How to work out whether a consultant is self-employed or an employee

June 2019

1. Broad test

The broadest test is whether the individual is genuinely in business on their own account. But there are no simple rules to determine whether a contract is an employment contract or not. Determining status is not a mechanical exercise of running through items on a checklist. There is lots of case law covering lots of grey areas covering many slightly different circumstances. A picture has to be painted from the accumulation of detail and not all details are of equal weight or importance to all situations.

2. Employment law v tax law

The rules can be slightly different for tax and employment law purposes. The weight given to different test factors varies between employment and tax tribunals. This is why neither employment nor tax status is determinative of the other, and why results are sometimes different. Thus can make things a bit confusing.

In December 2018, the government published the “Good Work Plan” in which it agreed that having different tests for employment status in the tax and employment law systems can lead to uncertainty and stated that it plans to reduce those differences to “an absolute minimum”. However, it has not given any detail on how it proposes to address the fundamental difference between the two systems.

3. Key tests

There are four key tests for whether an employment contract exists:
• Mutuality of obligations
• Personal service
• Control
• ‘Other consistent factors’

4. Mutuality of obligations

There must be ‘mutuality of obligations’ – broadly, the obligation on an employer to provide work where it is available and the obligation on an individual to accept that work unless there are very good reasons such as being ill.

Factors relevant to whether the required mutuality of obligation exists include:

• whether there is any notice period, or whether the individual is free to leave at any time;

• whether the individual has a right to a minimum amount of work or pay, or on the other hand, whether they are only paid for hours worked, would be sent home if the project suffered a hiatus for any reason, or could refuse work when offered;

• whether the individual has the right to fix the price payable for their services; and

• whether the individual is subject to non-solicitation covenants, which would impede their ability to carry out work on their own account following the end of the relationship with the client.

5. Personal service

The individual must provide their own skill and work in return for pay. See below for what this means in the context of the right of the consultant to appoint substitutes.

6. Control

There must be a sufficient degree of control of the individual’s activities. No single factor will be determinative here, but the following are likely to be relevant:

• The extent to which the consultant is integrated into the business (do they work alongside employees, have a desk, e-mail address or business cards?)

• The extent to which there is subordination between the individual and the client (eg is the individual subject to the client’s appraisal and disciplinary procedures?)

• The extent to which the client dictates the way in which the individual undertakes the work.

• Whether the individual provides their own tools and equipment.

• Whether the individual is prevented from taking on other work. If the individual is entitled to undertake assignments for other clients during the engagement, this will point away from status as an employee, particularly if can be shown that the right is exercised.

• The seniority of the individual. If they are a senior consultant with particular skill and experience, the “control” factor is likely to be less relevant. With a less senior consultant, factors such as whether the consultant can choose their hours are likely to point away from employment status.

• Whether the consultant needs training and supervision.

7. Other factors

The other provisions in the contract must be consistent with it being a contract of employment. These are mainly ‘economic reality’ tests. For example:

• Whether the individual carries the financial risk normally associated with self-employment (for example, the risk of making a loss on the contract, the possibility of termination without compensation for any reason, loss of income for absence or when no work is provided or available) in addition to a contractual obligation to put right at their own expense any defective workmanship.

• Whether the individual has incorporated a service company, primarily as a means of managing the financial risk that they assumed in the consultancy arrangement (that is, to limit their liability), as this is a relevant factor in negating employment status.

• Whether the individual is obliged to provide a minimum level of insurance cover.

• Whether the individual is entitled to employment-type benefits (for example, training, skills development, pension or insurance benefits, benefits in kind, bonus, share options or other incentive arrangements provided to employees of the client). However, case law has not considered this to be a strong factor, on the basis that employees are not always entitled to all these benefits.

• Whether the consultancy agreement contains provisions specifying that the parties had no intention to form an employment relationship and that there is no mutuality of obligation (although this will be of limited relevance).

• Whether the consultant is paid by a monthly salary (which tends to indicate employment) or a specific hourly rate or set fee (which tends to indicate consultancy status especially if there is no payment for periods of absence, and if the consultant has the opportunity to profit from sound management in performing the work).

• Whether the consultant can be regarded as carrying on business on their own account (for example, whether they take steps to market and promote their business, and cultivate relationships with clients through which future work is generated) or whether the client has “sole and absolute discretion” over whom the consultant can provide their services to.

8. Substitutes

If the individual has a general and unqualified right to appoint a substitute, for example by way of sub-contracting his obligations, this would be decisive in determining that the relationship is that of an independent contractor and not an employee.

A qualified right, for example a right to substitute only when the individual is unable (rather than unwilling) to carry out the work, or only with the consent of the client who has absolute discretion to withhold consent, is more likely still to be treated as consistent with an employment status. It all depends on the degree. For example, where the client’s right to refuse the right to substitute can only be exercised where the individual can’t satisfy it that the substitute is as qualified as the individual, this should be enough to escape from the employee status.

The following considerations may also be relevant in assessing the effect of a contractual right to delegate:
• The nature of the duties that can, and cannot, be delegated – both in terms of the proportion of those duties to the rest of the duties and whether they are the “dominant purpose” of the agreement. If the duties that can be delegated are the dominant purpose of the agreement, it is unlikely to be a contract of service (ie an employee relationship).

• Who organises and pays the substitute.

• Whether the individual would be able to profit from delegating the duties (that is, whether they could pay any substitute less than they receive themselves).

9. Sham contracts

Although you can try to word a contract so that it looks either like an independent consultancy relationship or an employee relationship, courts can look beyond the wording of the contract to decide what the true relationship was in reality.

So for example the test in one case about the right to appoint a substitute was set out as follows: ”If the reality of the situation is that no one seriously expects that a worker will seek to provide a substitute or refuse the work offered, the fact that the contract expressly provides for these unrealistic possibilities will not alter the true nature of the relationship. But if these clauses genuinely reflect what can realistically be expected to occur, the fact that the rights conferred have not in fact been exercised will not render the right meaningless”.

10. How to increase the likelihood of independent contractor status

So what can businesses do if they wish to improve the chances of individuals who provide services to them being properly categorised as independent contractors, rather than as employees or workers? In essence, the more control the business retains, the more likely the individuals will be deemed employees or workers. In particular, the business should consider allowing individuals the following freedoms:

• The ability to choose how to carry out the work and their own hours.

• The freedom to choose whether to accept, or reject, work.

• The ability to set their own fee or price.

• The ability to market their services freely and to work for third parties (in reality).

• The ability to freely provide a substitute to carry out work.

• The freedom to use their own equipment.