Difference Between Employee and Independent Contractor

In the modern industrial era employers have shifted their reliance form employees (dependant or subordinate) to self employed or independent contractors (independent or autonomous). The reason for this change is that employees enjoy greater statutory protection as compared to other classes of worker’s, [1] and this by itself is one of the distinguishing factors between an employee and an independent contractor.

In its general terms an employee is a person who is hired by an employer to perform specific work in the manner as is directed by the employer. An employee has been defined by The Employment Rights Act 1996 – section 230(1) as an individual who has entered into or works under (or worked under) a contract of employment. An independent contractor, however, is a person who runs his own independent business but work’s for other employer’s/businesses.

When distinguish an employee form an independent contractor one must bear in mind that an employee affords greater statutory protection; if an employee commits, in the course of his employment, a tortuous act than the employer may be made liable for the tort committed by the employee; employers are required to deduct income tax from their employees; [2] also in addition to the terms of the contract of employment the law implies a host of terms in the employment relationship. Independent contractors, however, have no such protection what so ever, but one notable exception is under the anti-discrimination legislation [3] .

The issue for us to determine is whether Mary Murphy who has been working under a contract for services for Bright Broom as a cleaner since June 2009 at Wetford Brake is, despite the title of contract between them, an employee or an independent contractor. A major contributor to the vast amount of case law in employment, over the last century, and in today’s employment environment, though not easy in practice, is the paramount need for employer’s to distinguish between their workforce, whether they are employees (who work under a contract of service) or independent contractors (who work under a contract for services). Lord Denning in Stevenson & Others v. MacDonald and Evans [4] said:

‘It is often easy to recognise a contract of service when you see it but difficult to see where the difference lies’

The Parliament is yet to legislate on this crucial matter but the court, over the years, have devised a series of tests in order to overcome this loophole in the employment legislation. The traditional test which had its origins from employers being vicariously liable-able in tort for the negligence of their employees is the control test. This test examined the employer – employee relationship as being one where the employer has control over the work that a person performs and how he performs that work. If this kind of relationship was present than that person was surmised to be an employee.

This test has been best expressed by Bramwell LJ in Yewens v. Noakes. [5] He defined an employee as being a servant who is

‘…subject to the command of his master as to the manner in which he shall do his work.’

Bramwell LJ viewed the employer – employee as that of a master – servant relationship. This test was subject to the control of master/employer as to when and how a specific job was to be performed. This was taken a notch further by MacKenna J in Ready Mixed Concrete (South East) Ltd v. Minister of Pensions and National Insurance, [6] where he stated that

‘control includes the power of deciding of how the thing is to be done, the means to be employed in doing it, the time when and the place where it shall be done. All these aspects of control must be considered in deciding whether the right exists in a sufficient degree to make one party the master and other the servant.’

The notion of the term servant, although maybe more desirable where the workers were unskilled but, fell apart to the modern day employee who became more skilled than their former counter parts and importantly than those employing them. Due to these advancements in employment the courts rendered the control test, as the single determining factor, inadequate (Hillyer v. Governors of St Bartholomew’s Hospital, [7] Addison v. London Philharmonic Orchestra). [8] Thomas J in Beloff v. Pressdram Ltd [9] said

‘The greater the skill required for an employee’s work, the less significant is control in determining whether the employee is under a contract of service.’

In Cassidy v. Minister of Health [10] the court sort to acknowledge that technological advancement rendered the control test inadequate in determining the true nature of the employment relationship and a more adequate and realistic approach was needed.

Lord Denning, taking account of the modern industrial reality, devised a new test called integrational/organisational test in an effort to overcome the inadequacies of the control test. Lord Denning in Stevenson & Others v. MacDonald and Evans [11] said

‘Under a contract of service a man is employed as part of the business, and his work is done as the integral part of the business, whereas under a contract of services his work, although done for the business, is not integrated into it, but is only accessory to it.’

The integration test, although was effective in vanquishing the inadequacies in the control test but it had its own flaws, which arose out of Lord Denning not explaining what integration/organisation means. What is integral to a business is difficult to assay. The integrity, to the business, of managerial or professional workers may be easy to establish but difficult as to outworkers or workers employed by sub-contractors as they too can very much be integral to the working of a business, void being its employees.

Another approach which appears in the employment case law is the test of economic or business reality which originated in an US case of United States v. Silk. This test analysis whether a worker is an independent businessman on his/her own account for another business which has the eventual profit or lose. This approach amplifies that if the appurtenant for the purposes of a particular job are conferred in the employer and he is who takes the consequential risk out of the working of the worker, even where the worker works at his own timetable. [12] Lord Griffiths in Lee Ting Sang v. Chung Chi-Keung [13] distinguished an employee and an independent contractor saying

‘a skilled artisan earning his living by working for more than one employer as an employee and … a small businessman venturing into a business on his own account as an independent contractor with all its attendant risks’.

Lord Griffiths in the case explained that the worker had no accountability towards the investment and management of the business and may therefore be an employee. This same approach was embraced by Henry LJ in Lane v Shire Roofing Co (Oxford) Ltd [14] . However, this may not always be the case (Hall v Lorimer) [15] .

Another concept to which the courts have placed emphasis on is the mutuality of obligation, this is the existence of a mutual commitment to advance an employment relationship for a term. This concept was explained by Simon Deakin in his book Labour Law citing Mark Freeland he wrote, ‘At the first stage there is an exchange of work for remuneration. At the second level there is an exchange of mutual promises of future performance, i.e. the promise to employ and to be employed’ [16] .

In the last couple centuries the employment law courts have vastly deliberated on the complex issue of employment relationship and the courts, broadening their approach, have realised that this kind of a complex relationship builds upon an array of factors and no single factor test can identify the core of such a relationship. Lord Wright in Montreal v Montreal Locomotive Works, said

‘in many cases the question can only be settled by examining the whole of the various elements which constitute the relationship between the parties’. [17]

Thus the courts have now developed a new multi-factor or multiple test. This test originated in the of Ready Mixed Concrete (South East) Ltd v Minister for Pensions and National Insurance [18] where MacKenna J stated

‘A contract of service exists [when] three conditions are fulfilled. (1) The servant agrees that, in consideration of a wage or other remuneration, he will provide his own work and skill in the performance of some service for his master. (2) He agrees, expressly or impliedly, that in the performance of that service he will be subject to the other’s control in a sufficient degree to make the other master. (3) The other provisions of the contract are consistent with it being a contract of service.

A host of factors must be considered when applying this test, as is listed by_______________ ____________________________________________ where he explains that ‘whether a worker pays his own tax and national insurance contribution, is given holiday pay, is allowed to send a substitute to work in his place, and whether all other terms of the contract are consistent with it being a contract of employment or a contract for services.’

Following the new multi-factor test in Ready Mixed the courts have started to endorse new factors in their analysis of an employment relationship. In the case of Market Investigation Ltd v. Minister of Social Security [19] explained the factor that is to be by the courts is that whether a person is an individual doing business on his own account or whether he is working for another on his account. Another factor which has been of great significance and doubt is whether the courts should resolve the ambiguities in a relationship by looking at what the parties actually conceded of their relationship. Lord Denning in Massey v. Crown Life Insurance Co [20] was of the opinion that this should play a vital part in determining the issue of employment relationships. This approach was not endorsed by most courts and Stephenson LJ in Young & Wood Ltd v. West [21] stated

‘It must be the court’s duty to see whether the label correctly represents the true legal relationship between the parties.’

This test also requires that the worker should provide personal service as was considered by the Court of Appeal in Express and Echo Publications Ltd v. Taunton [22] as ac crucial prerequisite for a contract of service. However, this concept for further elaborated in McFarlane v. Glasgow City Council, [23] which turned to the decision in Ready Mixed where it was said that the requirement of personal service did not mean that delegation was non grata.

In the case of O’Kelly v Trusthouse Forte, [24] Ackner LJ summarised the decision taking by the tribunal, where he produced a list of factor which should be taking into account for understanding an employment relationship. In making their assessment, the tribunal took into account the following factors which they considered ruminating with a contract of employment:

“(a) The applicants provided their services in return for remuneration for work actually performed. They did not invest their own capital or stand to gain or lose from the commercial success of the functions organised by the banqueting department. (b) They performed their work under the direction and control of [the company]. (c) When the casual workers attended at functions they were part of [the company’s] organisation and for the purpose of ensuring the smooth running of the business they were represented in the staff consultation process. (d) When working they were carrying on the business of [the company]. (e) Clothing and equipment were provided by [the company]. (f) The applicants were paid weekly in arrear and were paid under deduction of income tax and social security contributions. (g) Their work was organised on the basis of a weekly rota and they required permission to take time off from rostered duties. (h) There was a disciplinary and grievance procedure. (i) There was holiday pay or an incentive bonus calculated by reference to past service.”

The following additional factors in the relationship the industrial tribunal considered were not inconsistent with the contract of employment:

“(j) The applicants were paid for work actually performed and did not receive a regular wage or retainer. The method of calculating entitlement to remuneration is not an essential aspect of the employment relationship. (k) Casual workers were not remunerated on the same basis as permanent employees and did not receive sick pay and were not included in [the company’s] staff pension scheme and did not receive the fringe benefits accorded to established employees. There is, however, no objection to employers adopting different terms and conditions of employment for different categories of employee (e.g., different terms for manual and managerial staff). (1) There were no regular or assured working hours. It is not a requirement of employment that there should be ‘normal working hours’: see Schedule 3 to the Act. (m) Casual workers were not provided with written particulars of employment. If it is established that casual workers are employees there is a statutory obligation to furnish written particulars.”

The following factors were considered by the industrial tribunal to be inconsistent with a contract of employment:

“(n) The engagement was terminable without notice on either side. (o) The applicants had the right to decide whether or not to accept work, although whether or not it would be in their interest to exercise the right to refuse work is another matter. (p) [The company] had no obligation to provide any work. (q) During the subsistence of the relationship it was the parties’ view that casual workers were independent contractors engaged under successive contracts for services. (r) It is the recognised custom and practice of the industry that casual workers are engaged under a contract for services.” [25]

In the case of Market Investigations Ltd v. Minister of Social Security, [26] Coke J emphasised that in determining the employment relationship no exhaustive list has been or could be of contemplation.