Determining Employment Status in the UK

Employment status is and always has been a very complex matter in the UK.  However, in the years leading up to 1996, one could reasonably conclude that it was markedly less complex than it is now, in 2024.  I explain why below, but it is essentially because employment status in the UK is determined for law and tax separately, using similar, but not the same, benchmarks.  Employment law governs employment rights and contractual terms and conditions and employment tax governs the type of taxes the individual should pay such as income tax, PAYE and National Insurance contributions (NICs).  The following paragraphs illustrate the complexity. 

Employment law

The legislation concerning itself with the employment law part of employment status is overseen by the Department for Business & Trade (DBT) and is contained within the Employment Act, and several other pieces of legislation which compliment it, such as the Employment Rights Act (ERA).  This legislation is further supplemented by Employment Tribunal case law precedents from the Employment Appeal Tribunal and higher courts.  In employment law, since 1996, there have been three statuses – employed, self-employed and “worker”.  

The term ‘worker’ is not helpful, since in everyday language, a ‘worker’ is a word which can appear in discussions concerning individuals or groups of individuals who may be employed or self-employed – for example, the Cambridge Dictionary defines a worker as someone who a) works ‘in a particular job’ (i.e. skilled or unskilled), or b) works ‘in a particular way’, such as a good/tireless/skilled worker.  It can also mean someone who works for a company or organization as an employee but does not have a powerful position.

By contrast, for employment law purposes, a “worker” is defined by section 230(3) ERA 1996 as: “an individual who has entered into or works under (or, where the employment has ceased, worked under) –

1. a contract of employment; or
2. any other contract, whether express or implied and (if it is express) whether oral or in writing, whereby the individual undertakes to do or perform personally any work or services for another party to the contract whose status is not by virtue of the contract that of a client or customer of any profession or business undertaking carried on by the individual.”

ACAS tells us that someone is likely to be legally classed as a “worker” if most of these things apply:

• their work for the organisation is more casual, for example work is less structured or they do not have a regular working pattern
• they’re usually required to personally do the work
• they’re not offered regular or guaranteed hours by the employer
• they have very little obligation to make themselves available for work, but should do work they’ve agreed to

If most of these do not apply, someone is more likely to be an employee or self-employed.

So essentially, “worker” status falls in between employed and self-employed status.  Workers have some employment rights, but not as many as employees.  They have a more flexible arrangement, but with fewer statutory rights.  

Workers are sometimes referred to as ‘limb (b)’ workers. This term comes from the Employment Rights Act 1996, s. 230(b). So, what exactly are workers entitled to receive, and more importantly perhaps,  not entitled to receive, as part of their relationship with the engager?  

Workers are entitled to:

• a written statement of employment particulars outlining their job rights and responsibilities
• National Minimum Wage
• paid holiday
• payslips
• protection for whistleblowing
• protection against discrimination
• protection from less favourable treatment for working part time

Workers are not usually entitled to:

• a minimum notice period if their employment is ending, for example if their employer is dismissing them
• protection against unfair dismissal
• make statutory flexible working requests
• time off for dependants
• statutory redundancy pay

Employment taxes

‘Employment taxes’ is a very wide-ranging term for a host of different pieces of legislation covering different aspects of employment and working arrangements, such as payroll, National Minimum Wage (NMW), Income Tax (PAYE), National Insurance contributions (NICs), Pension arrangements,  benefits in kind, remuneration planning, share schemes and reward, working time, termination payments, Construction Industry Scheme (CIS), Optional Remuneration Arrangements (OpRA), off-payroll working arrangements, to name but a few. 

The employment status legislation for tax purposes is essentially, and unhelpfully, non-existent, because there is nothing set down in legislation which points the researcher to a definitive set of rules and guidance which sets out when and how someone is classified as employed or self-employed. 

So, how is employment status for tax determined?

Employment status for tax is determined by referring back to tax case law precedents and HMRC guidance (generally understood to be HMRC’s own interpretation of the legislative provisions and case law) on the subject, as well as some supplementary legislative provisions set out at Part 2 of ITEPA 2003, chapters 7,8,9 & 10.  HMRC has also produced guidance in the form of their Employment Status Manual on GOV.UK, as well as a status determination tool, known as Check Employment Status for Tax (CEST).

Case Law

The most important case law precedent in terms of employed v self-employed dates back to the Ready Mixed Concrete case of 1968.  McKenna J issued a decision containing his definition of a ‘contract of service’ (an employment contract), which has been and still is today referred to in most employment status cases by other judges.  Essentially this is:  

• The individual provides personal service to the engager in return for remuneration; and
• sufficient control exists by the engager over the individual; and
• the other contractual provisions are consistent with an employment contract.

However, this has led to the courts determining status by referring to this method, seemingly without questioning why employment should be examined before self-employment is examined. 

It is interesting that the new UK government’s reforms propose a radical shift to a single worker status for all but the “genuinely self-employed” (this term is yet to be clarified), merging together the existing ‘employee’ and ‘worker’ categories. 

Labour are proposing to merge together the existing ‘employee’ and ‘worker’ categories – returning to pre-1996 times. The consequence of such a change would significantly extend vital rights (e.g. paid holidays, statutory sick pay, and anti-discrimination protections) to many more individuals who are currently classified as “workers” including agency and zero-hours contracts workers (also known as ‘casual’ contracts). The work needed to do this will involve unpicking several legal precedents.  Changing over the contracts to employment contracts will be complex, and it is not currently clear whether some individuals will be able to retain self-employed contracts while gaining a suite of employment rights.

In spite of challenges, the proposals around a “single worker status” isn’t all doom and gloom – because the outcome may achieve simplification of what is a universally acknowledged complex area, and provide some stability into the bargain.

Intermediaries: Part 2 ITEPA 2003 Chapters 7,8,9 &10 (also known as the “intermediaries’ legislation”)

To add to the confusion, and having stated earlier in this blog that employment status legislation is non-existent, I must complete the picture by discussing the general concept known as the “intermediaries” legislation.  The legislation does not solve the status conundrum – rather, it serves to make it still more complex.  

To counter the steep rise in employment taxes avoidance by engagers which became prolific in the early millennium years which coincided with the emergent Information Technology (IT) sector thanks to the internet and evolution of consultant-based working arrangements, legislative provisions were introduced which aim to capture alternative working arrangements such as working through a limited company or LLP (an ‘intermediary’), or an agency, or perhaps through a Managed Service Company (MSC) or via an Umbrella Company – all of which became so prolific that it was necessary to legislate for them to prevent further revenue leakage from the Exchequer’s most important revenue stream^[1] – PAYE and NICs.  All these pieces of legislation have been introduced to try to combat various methods of working which have attempted to circumvent the normal “employed v self-employed” rules.  Note however that it is important to maintain a clear perspective – if someone is genuinely self-employed, they should have the democratic right to be treated as such – subject to the fact pattern fitting the bill.

These rules tie in with or must be considered before (“trump”), other aspects of employment taxes legislation^[2].  Thus, the way in which status needs to be approached for tax purposes is first to consider whether the individual is working as a sole trader contractor or in a partnership or working through some other kind of legal entity such as a corporate body. 

CEST and HMRC guidance

The CEST tool is to be used to determine employment status for tax only.  

The CEST tool was born in the millennium years, when HMRC wanted to provide a tool which employers could use online.  HMRC agree to honour the outcome, based on the facts supplied at the time of completing the tool.  Obviously, should the facts not match the reality, HMRC would not honour the decision.

However, it is very difficult to produce a tool which can determine employment status without considering a whole host of facts, and each case is different.  The guidance on employment status produced by HMRC can be found at https://www.gov.uk/hmrc-internal-manuals/employment-status-manual – and yet, this is not the only guidance which needs to be looked at, because it is about taxation and not employment rights.  Ideally, the two parts of employment status should not be considered in isolation, but in tandem. This helps to avoid problems further down the line and helps eradicate exploitation of immigrants and low-paid workers, and indirectly tackle issues such as modern slavery.

How do employers and agents need to approach employment status?

To really get employment status right, what strategies should employers and agents adopt? 

In many cases, it’s possible to tell immediately whether someone is employed or self-employed for tax purposes.  However, others are less clear-cut and need further examination.  

The tendency to try to rush employment status decisions to expedite recruitment can be a bear trap. Better recruitment planning can avoid this. Talking through the issues around whether the person required is to be classified as employed or self-employed can assist employers in  being comfortable with the decision-making process.  The fact pattern must match the eventual contractual terms of engagement.

The employment law side must also be given due consideration – self-employed workers can also appeal to the Employment Tribunal if they feel they should have been classified as an employee all along! 

What are the main stumbling blocks?

The main stumbling blocks with making employment status decisions that are commonly encountered by employers, individuals and agents alike are:

• Misunderstanding the terms around employment status;
• making assumptions and not having the whole fact pattern to hand;
• trying to (consciously or unconsciously) make the role fit the preferred status;
• not being told the whole truth by someone about the role and the terms of engagement;
• not seeking expert advice; and
• trying to do things too quickly and missing things.

Has the 2024 UK Budget helped employment status?

In a word, no.  Despite claiming to deliver a Budget with no impact on the “working man”, the Chancellor’s rise in employers (or secondary) NICs from 13.8% to 15% will undoubtedly prove to be a huge burden on employers of all sizes.  The unintended consequences of that may be:

• Pay rise freezes;
• recruitment freezes;
• promotion freezes; 
• headcount reductions; and
• pushing individuals into bogus or false self-employment.

Conclusion and next steps

It is clear the current situation relating to determining employment status is far too complex, onerous, burdensome and a barrier to doing business, detrimental to the flexible UK labour market and negatively affecting the UK economy.  Coupled with Brexit, which has affected many sectors of the labour market including the NHS and social care, clearly, something needs to be done.

In July 2024, I set up the so-called Employment Status Consultative Committee (ESCC) which is a collective of representatives from a number of different professional, representative and industry bodies who are hoping to work with the UK government to consider the whole of employment status and consider how it could be reconfigured to attain a workable and viable, future-proof solution.  A letter has been written to the Exchequer Secretary to the Treasury (XST), James Murray MP and a copy of this can be found here.

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^[1] HMRC tax receipts and National Insurance contributions for the UK (monthly bulletin) – GOV.UK

^[2] These provisions are as follows:

1. Ch. 7 Part 2 ITEPA 2003  – this is the Agency rules.   Where Chapter 7 applies, the agency is treated as the worker’s employer and has tax and NICs withholding obligation. 
2. Ch. 8 Part 2 ITEPA 2003 – this is the “IR35” rules.  Where Chapter 8 applies, private sector clients are supplied with work by an intermediary (usually a Personal Service Company or PSC). The PSC decides if IR35 applies to them.  From 6 April 2021, Chapter 8 only applies where the services are provided to private sector clients that are small or have no UK connection. 
3. Ch. 9 Part 2 ITEPA 2003 is the Managed Service Companies (MSC) rules. Where Chapter 9 applies, the intermediary providing the labour is classified as a MSC.  Chapter 9 trumps Chapter 8. 
4. Ch. 10 Part 2 ITEPA 2003  – this is the Off Payroll Working (OPW) rules.   Where Chapter 10 applies, from 6 April 2017, a public sector body must apply the rules to intermediaries supplying workers’ services.  From 6 April 2021, it applies where the work is provided to medium and large UK connected private sector clients.  The engager decides if OPW applies