What is the Difference Between an Employee and a Worker?
This is a question that comes up often!
First, a clarification: the term “Worker” is only used in the context of employment law rights. From a tax perspective the term isn’t used. In tax, people are employed or self-employed.
So, you have two steps to address:
For the purposes of employment law is the individual an employee, worker or self-employed?
If the individual’s employment status is that of “Worker”, are they an employee or self-employed for tax purposes?
Let’s start with question 1.
To briefly deal with self-employment and get it out of the way: largely this should be someone who is in business on their own account, who takes financial risks with the work they offer (i.e. can stand to gain or lose from the prices they offer), has an unfettered right to provide you with a substitute to do the work instead of doing it themselves and who does not take instructions from you on how their work should be done, beyond agreeing what outcome you are looking for.
Largely, where someone is truly self-employed it’s pretty obvious. If you find yourself a little unsure whether someone you have engaged to do work is self-employed, there’s a good chance they could be a worker.
When someone is an employee, they have the gold standard of employment rights, meaning they accrue all of them over time. Usually both parties agree they are employees and (ideally) the employer will have issued a written contract of employment. Crucially, part of that contract will involve the employer confirming it will offer a certain amount of work on a regular basis (e.g. 35 hours per week, Monday to Friday) and the employee will agree that they must be available to do the work given to them by their employer during those hours. This is known as “mutuality of obligation”. The benefit to both parties is the certainty this offers. The employee knows they will be given work and can expect to be paid on a regular basis and the employer can rely on having permanent staff available to carry out work as it comes in.
Mutuality of obligation isn’t the only criteria for identifying an employee. There are other elements that build up a “picture” of employment, such as the employer having control over when and how work is done, a requirement for the individual to do the work themselves (i.e. a requirement of personal service, the individual cannot present a substitute to do the work instead) and requiring the individual to wear a uniform or use the employer's equipment. However, to a large extent these other elements would also be present where the individual is actually a worker.
So, what is a worker?
One of the biggest pointers to someone being a worker is where, whilst they are at work, they are treated much like an employee (for example, they must follow management instructions, do the work in the way they are directed, must attend personally for work and may even be required to wear a uniform) BUT, they are not required to accept work.
While employers and employees have mutuality of obligation, workers are free to accept and reject work as it is offered to them. A classic example of this is in the gig economy, where businesses work exclusively on the basis of having a pool of individuals who might be available to “pick a job up” as it comes in. Another common example is where a seasonal business operates throughout the year with a skeleton staff made up of permanent employees, but which takes on casual workers at particularly busy times to boost the amount of work the business can take on.
When an individual is a worker they will accrue many of the same employment rights as employees, they will be entitled to be enrolled into a pension (if they meet other eligibility criteria), they are entitled to paid holiday and they are entitled to be paid the national minimum wage (to name a few). However, they do not accrue the right to bring a claim of unfair dismissal against an employer, their holiday should be calculated only according to the hours they actually work, they do not have an agreed number of hours work they are entitled to be offered and they can be paid hourly, rather than being paid an agreed salary. For these sorts of reasons, if the employer does not feel it needs the level of commitment it can expect from a fully blown employee, it might prefer instead to accept that an individual may not always be available to work, and make them a worker.
A good way to record a “worker” arrangement between the parties is to have a casual workers contract in place. This is distinct from an employment contract in a few ways, not least, by clarifying that the individual is not an employee. If this is of interest, the best thing you can do before committing to such a contract is to take advice from an employment lawyer. Employment status where workers are involved is rarely clear cut and in a dispute, a number of factors (in addition to the ones I have set out above) would be considered to “paint a picture” of the true employment status of an individual. It is always wise to tread carefully!
This leads on to the second question:
Once you have determined that an individual is a worker for employment law purposes, are they an employee or self-employed for tax purposes?
Many employers start with the mis-apprehension that, as they have agreed an individual will work on a casual basis, that person is therefore not an employee and must be self-employed for tax purposes - if this is you STOP AND TAKE ADVICE!
While the Tax Courts do not recognise the status of “worker” they assess employment status using largely the same indicators as the employment tribunals. Mutuality of obligation is just one of the criteria relevant to determining employment status. Just because it may not be present in relation to an individual who has been identified as a worker for employment law purposes, does not mean that the other factors won’t lead the tax courts to take the view that the individual and business should be taxed as if that person is an employee.
Before you get your worker to sign up with HMRC as self-employed, check with a tax advisor that you’re getting it right!
If you would like advice on any of the above, get in touch!
