Complex Law Surrounding Employment Status

The law concerning employment status is complex, and far from simple to interpret. Therefore, determining entitlement to employment rights is subject to the particular facts of each individual case, rather than following a clear, structured definition.

Determining employment status of an individual is important for many reasons, and is vital to ascertain who has entitlement to the various employment rights available.

The courts have developed various common law tests to determine the status of an employee, over the last century and a half. This is to decide whether or not the individual is an employee, and therefore would have the full entitlement to the full range of employment protection rights. The system used is to establish between two clear categories of employment status; where individuals are either classified as being an employee (contract of service) or an independent contractor (contact for services).

There are three main reasons to ascertain whether an individual is an employee or independent contractor. These are:

• to establish any entitlement to statutory employment rights;
• for Tax and National Insurance purposes; and
• to determine the law relating to vicarious liability and employer’s liability.

The term ‘employee’ is defined as “….an individual who has entered or works under (or, where the employment has ceased, worked under) a contract of employment.” [1] Since this term is narrower than the term ‘worker’, all employment rights are limited to employees, apart from certain specific stipulations. It is therefore held that all employees are workers, but not workers are employers, which was illustrated in Broadbent v Crisp. [2]

The terms ‘contract of service’ and ‘contract for services’ carry no statutory definition and the category in which a particular contract falls is determined according to case law. The term ‘contract of service’ implies that an applicant is (or was) working in a subordinate role, which puts them under the control and supervision of an employer. This relationship is the current equivalent to the nineteenth-century concept of ‘master and servant’. The term ‘contract for services’ implies that there is no such instructions given from the employer, to the employee which they are obliged to obey, This means there is no subordination of the master and servant concept. A useful distinction of these terms is made in by Lord Patrick, in Stagecraft Ltd v Minister of National Insurance. [3]

The two distinct types of employment status, employee and independent contractor, have been made blurred in modern society, by the introduction of the status ‘worker’. This means that there are now three categories of employment status, rather than the traditional two. The term ‘worker’ is variably defined from one statute to another, but the two main definitions can be found in s.296(1) TULRCA 1992 and s.230 Employment Rights Act 1996.

The views of Stephen Taylor and Astra Emir [4] are that “the employment statutes provide litter or no assistance.” This view is also echoed by Painter and Holmes [5] , “the only guidance on the question in the legislation is so completely circular as to be absolutely useless.” It can also be implied, that when these statutes were passed by Parliament, it was effectively allowing the courts to apply and further build on their own common law definitions, to establish the meaning of ‘contract of service’ and to apply these definitions to each individual case.

Therefore, in this important and major area of employment law, there is a distinct lack of clarity surrounding the entitlement to employment rights. Consequently, it has been the undertaking of the courts to establish the status of the individual, which they have done by developing a variety of tests to apply. Deakin and Morris [6] identify tests which the courts have used either solely or in conjunction with one another. The tests which were widely replied on are; control, integration and business (or economic) reality. There is also now the multiple test which has evolved over a number of years and is when the courts look at all the tests and other relevant factors when making their decision.

The control test is the most traditional, of all the common law tests and originated back in the nineteenth century. This was the approach being taken by the courts during this time, and also into the early twentieth century to determine whether or not the relationship between the employer and employee, was one which a person was under the direction and control of the other party as to how the work will be done; as illustrated in Narich Pty Ltd. V Pay-roll Tax Comr [7] . If the employer could tell the employee what to do, and how it should be done, then it was held that a ‘contract of service’ existed. This was evidenced in Yewens v Noaks [8] , when Lord Justice Bramwell gave judgement and said “a servant is a person subject to the command of his master as to the manner in which he shall do his work.” The exercise of a degree of control is not conclusive, as evidenced in Hitchcock v Post Office [9] , and also illustrated in Ready-Mixed Concrete (SE) Ltd v Minister of Pensions and National Insurance [10] where an independent contractor can agree to work under the same degree of control as an employee, without having to become one.

In modern conditions, applying the control test is unpractical when looking at skilled employees. Many employees have such expertise, that it is unimaginable that an employer could tell them how to do their job, and control the methods used. It has also been under incisive criticism, in particular by Professor Kahn-Freund in his case note in Cassidy v Ministry of Health [11] that for an employer to control the manner of performance of a skilled worker at his work “is unrealistic and almost grotesque.”

Another difficulty arises when dealing with ‘agency workers’. In the decision of Honeywill and Stein Ltd v Larkin Brothers Ltd [12] , an individual is held to be an employee where the employer ‘retains control of the actual performance of the work’. The impact of this is that the agency itself has very little control over the method and the way the individual carries out their work.

Due to the problems which occurred when applying the control tests, the courts then relied on the integration (organisational) test from the late 1940s. This test focussed on the extent to which the individual was integrated into the company; the more integrated the individuals work was, then it was more than likely held that they were an employee and working under a ‘contract of service’.

The integration test was initially suggested by Lord Justice Denning, in Stevenson, Jordan and Harrison v MacDonald and Evans [13] where he said “under a contract of service, a man is employment as part of the business and his work is done as an integral part of the business.”

In Whittaker v Minister of Pensions and National Insurance [14] , a trapeze artist was an independent contractor and would not normally be integrated into the company. When she sustained injury and tried to claim payment from the government, they refused due to her status as an independent contractor. When she showed that she was also required to perform general duties, and the court held that was sufficient and proved that she was integrated into the business, and therefore an employee. The definition of the integration test appears to use common sense, but Lord Justice Denning did not ever define the word integrated, to help in recognising where the separation between employee and independent contractor lay.

This test has been criticised for being too vague, and looks upon the ‘ordinary man’ situation when looking as to whether the individual was part and parcel of an organisation. The test was also criticised on the basis that contracting staff out (rubbish collectors etc) can be integral to trade and commerce, leaving the test inconsistent.

The next test to have an influence on the courts was the economic reality test. This test examines the circumstances of the working relationship between the ‘supposed’ employer and employee, by asking the question: “Was the person performing services as a person in business or for their own account?” The financial aspects are therefore looked at to see if an individual is running his business on his own account. Thus, in the sense that employee status is the result of “the extent to which the individual is dependent or independent of a particular paymaster for the financial exploitation of his talent.” [15]

The test was first put forward in the High Court decision of Market Investigations Ltd v Minister of Social Security [16] in 1969. It was further used in Withers v Flackwell Health Football Supporters Club [17] and Warner Holidays Ltd v Secretary of State for Social Services. [18]

The economic reality test has been condemned, as from a conjectural point of view it does not provide a complete definition of service, only a partial definition of non-service. From a practical point of view, asking a question about whether an individual is his own boss rather than if he is an employee, would still be doubtful as to provide a useful conclusion in a borderline case.

The modern approach is that there is not any one test of feature which proves to be conclusive. Over the years, what has evolved is situation whereby the courts look at all the tests, as well as other relevant factors when deciding an individual’s employment status. This is the multiple and it was established in 1968, in Ready Mixed Concrete Case There was a three-pronged formulation laid down by McKenna J, in paragraph 16 of the above case. The first aspect looked as is whether the individual agrees that in return for remuneration he will provide his own work and skill for the employer. The second is that the individual agrees that he will be under a sufficient degree of control by the employer, and the third is that other provisions or factors are consistent with a contract of employment. These can then be further broken down into a number of other considerations.

The multiple test was applied in Hall (Inspector of Taxes) v Lorimer [19] , and since the Ready Mixed Concrete case, the formula has been approved on several occasions by the Court of Appeal and more recently in the House of Lords in Carmichael and another v National Power plc [20] .

It is now regarded as setting out the approach to which tribunals and courts must follow, but the case is not prescriptive when looking at which factors should be taken into account when making a decision. However, Mackenna J did give examples of different factors which might be significant, but he did not say which should be considered and the weighing up of these factors.

Mutuality of obligation and control are the “irreducible minimum by way of legal requirement for a contract of employment to exist”, and this was concluded in the Court of Appeal case of Montgomery v Johnson Underwood Ltd [21] . These two factors were to be used together with an irreducible level of personal service, as decided in MacFarlane v Glasgow City Council [22] . The multiple test has been given prominence over and above the integration and economic reality test. The test must still be applied, but without clear evidence showing that if any one of the three areas is not established, a conclusion must be reached that that no contract of service exists. However, this should not be taken as an incontrovertible rule.

The multiple test is the nearest anyone has ever came to an acceptable definition of a contract of service. However, the multiple test has problems when dealing with workers who do not fit into the usual categories, for example; home-workers and zero-hours contract workers.

The current law, as it stands, on employment status is most unsatisfactory and unclear. It has been said that although the law has developed steadily over many years, it has failed to keep up to date with the variety of types of employment relationship in the modern labour market. The result of this is that many groups within the workforce are left unsure of their entitlement to employment protection rights.

In 1998, a white paper called “Fairness at Work” was published by the Blair government, which acknowledged that the coverage of individual employment rights did not fully reflect the ‘modern world of work’. There was early employment legislation passed by Parliament, but when Ministers commissioned a report into the other issues raised in 2001, no proposals were brought forward. In March 2006, the Government made the decision not to make any changes or extend rights. In summarising responses the Government reported as follows: “the present legal framework works appropriately in attaching the most rights to the employment relationships requiring higher levels of obligation from individuals.”

It is clear that from the legislation, that it stands very broad and requires reference to case law and precedent, to enable the extraction of the determining factors of employment status. The outcome of this is that the common law tests have evolved from control, integration, economic reality and now to the more modern mixed / multiple factor test.

What is required, through employment legislation, is to define a number of various types of employment relationship, similar to the system currently used in France. If Parliament are prescriptive when defining who would be held as an employee, it would give greater capacity to employers to make sure that entitlement to employment protection rights are afforded correctly.