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 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:

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