The dichotomy between employee and self-employed

This question requires to analyse the operation of laws governing the classification of employment relationships. Access to employment rights depends to a large extent on whether an individual is employed as an employee. The self-employed and a number of other groups (such as agency workers) tend to find themselves excluded from employment protection law.

The answer will reflect how laws relating to the 'status' of employees and the self-employed work in practice, will identify the sources of uncertainty in the application of the legal tests of employment status and will evaluate to what extent the distinction has been eroded and the justification of maintaining the status quo. For a variety of reasons, which will be discussed below, it is important to determine whether a person is employed under a contract of employment.

Before discussing the statutory definition of an employee and a self-employed, it will be appropriate to define the terms 'employee' and 'self-employed' generally. The term 'self-employed' means persons who provide services to another party under a contract for services, but are genuinely in business on their own account, in that they are partners in a business or the sole owner of their own business and may employ others1. On the other hand, an employee is an individual who is employed by another under a contract of employment and is not genuinely in business on his or her own account.

By s. 230 of the Employment Rights Act (hereinafter ERA) 1996: a 'contract of employment' means a contract of service or apprenticeship, whether express or implied, and (if it is implied) whether it is oral or in writing… 'Employee' means an individual who has entered into or works under … a contract of employment'. This definition of an employee, although provided by statute, is not, however, helpful as it fails to define what is meant by a contract of service.

It is important to note that the definition given by the parties (self-labelling) to the relationship is not conclusive and it is the court which determines the status of the parties within the relationship. Thus, the fact that a person is called an employee doe not mean that he is employed under a contract of employment. Due to the lack of clarity provided by statute, over the years, the courts have devised a series of tests to decide if the relationship is one of employer and employee. Four tests, in particular, are widely relied on: 'control', 'integration', 'business reality', and 'mutuality of obligation'.

In early cases, when employees were less skilled than today, the courts used the single test of control. This test arose in the context of various liabilities and it seemed logical to look at the control an employer exercised over the employees3. As Bramwell LJ said in Yewens n Noakes4: 'A servant is a person subject to the command of his master as to the manner in which he shall do his work'. The test to apply in determining whether an individual was an employee or self-employed was 'who lays down what is to be done, the way in which it is to be done, the means by which it is to be done, and the time when it is done?

' While the control test worked well when workers were unskilled, it became apparent that it became more of a legal fiction as the industrial revolution meant that workers became more skilled. In Hillyer v Governors of St Bartholomew's Hospital5, it was held that nurses were not employees when carrying out operating theatre duties, although a more realistic approach was taken in Cassidy v Minister of Health6. Cassidy, however, shows that control by itself was an insufficient test in a modern industrial society.

Due to the inadequacies of the control test, the courts looked for another test which would reflect the realities of a modern day employment relationship. In Stevenson, Jordan and Harrison Ltd v Macdonald and Evans7, Denning LJ developed what he called the integration test. He said in the case: '… under a contract of service, a man is employed as part of the business and his work is done as an integral part of the business but, under a contract for services, his work, although done for the business, is not integrated into it but only accessory to it.

' While such a test got round the problems of the control test, Denning never explained what he meant by integration and later judgements regard the question of integration as part of a wider test rather than a test on its own. Integration, then, places less emphasis upon the personal 'subordination' of the employee to the employer, and more upon the way in which their work is organised. The test could be said to be appropriate to situations in which managerial authority is exercised in a de-personalised way, and subjected to bureaucratic rules and procedures.

The test is arguably of less use in situations where the boundaries of the organisation are diffusing or unclear, as in the cases of sub-contract or agency labour8. The courts realised that, in a modern industrial society, no one factor could be isolated as the determination of the relationship and, therefore, they developed what is known as the 'multiple test'. This was first propounded by McKenna J in Ready Mixed Concrete (South East) Ltd v MPNI9 where he looked at a variety of factors, some indicating that the lorry drivers were self-employed, some indication that they were employees.

As the drivers could delegate driving duties and, therefore, although there were factors indicating that they were employees, McKenna ruled that this term was inconsistent with a contact of service and, therefore, the drivers were self-employed. While his decision was later criticised, the basis of it, that is, looking at a multitude of factors, was not and this is the approach of the courts today.

Cooke J summarised the approach of the courts in Market Investigation Ltd v MSS10 when he said that the question to be determined by the court was whether the person was in business on his own account ( the small businessman approach). The small businessman approach means that the courts looks at a variety of factors such as investment, ownership of tools, who bears the risk of loss and who stands to make a profit. If so, then there was a contract for services11. In Hall (Inspector of Taxes) v Lorimer12, however, the court stressed that the list of factors should not be gone through mechanically.

Upholding a decision of the special commissioners, the court said: 'The whole picture has to be painted and then viewed from a distance to reach an informed and qualitative decision in the circumstances of the particular case. ' The court was apparently influenced by the large number of separate engagements Lorimer had undertaken- some 580 in 800 days- and the short duration of many of them. This would appear to be a common sense decision, despite the fact that Lorimer did not have any investment in equipment, made no financial contribution and took no risk of profit and loss as detailed in Market Investigations.

Home workers and casual workers are particular groups where establishing the nature of the relationship may prove difficult13. In both Airfix Footwear Ltd. V Cope14 and Nethermere (St Neots) Ltd v Taverna and Another15, it was decided that home workers were employees, in Cope, because work was provided on a regular basis and there was a strong element of control and, in Nethermere, because, in reality, there was a mutuality of obligations because of the length of the relationship.

By contrast, a case involving casual workers was O'Kelly v Trust House Forte plc16 where it was held that casual workers were self-employed, even though they worked solely for one employer, because there was no obligation for the employer to provide work when they showed up and no obligation on the casuals to offer their services. It was thus the lack of mutuality which leads to the decision, despite the clear control exercised by the employer and the fact that it would be difficult to describe a casual worker as being in business on his own account.

The House of Lords reached a similar conclusion in Carmichael and Lesse v National Power plc18 , where it was decided that guides employed on a 'casual as acquired' basis were self-employed. Lack of mutuality of obligations has led to agency workers being classed as self-employed (Wickers v Champion Employment19), although McMeechan v Secretary of State for Employment20 and trawler men who entered separate crew agreements for each voyage were also deemed to be self-employed, despite the fact that they invariably returned to the same employer, again because of the lack of obligation to provide work or services.

However, the position seems to have changed by the application of the recent case Motorola Ltd v Davidson21 where the court found that the requisite employment relationship existed given the practical degree of control exercised by Motorola Ltd over Davidson, and from the fact that Motorola Ltd had conducted disciplinary proceedings culminating in Davidson's dismissal without MC's (an employment agency) knowledge. T he question which must now be asked is: why is the distinction between employees and independent contractors important?

A variety of rights and liabilities apply in respect of employees which do not apply to independent contractors. An employee pays insurance contributions which are a percentage of his earnings and the employer also makes a contribution. This gives the employee certain benefits in respect of unemployment, sickness and industrial injury as well as Sate pension rights. An independent contractor pays a flat rate insurance contribution, irrespective of earnings and has no rights to the benefits mentioned.

Moreover, an employer must deduct tax at source for his employees and may be committing a criminal offence should he fail to do so (Jennings v Westwood Engineering22). The employer is under no such obligation in relation to independent contractors, although, in the building industry, the employer is required to deduct tax as if the workers are employees and the workers can then claim tax back if they are genuinely self-employed.

Furthermore, an employer is vicariously liable for his employees if they cause damage during the course of their employment, while, generally, no such liability exists for his independent contractors. In addition, while independent contractors and employees are protected by the Health and Safety at Work Act 1974, the employer owes more stringent duties to his employees, supplemented by implied terms in the contract of employment.

Finally, employment protection legislation, in the form of unfair dismissal and redundancy compensation, time off rights, guaranteed payments and maternity rights only apply to employees. Independent contractors have no such protection, although Quinnen v Hovell23 has decided that all workers whatever their status, are protected by the Sex Discrimination Act 1975 and the Race Relations Act 1976 where they are providing personal services24.