation between jobs
Implication: A genuine, unfettered right of substitution is strong evidence of self-employment. But this must be real, not just a contractual clause that's never used.
Practical lessons from case law
- Contracts don't determine status: What the contract says is irrelevant if the reality is different
- Look at the whole picture: No single factor is decisive
- Substitution must be genuine: An unused right to substitute proves nothing
- Control over pricing indicates employment: If you set what they can charge, they're not genuinely in business
Employment status vs tax status (IR35)
There's an important distinction between employment law status and tax status. Someone might be treated differently for each purpose:
- Employment law: Determines rights like holiday pay, unfair dismissal protection, sick pay - enforced through employment tribunals
- Tax law (IR35): Determines whether to tax someone as employed or self-employed - enforced by HMRC
The IR35 rules (off-payroll working) apply when a contractor works through a limited company but would be an employee if engaged directly. The same tests apply, but with specific rules about who must make the determination:
Who determines IR35 status?
For contractors working through limited companies (personal service companies), the responsibility for determining status depends on your business size:
Are you a small company? (IR35 exemption)
Small companies are exempt from IR35 determination responsibilities. The contractor determines their own status. To qualify as small, you must meet 2 of 3 criteria:
Using HMRC's CEST tool
HMRC provides the Check Employment Status for Tax (CEST) tool to help determine IR35 status. If you use it correctly, HMRC will stand by the result:
-
Gather information before starting
You'll need details about the contract, working practices, control arrangements, substitution rights, and how payment works. Don't guess - base answers on the actual reality, not contract wording.
-
Access the CEST tool
Go to gov.uk/guidance/check-employment-status-for-tax. You don't need to sign in. Answer questions honestly based on actual working practices.
-
Answer based on reality, not the contract
CEST asks about real working arrangements. If the contract says one thing but practice is different, answer based on what actually happens. HMRC will check.
-
Save and document your result
Print or save the CEST result. This is your evidence if HMRC later challenges the determination. Keep it with the contract for at least 6 years.
-
Reassess if circumstances change
If the working relationship changes materially (different control, new substitution rights, changed hours), run CEST again. The original result won't protect you if facts change.
When CEST gives an 'undetermined' result
Sometimes CEST can't determine status and gives an 'undetermined' result. This happens when factors point both ways. In this case:
- Seek professional advice: Consider consulting an employment lawyer or tax adviser
- Gather more evidence: Document exactly how work is controlled, substitution has worked in practice, and financial risk is shared
- Consider the risk: An undetermined result doesn't protect you - if HMRC later investigates and finds the contractor is inside IR35, you're liable
- Default to caution: If genuinely uncertain, treating someone as inside IR35 protects you from tax liability (though may cost more in employer NI)
The consequences of getting it wrong
For employment law status
If you classify someone as self-employed when they're actually an employee or worker:
- Holiday pay claims: Workers accumulate 5.6 weeks' holiday per year - you could owe years of backdated holiday pay
- National Minimum Wage claims: HMRC can investigate NMW compliance and issue penalties
- Sick pay claims: Employees may claim unpaid SSP for past absences
- Unfair dismissal: If you end the relationship, they could claim unfair dismissal (after the qualifying period — currently 2 years, reducing to 6 months from January 2027)
- Pension auto-enrolment: You may owe backdated pension contributions plus penalties from The Pensions Regulator
For tax status (IR35)
If HMRC finds you incorrectly determined a contractor as outside IR35:
- Tax and NI: You owe all tax and National Insurance that should have been deducted - potentially years' worth
- Interest: Charged from when tax should have been paid until you pay it
- Penalties: Up to 100% of unpaid tax for deliberate non-compliance; lower for careless errors
- Example: A contractor paid £100,000/year for 3 years, wrongly classified as outside IR35, could result in £50,000+ in back taxes and penalties
Practical steps for compliance
-
Assess every engagement individually
Don't apply blanket policies. Each worker must be assessed on their specific arrangements. A genuine self-employed relationship with one person doesn't mean others are the same.
-
Document the relationship
Keep records of: how work is assigned and controlled, any substitution that's occurred, financial arrangements, and the worker's other clients. This evidence protects you if challenged.
-
Review contracts against reality
Compare contract terms with actual working practices. If they differ significantly, either update the contract or accept the status reflects the reality, not the contract.
-
Issue Status Determination Statements for IR35
If you're a medium/large business engaging contractors through PSCs, issue a written SDS before work starts. Explain your determination and the reasons.
-
Have a dispute resolution process
Contractors can challenge your IR35 determination. You must respond within 45 days with reasons. Document all disagreements and responses.
-
Seek professional advice for unclear cases
If CEST is undetermined or the situation is complex, get advice from an employment lawyer or specialist accountant before proceeding.
Workers are different from employees
Worker status is often overlooked. Workers get:
- National Minimum Wage
- Statutory holiday pay (5.6 weeks)
- Protection from discrimination
- Statutory Sick Pay (if earning above threshold)
- Workplace pension auto-enrolment
But workers don't get:
- Unfair dismissal protection
- Statutory redundancy pay
- Statutory maternity/paternity/adoption leave and pay
- Minimum notice periods
Many gig economy workers, agency staff, and casual staff are workers - not employees or self-employed. The Uber case confirmed this middle category is significant.
Construction Industry Scheme (CIS) and employment status
In construction, employment status interacts with both IR35 and CIS:
- CIS deductions: Apply to subcontractors regardless of employment status
- IR35: If a contractor is inside IR35, you may need to operate PAYE in addition to CIS
- False self-employment: HMRC particularly scrutinises construction for workers wrongly classified as self-employed
Genuine self-employment in construction typically involves: providing own tools, working for multiple clients, quoting for jobs, and bearing financial risk on projects.