2. Types of employment contract

The principles outlined in the previous chapter apply to all types of contract that may govern an employment relationship. However, the nature of that employment relationship can take different forms and it is important to establish what these are because different categories of workers have different employment rights.

Anyone can enforce their rights under a contract (see Chapter 7 for remedies for breach of contract) but employment legislation gives additional statutory rights to individuals according to their employment status.

There is a legal distinction between an employee, a worker and someone who is genuinely self-employed. The nature of the relationship is established by the contract, although a written contract itself may not contain such a definition. Whatever the contract does or does not specify, it will be for the tribunal or court to determine the nature of the relationship from the way that the contract has operated in practice.

Legislation normally states to which category of worker it applies and will usually define that category. Unfortunately, the definitions are not always the same or clearly explained — additionally the nature of the working relationship can render classification difficult. As a result there is a large amount of case law dealing with the status of workers, and this is being constantly modified.

The Employment Rights Act 1996 (Section 230) gives the following definitions:

• an employee is “an individual who works or worked under a contract of service or apprenticeship”;

• a worker is “an individual who works or worked under a contract of service or any other contract 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 client or customer of any profession or business undertaking carried on by the individual.”

An employee will always also meet the definition of a worker and qualify for any rights that apply to workers, but a worker will not always meet the additional requirements needed for the status of employee. The definition of a worker centres on the need for the individual to carry out the work themselves (defined as a “contract for services” as opposed to a “contract of service”) and excludes those who are genuinely in business on their own account.

However, an independent contractor can be a worker depending on the nature of the contract and largely whether they are able to send someone else to do the work (the right to substitute). The case law examples below look at how the definitions have been applied in practice.

A worker has some employment rights, including for example limits on their working time, the right not to have unlawful deductions from their wages and protection from making disclosures in the public interest. However, only an employee has additional rights which include protection against unfair dismissal, the right not to suffer a detriment on specified grounds (such as carrying out duties as a health and safety representative), the right to parental leave and flexible working - although in most cases they will have to have been employed for a certain period of time before they acquire these rights.

The Sex Discrimination, Race Relations and Disability Discrimination Acts apply to anyone who is in “employment” under “a contract of service or apprenticeship or a contract personally to execute any work or labour”. The Employment Equality (Sexual Orientation) and (Religion or Belief) Regulations include similar definitions. These therefore can apply to both employed and self-employed people.

Part-time workers are protected under the Part-time Workers (Prevention of Less Favourable Treatment) Regulations 2000 and fixed-term employees by the Fixed-term Employees (Prevention of Less Favourable Treatment) Regulations 2002. As the titles suggest, the part-time regulations apply to workers and the fixed-term regulations only to employees. In both cases the claimant will need to be able to show that they are working under the same type of contract as their comparator.

Crown employees, Parliamentary staff and officeholders such as police officers and members of the clergy, are regarded as a separate category of worker and some statutory provisions will not apply to them.

Anyone seeking to bring a claim derived from a statute should be aware of the qualifying criteria in their particular case.

Who is classed as an employee?

The courts have over the years established a number of tests to determine whether or not an individual is an employee, as opposed to a worker or an independent contractor. One of the first essentials is that the person must be required to carry out the work personally. This was decided in an early case that is still frequently relied on today:

However, personal service by itself is not conclusive — an independent contractor could carry out the work herself or himself and this would not by itself make her or him an employee. The requirement to do work personally was the main consideration in the following more recent case. The EAT said that a limited right to provide a substitute did not necessarily mean someone could not be an employee, even though that was not the outcome here:

Also, in the case of Real Time Civil Engineering Ltd v Callaghan EAT/0516/05, the EAT held that a lorry driver was not an employee because he had signed a contract just 18 months previously that said he could send in a substitute — even though he had never exercised that right.

The tests developed by courts and tribunals have been defined as:

• the control test: whether the employer can tell the employee what to do and also how to do it;

• the organisational test: whether the work the person does is an integrated part of the organisation. For example, the hospital authorities cannot tell a resident surgeon how to perform an operation so they do not have control over her or him, but she or he is an employee because they are part of the hospital organisation;

• the economic reality test: to determine whether or not someone was an independent contractor including investment in tools or equipment and skills required; and

• the multiple test: this looks at all the factors and no one particular factor determines whether an individual is an employee.

Courts now tend to take a multiple test approach — they may not consider all of the factors mentioned in earlier tests but are likely instead to consider the elements that are appropriate to the particular circumstances. The element of control was an important factor in a recent decision of the EAT in respect of a temporary worker:

One principle that has become predominant in deciding whether someone is an employee is that of mutuality of obligation. There will be a mutuality of obligation where the employer is obliged to give work to the employee and the employee is obliged to accept it. Without this, there cannot be a contract of employment:

If the individual is entitled to refuse to work at all, it is unlikely that they will have mutuality, as found by the EAT in the case of Khan v Checkers Cars Ltd EAT/0208/05:

Without the existence of control on the part of the employer and a mutuality of obligations there will not be a contract of employment. The Court of Appeal has held that these are the minimum legal requirements that have to exist for there to be a contract of employment:

The court said that in deciding the question of whether a contract of employment exists, tribunals should follow the guidance of the House of Lords in Carmichael v National Power plc [2000] IRLR 43, which gives three conditions that have to be fulfilled:

1. “mutuality of obligations” (wages in return for work);

2. an express or implied agreement that performance of the service would be the subject of the control of the party employing; and

3. that the other provisions of the contract are consistent with it being a contract of service.

Another agency situation was considered by the Court of Appeal in the following case and this time the claimant was found to be an employee of the client company:

If there is a specific term in the contract that specifies the nature of the employment relationship this will be a strong factor in the decision and could be conclusive.

In Stevedoring and Haulage Services Ltd v Fuller [2001] IRLR 627, the Court of Appeal said that if there is an express term in the contract that specifically excludes mutuality of obligation there cannot be a contract of employment, even if mutuality of obligation could be established in practice. However, another Court of Appeal decision shows that this is not always the case:

In the subsequent case of James v London Borough of Greenwich [2008] EWCA Civ 35, the Court of Appeal, finding that there were clear contractual terms between the worker and the agency, stated that it will be rare for a contract of employment to be implied between an agency worker and the end user. The Court of Appeal decided that it will only be necessary to imply terms where none exist or where agency arrangements are a sham (which is a hard test to meet).

It may be more straightforward to establish that the written terms are a sham where they have been introduced in an effort to disguise a continuing contractual relationship, or where the parties have attempted (and failed) to change the contractual relationship. This happened to Patrick Muscat, who was dismissed and re-engaged as a contractor in order to reduce staffing levels; the Court of Appeal held that despite the new written terms, Mr Muscat remained an employee (Cable & Wireless v Muscat [2006] EWCA Civ 220 ([2006] IRLR 354)).

The Agency Workers Directive was agreed by the EU Council of Ministers in November 2008. Under the terms of the Directive, which must come into force by 5 December 2011 at the latest, agency workers with 12 weeks’ service will acquire the same basic employment rights as permanent staff.

A tribunal may, having found that someone is not an employee, go on to consider whether they are a worker:

Who is classed as a worker?

As with an employee, a worker must be required to carry out the work personally. However, a limited power to provide substitutes to carry out the work does not necessarily take away the obligation to carry out the work personally:

Other factors are: whether the right to delegate only applies in circumstances where the contractor is unavailable to work, as opposed to them just preferring not to do the work; whether they were free to choose who to send as a substitute, and whether the right to send a substitute was really intended to be exercised.

Payment of regular wages and deduction of tax and national insurance are not conclusive of someone’s employment status, nor is the way that they define themselves, but they are all factors that will be taken into consideration (see checklist on page 62).

Independent contractors

An independent contractor is someone who is in business on his or her own account. They are employed under a contract for services rather than a contract of service.

An independent contractor is responsible for making his or her own decision about the way they carry out the job and they are economically independent — their contract is an agreement to provide an end product or provide a completed job. They can be described in a number of ways, including “freelance” or “self-employed”.

Someone who is genuinely in business on their own account does not have the statutory rights that apply to employees or workers. In return they are free to get the job done in the way that they wish, including hiring other people to do the work and benefit from a more favourable tax position.

The Privy Council in Lee v Chung and Shun Shing Construction and Engineering Co Ltd [1990] IRLR 236, said that there is no definitive question that will determine who is in business on his or her own account, but consideration would include whether they provide equipment, hire their own helpers and the degree of financial risk and responsibility that they bear.

In London Fitness Consultancy v Hickson EAT/0160/05 a gym worker who asked to be self-employed and paid tax on a self-employed basis was an employee on account of the control exercised by her employer, which included setting her hours and disciplining her.

Also, in Redrow Homes (Yorkshire) v Wright; Redrow Homes (North West) v Roberts [2004] EWCA Civ 469 ([2004] IRLR 720), the Court of Appeal ruled that bricklayers working for the Redrow group were workers, despite the employer’s argument that they did not have to carry out the work personally and therefore were self-employed. They had been issued with standard subcontractors’ contracts that stated that they “must at all times provide sufficient labour”, but the court held that this was not a right to provide a substitute. It pointed out that they were paid weekly and given individual contracts, which suggested that they were expected to carry out the work personally. They were workers and so were entitled to holiday pay .

However, in R J Prentice Brickwork v O’Brien EAT/1086/02, Mr O’Brien was a bricklayer whose contract gave him an absolute right to provide a substitute to do his work. When he was made up to chargehand, he argued that this meant in practice that he could no longer engage a substitute; therefore, he said he was a worker and entitled to holiday pay. But the EAT held this was not the case: it said that the express term in his contract was clear and was not overruled by his becoming a chargehand.

There are now many people working as independent contractors who contract to carry out the work personally. This is common, for example, in the building industry and in the information technology (IT) sector. In some cases these contractors may be “workers” for the purposes of legislation (see cases under “Who is classed as a worker?” above).