Employment status – An Employee, Freelancer or Worker?

Deciding someone’s employment status can be complicated as there’s no single legal definition. 

IR35 legislation has muddied the legal waters further, and not knowing how to correctly define someone’s employment status can lead to costly and time consuming Employment Tribunals (if you get it wrong) and, in some cases, financial penalties from the HMRC.

The importance of establishing your staff’s status:

There are three different types of working individuals:

• An employee
• A worker (someone who works on a casual basis or is an agency temp)
• Someone who is self-employed (i.e. a freelancer or contractor).

It’s important to establish the status of those you employ correctly since employees generally have more employment rights than workers or those who are self-employed (see our article about your Employment Rights). There’s also a difference in National Insurance contributions, tax, and benefits between employees/workers and those who are self-employed.

Whether you’re taking on an employee, or hiring a freelancer or contractor to help your business for a short period, knowing their status is a key decision. If you’re taking on an apprentice, check out our guide to apprenticeships for all the information you need.

ACAS (the Advisory, Conciliation and Arbitration Service) have guidance for employers in relation to employment status. The guidance is to assist employers following the numerous cases regarding employment status in the ‘gig economy’ and also covers agency workers, apprentices, fixed term workers, piece work, volunteers, work experience, internships, and zero hours contracts.

Who is an employee

Presently, there’s no single legal test to determine if someone is an employee or a worker, but someone is more likely to be an employee (whether on a PAYE permanent, open-ended contract, or on a PAYE fixed-term contract) if:

• The employer provides the work, any tools and equipment for it, and they decide how and when the member of staff does the work (known as the “What, Where, When and How Tests”)
• They’ll usually have a written contract (although a verbal contract will count)
• They’re expected to do the work themself, and may be moved to different tasks
• They’re usually paid a regular amount according to the hours they work (through the Pay As You Earn (PAYE) system – so tax and National Insurance is deducted), and they usually have to work a set amount of hours. They may also get extra pay for overtime and bonuses, work variable hours.

The legal definitions of these tests (from case law, not from statute/legislation) are personal service, mutuality of obligation, and control.

An employee will have a contract that is called a ‘contract of service’.

Fixed-term contracts

There’s a provision in law where someone employed on a PAYE fixed-term contract can receive a PAYE permanent (open-ended) contract if:

• They have been continuously employed (i.e. no significant breaks) by the same employer on a fixed-term contract for four years or more that started after 10th July 2002 (unless the employer has changed this time limit by a ‘workforce’ or ‘collective’ agreement)
• If this is the case, the employee can ask the employer for a statement confirming that they’re now permanent and no longer employed on a fixed-term contract
• The employer can only keep the employee on a fixed-term contract after four years if they can objectively justify this at the point thefixed-term contract was last renewed
• If the employer fails to give the employee this statement (when it’s requested) or gives the employee a statement of reasons why they must remain on a fixed-term contract that the employee doesn’t agree with, they can make a claim to an Employment Tribunal.

You can read more about fixed-term contracts in our “What are they and how can they come to an end?” article.

A worker

This is a broader category than an ‘employee’, introduced by European Union legislation (although there is no EU definition). A worker is anyone who works for an employer under a contract of employment (this may or may not be a written contract, and the contract may not come directly from the employer) and performs the work personally (which can include some freelancers).

Workers are usually either:

• Agency workers (‘temps’) – the agency who finds you work pays your wages, or if you are a contractor, you may get work through an agency but an Umbrella company pays your wages. The company who hires you pays a fee to the Agency for your work. The Gov.uk website has got more information on the employment status of ‘worker’ and also that of an ‘Agency worker’. On 1st October 2011, the government introduced the Agency Workers Regulations which gives ‘agency workers’ the right to equal treatment (with permanent staff working at the same organisation). For full details of these regulations see our guide to the Agency Workers Regulations.
• Short-term casual workers – hired directly by the employer, often with a written contract, and usually paid via PAYE (with Income Tax and National Insurance Contributions deducted). Casual Workers aren’t usually part of the permanent workforce but supply their services on an irregular or flexible basis or have a ‘minimum guaranteed hours‘ or ‘zero hours’ contract. DirectGov has got more information on how to work out if you are a casual worker
• Freelancers and contractors – there are occasions when those who are self-employed for tax purposes may be classified as ‘workers’ for employment rights purposes (e.g. holiday entitlement), including when a self-employed person is personally providing a service (see Pimlico Plumbers case below). You generally can’t be a ‘worker’ if you’re self-employed and the contract between yourself and your client includes a genuine right entitling you to ‘substitute’ someone else to do the work at all times.
• Limited Liability Partnerships – In May 2014 the Supreme Court ruled that members of Limited Liability Partnerships are workers for the purposes of the Employment Rights Act 1996 – which gives entitlement to statutory rights and protections including rest breaks, annual leave, part-time workers rights, and for whistleblowing protection.

In addition, there are also home-workers (or piece-workers) who have more limited rights than normal ‘workers’. See our guide to employment rights for the full details.

Foster carers and parents have generally not been seen as workers –  but in August 2020 a Scottish Employment Appeal Tribunal found that a couple who were involved in a specialist foster care programme were workers.

Self-employed (freelancer or contractor)

You’re likely to be self-employed if:

• You determine how and when you do the work within reason (known as master/servant relationship)
• You can hire helpers or replacements for you if you’re unable to do the work (known as substitution)
• You pay your own Income Tax and National Insurance Contributions on a self-employed basis (meaning you complete a Self Assessment tax return)
• You’re contracted to provide services to the client/employer over a certain period of time, or on an ad-hoc basis, for an agreed fee and aren’t integrated into the company
• You run your own business and take financial responsibility if it’s successful or not, and provide the main items of equipment
• You may work on your own premises
• You may have several customers (clients) at one time (known as economic reality).

If you’re self-employed, your contract is called a ‘contract for service’.

Determining your employment status

There’s no one single thing that completely determines your employment status. An Employment Tribunal will make a decision based on all the circumstances of the case to decide your status if there is a dispute between the individual and the  employer. There are four main categories they look at:

• Control – Do you have the final say in how your business is run? Can you choose whether to do the work yourself or can you send someone else to do it (Substitution)? Can you choose when and how you work (or does your employer tell you what to do and when to do the work?)
• Integration – Are you responsible for hiring other people and setting their terms of employment if you need help? Are you excluded from your employer’s internal organisational matters, corporate training, staff meetings? Are you exempt from having action taken against you using the company’s disciplinary procedures and have no access to their grievance procedures? Are you excluded from company benefits and perks? (If, for example, you lead a team of employees, you may be integrated)
• Mutuality of obligation – Does the employer offer work to you only if and when it’s available? Can you decide when you will work and can you turn the work down that is offered (or are both parties of a view that a contract of employment exists)?
• Economic Reality – Are you responsible for meeting the losses of your employment as well as taking the profits? Are you responsible for correcting unsatisfactory work at your own expense? Do you have to submit an invoice to the company for them to pay you? Do you get a fixed payment for the job or charge an hourly rate(including labour and tools/materials)? Are you registered for VAT? Do you provide the main items of equipment needed to do the job? Do you work for a range of different employers/clients?

None of these on their own will decide someone’s status. One judge described it as ‘painting a picture’ of all the details and looking at the ‘picture’ from a distance.

So, with these four main categories in mind, if you answered:

• Yes to all or most of the questions above, then it’s more likely that you/the individual is self-employed
• No to all or most of these questions, then you/the individual is likely to be an employee
• Yes to some (specifically that you can decide when you will work and can accept work or turn it down; and that the employer will only offer work when it’s available) but you’re not in business on your own account, it’s likely you would be considered a worker.

These questions are a summary for guidance only and the courts take a view of all of the tests – none will decide a case on its own. You should get advice from an expert if you’re unsure about your or your member of staff’s status.

HMRC published “Supervision, Direction or Control” guidance in March 2014. There is also the thrilling read of the employment status manual from HMRC with all the detail you could ever need on the subject.

There have been several important Employment Tribunal case about employment status and these include:

• Autoclenz Ltd v Belcher, 2011 – which made it clear that the courts will focus on the actual reality of the working relationship between the individual and the employer, and not focus on what the contractual documentation says.
• And Pimlico Plumbers v Smith, 2014 –

Pimlico Plumbers v Smith, 2014

In the 2014 case of Pimlico Plumbers v Smith, Mr Smith was employed as an ‘independent contractor’:

• He was described as “in business on his account”,
• He was required to provide his own tools, submit invoices to be paid, and to have professional indemnity insurance,
• He could choose his particular working hours and reject jobs,
• He was required to work a minimum number of hours per week (five days per week/40 hours),
• Pimlico Plumbers weren’t under an obligation to provide work if there was no work available,
• He did, however, have to wear a Pimlico uniform, have a Pimlico ID badge and mobile phone, drive a van with a Pimlico logo (which he had to pay rent for) and could only be contacted by customers through the company,
• Customers would receive contracts and estimates in the name of Pimlico and would only pay Pimlico,
• He had his movements monitored by Pimlico through GPS installed in the van,
• The agreements he signed said if he did private work for a customer, this would result in dismissal,
• This agreement also contained post-termination restrictive covenants.

Following a heart attack, Mr Smith asked to reduce his working hours to three days per week, and when this was refused, Mr Smith bought claims to an Employment Tribunal for unfair dismissal and/or wrongful dismissal and direct disability discrimination, among others.

The original Employment Tribunal and the Employment Appeal Tribunal found that he was a ‘worker’ not an employee. The case was passed up to the Court of Appeal and finally to the Supreme Court, in 2018, who finally concluded that the “dominant feature” of his contract was that he should perform the work himself (the contract referred to his skills with a warranty that he was competent to carry out the work, and required a high standard of conduct and appearance; there was no ‘substitution’ clause). Therefore, Mr. Smith was ruled a ‘limb worker’ for employment rights purposes because he provided a personal service and there was no right of substitution.

Mr Smith’s later claim for holiday pay eventually succeeded:

Although Mr Smith has been declared a worker, an employment tribunal in March 2019 ruled that he could not claim holiday pay for the six years he worked at Pimlico Plumbers (from 2011) as he had not made the claim quickly enough (Smith had actually taken holidays but he had not been paid for the holiday).  In March 2021 the Employment Appeal Tribunal agreed that his claim was out of time. This case was appealed to the Court of Appeal, who ruled (in February 2022) that the original ET and the EAT were incorrect and that Smith was entitled to carry over four weeks of leave per year, even if the leave had been taken but not been paid.  The Court of Appeal said that the right to carry over this leave is only lost if the employer can show it gave the worker the chance to take the paid leave and told them that the right would be lost if they didn’t take it. Smith is now entitled to 4 weeks annual leave (required by the original EU Working Time Directive that gives 4 weeks annual leave) for every year he was working for Pimlico between 2005 and 2011!  It was assumed at the time that Pimlico would appeal this decision to the Supreme Court because of the large sums involved; Mr Smith estimated he was owed can holiday pay of around £74,000! 2025 Update – it appears that Pimlico did not appeal this and the claim was meant to submitted back to an Employment Tribunal to calculate how much holiday pay he was owed…. but we can find nothing further reported about this since, so we are unsure what happened..

In Stuart Delivery Ltd v Augustine

In October 2021, the Court of Appeal confirmed that a courier who could offer a time slot to another courier, if he was unable to fulfil that slot, was still obliged to perform the work personally, and was therefore a ‘worker’.  You can see more details of this case and other ‘gig’ economy cases here.

Other things to consider

You can, of course, be employed and self-employed at the same time (i.e. an individual may be an employee during the day and they work for their own business in the evening; or they take a freelance contract with one employer and another contract on a PAYE basis).  Each job needs to be considered separately. HMRC can help decide what is right in these circumstances.

If an employer believes that an individual should be self-employed, but the individual thinks this is unlikely, then they must tell the employer this and the employer should not insist that they’re self-employed (to save national insurance contributions etc). An individual can’t be classed as self-employed if the employment looks like it has employee status, regardless of what the contract actually says.

If HMRC decides you’re a ‘deemed employee’ (i.e. you’re an employee, not a freelancer), they would seek to recover the higher levels of tax due from the employer/client, generally not from the individual.

TV and film industry

In the film and TV industry, there are many people working who find it difficult to determine their status. HMRC have issued detailed criteria to help determine whether you are employed or self-employed. We’ve written an article on the recent HMRC specific guidance list for the film and TV Industry, specifying which jobs are allowed to have self-employed status.

There are also occasions in the film and TV industry when you’ll do a job that isn’t on the list produced by HMRC, but if you contact them, they may class you as self-employed and give you a letter of authority. The above link gives details of how to do this; the letter of authority must be given to your employer.