Employment status: employee, worker, or self-employed

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 business or running their own?

• 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

Two Supreme Court rulings on gig economy platforms show how the tests above apply in practice, and why the two cases reached different results on different facts.

Uber v Aslam and IWGB v CAC (Deliveroo) also decided different legal questions. Uber v Aslam determined "worker" status under section 230(3) of the Employment Rights Act 1996. IWGB v CAC (Deliveroo) decided a narrower question: whether an "employment relationship" existed for trade union recognition purposes under article 11 of the European Convention on Human Rights.

Both cases used the same method: looking at the reality of the relationship, not the contract wording. But the Deliveroo ruling does not settle whether Deliveroo riders are "workers" for National Minimum Wage or holiday pay purposes. It settled a different, narrower legal question.

Full details of both cases, including the specific factors the Court relied on, are set out below.

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, and a right of substitution alone does not guarantee self-employed status for every purpose
• 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:

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 penalties apply 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