Employee or Independent Contractor

Distinction

A key distinction in employment law is between a “contract for services” and an employment contract. A contract for services is provided by an independent contractor i.e. someone in business on his own account.  An employee is somebody who works under the terms of an employment contract.

There can sometimes be a thin dividing line between a contractor and an employee.   The law has always been, that if the relationship is in substance and in practice an employee/employer relationship, then it is deemed to be so, no matter what the parties label or call themselves.

Being an “employee” carries certain consequences particularly for the employer.  Employees are entitled to a range of protected rights.  The employer is obliged to deduct PAYE and National Insurance Contributions from payments to an employee.   The failure to properly identify a person as an employee who labels wrongly himself as an independent contractor could cause significant liability for the employer if the matter is reviewed by HMRC at a future date.

There are a number of key tests to determine whether somebody is or is not an employee.   Control is an important element.  Generally, an employee can be instructed as to which tasks to perform and how to perform them.  The degree of integration of a person as part of the organisation is a significant factor.  An employee is generally obliged to carry out the work personally.  In contrast, an independent contractor may be able to substitute someone else to do the work.

Economic reality is an important factor.  An independent contractor is in business on his own account and bears the financial risks (and rewards) from his own sound management of the task.

The Courts and other bodies undertake a composite test, taking all of the above factors into account.  The level of independence is critical.  Having a final say in how the business is run, risking one’s own money, providing his own equipment and the ability to substitute, are key indicators of a contract for services i.e. the person is an independent contractor.

In a borderline case,  the question as to whether an individual is an employee or independent contractor may only be ultimately decided in some formal body such as the Revenue,  an employment tribunal or by the Courts in the event of a dispute.

An individual who is self-employed must inform the Revenue himself and has his own independent tax obligations.  He will generally have to charge VAT on services provided.

Outsourcing

The distinction between an employee and an independent contractor can be sometimes difficult to draw.   The following deals with genuine “contractors” who provide services on their own account and are not disguised employees.  Contractors provide services for a set fee and duration under a contract for services.

The form and content of outsourcing contracts are very varied. Contractors can provide flexibility and can be more effective.  Typically, VAT will be payable,  although this will generally be reclaimable.  There will be no responsibility for PAYE and National Insurance but there are certain sectors (e.g. in the construction industry) where there are obligations to deduct tax on payments to contractors.

Contractors, sub-contractors and agency workers have fewer rights than employees. They are not entitled to receive the minimum wage, rights under Working Time Regulations, rights to paid leave and rights not to be discriminated against.

Some Health and Safety requirements apply in respect of contractors as well as employees.  There is a duty to ensure that a contractor has the appropriate training and ability and that the appropriate health and safety provision is made. There is an obligation to provide relevant information (and training where required) on health and safety issues.

There have been many cases where employers have been fined or have been found legally liable in civil claims for damages for failing to ensure contractors’ competence, failures of supervision, failures to ensure safe operation of vehicles, safe loading etc.

Public liability insurance may be required for contractors as liability can arise for their actions or omissions, under certain circumstances.  This would not be covered under an employer’s liability policy.  A public liability policy may be required to cover liability arising away from the business premises.  It is desirable to verify that the contractors have their own insurance and to ensure that the terms of the contract pass as much risk to the contractor as possible.

Contracts

The contract should provide for a schedule setting out the works concerned, performance targets and deadlines.  Payments should have an appropriate mechanism.  There should be “penalties” for failure to meet time and quality requirements.

The agreement should set out the contractor’s responsibilities, the objectives and the scope of the work.   It should specify the resource the Contractor agrees to commit.  It should provide mechanisms for resolving disputes.

A contract for services may contain many of the provisions found in employment contracts.  In particular, it is often desirable to protect confidentiality and intellectual property rights.  There should be a non-disclosure agreement where appropriate.