Check whether someone is an employee, worker or self-employed

Getting employment status wrong can be extremely costly. If you wrongly treat someone as self-employed when they are an employee, HMRC can make you pay back the tax and National Insurance you should have deducted, plus interest and penalties. The person can also bring tribunal claims for holiday pay, sick pay, redundancy pay and unfair dismissal. Cases such as Uber and Deliveroo show the public scrutiny misclassification attracts.

Employment status depends on the reality of the working relationship, not what the contract says. 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.

Control

Ask how much control you have over what work is done, how it is done, when it is done and where. If you assign specific tasks, dictate methods, set hours and require them to work at your premises, that points to employment. If you specify the outcome you need and they decide how to achieve it, that points to self-employment.

Substitution

Ask whether the worker can send someone else to do the work in their place. If they must do the work themselves, that points to employment. A genuine, unfettered right to send a substitute, who does not need your approval and whom you or the worker pays, points to self-employment.

A substitution clause is worthless if it is never used in practice, or if it carries so many conditions that it is not genuinely available.

Mutuality of obligation

Ask whether there is an ongoing obligation for you to provide work and for them to accept it. Guaranteed minimum hours and an expectation that they accept work offered point to employment. No obligation on either side between engagements, with each project a separate arrangement, points to self-employment.

Financial risk

Ask whether the worker bears financial risk. Being paid regardless of how the business performs points to employment. Risk of loss, investment in equipment and putting mistakes right at their own cost point to self-employment.

Integration

Ask whether the worker is part of your business or running their own. Working in your team, using your equipment and email address and appearing as staff point to employment. Having their own business identity, working for several clients and marketing their services independently point to self-employment.

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.

Practical lessons from case law

• What the contract says is irrelevant if the reality is different.
• No single factor is decisive, so look at the whole picture.
• An unused right to substitute proves nothing, and a right of substitution alone does not guarantee self-employed status for every purpose.
• If you set what they can charge, they are not genuinely in business on their own account.

Employment status vs tax status (IR35)

Employment rights and tax status are decided separately: employment tribunals decide rights such as holiday pay and unfair dismissal, and HMRC decides how someone is taxed. The off-payroll working rules (IR35) apply when a contractor works through their own limited company but would be an employee if you engaged them directly, and they use the same tests. If you are a medium or large business, or a public sector body, you must decide the contractor's status, give them a written Status Determination Statement with your reasons before work starts, and respond to any disagreement within 45 days. If you are a small private sector business under the Companies Act size test, the contractor's own company decides instead.

Using HMRC's CEST tool

HMRC's Check Employment Status for Tax (CEST) tool helps you decide IR35 status. If you use it correctly, HMRC will stand by the result.

When CEST gives an 'undetermined' result

Sometimes CEST cannot decide and gives an 'undetermined' result, because the factors point both ways. An undetermined result does not protect you: if HMRC later finds the contractor is inside IR35, you are liable. Document exactly how the work is controlled, how substitution has worked in practice and how financial risk is shared, and consider advice from an employment lawyer or tax adviser. If you are genuinely uncertain, treating the contractor as inside IR35 protects you from the tax liability, though it may cost more in employer National Insurance.

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:

• Workers build up 5.6 weeks' holiday a year, so you could owe years of backdated holiday pay.
• HMRC can investigate National Minimum Wage compliance and issue penalties.
• Employees may claim unpaid SSP for past absences.
• If you end the relationship, they could claim unfair dismissal (after the qualifying period: 2 years, and the government intends to cut it to 6 months from 1 January 2027).
• 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:

• You owe all the tax and National Insurance that should have been deducted, potentially for several years.
• Interest runs from when the tax should have been paid until you pay it.
• Penalties can reach 100% of the unpaid tax for deliberate non-compliance, with lower penalties for careless errors.

For example, a contractor paid £100,000 a year for 3 years and wrongly treated as outside IR35 could leave you owing £50,000 or more in back taxes and penalties.

Practical steps for compliance