When is an employee not an employee?

It might sound like the start of a very poor joke, but the taxi app company Uber has been in the news recently for just this question. Should their drivers be treated as employees? And, as such, subject to employment law?

When is someone classed as an employee or contractor?

It’s not always easy to understand UK employment law, with all its ins and outs. So let’s break it down for you in simple English so you can see more clearly when someone should be classed as an employee or contractor:

  1. What hours do they work for you? — if you have someone working for you for a number of set hours over the course of a week or month, it’s likely that they should be treated as an employee
  2. How are they paid? — just like the above point, do you pay the individual regularly by the hour, week or month? Not the kind of one off, £50 per hour contracting job, but an agreement to pay them each month to the tune of £Xk per year? This would point to them being an employee.
  3. Where do they work? — does the individual work exclusively for you, and at your place of work? Or at places determined by you? If yes, they’re likely an employee.
  4. What level of involvement do they have? — is the individual risking their own money in the business? Do they have any final say in how you run the business? Do they bring their own equipment? Can they hire people in their own right? These are pointers that they wouldn’t be an employee.

So these are the four main questions to ask yourself if you’re unsure about whether someone is an employee or contractor. However, some other important things to think about are:

– Whether they are ‘controlled’ by anyone – do you have a say over how they work etc.?

– Do you have an obligation to provide them with work? And do they then have an obligation to do it?

– Are they unable to get someone to do their role for them? i.e. in a service business they may ask an employee of theirs to do the work

If you answer yes to these, it’s again likely that the individual should be treated as an employee.

There is a third employment status of ‘worker’ which is somewhere between an employee and contractor, these people have some but not all employment rights, and the status is dependent on the degree of flexibility both employer and worker have. Typically zero hours or casual staff would be workers. However, here we’ll just be looking at employees or contractors.

What are the benefits of working with employees or contractors?

When deciding whether someone is an employee or contractor, it’s worth thinking about the benefits of both situations.

Now obviously, taking on an employee means that you have an individual working for you with no other commitments in your business hours. They work purely for you (or should do!), meaning that you have them as a resource to use purely for your business. If you want to have resource available at all times during set working hours – then this is the choice for you. And if you get the right person, it can be much more beneficial for your business than taking on contractors.

However, taking on a contractor does have its benefits. First of all, you may not want to have to organise PAYE or to have to contribute to National Insurance for another person – with this, you don’t have to. Also, when someone is a contractor, you do not have to work with them under the terms of employment law – therefore the individual doesn’t get the benefits of sick pay and holiday. And it’s one less bit of HR admin to sort out too!

Usually you will pay a higher day rate for the work for a contractor as they have to cover their own tax and any overheads and expenses, although you will obviously need to cover these directly for an employee.

Can someone be both an employee and contractor?

Obviously, there are grey areas in the law when it comes to deciding whether someone is an employee or contractor. Sometimes, though not often, it’s just not that clearly cut.

For example, in the recent budget, the government announced further powers to close loopholes in UK law to catch those that might be sitting on the fence.

First off is the IR35 rule, which allows HMRC to impose penalties of 100% of tax due when ‘contractors’, who are effectively employees according to the above criteria, have asked to be paid through their personal service companies. These companies were perfectly legitimate, however the use of them was not, and meant that they were avoiding IR35 to pay themselves a more advantageous wage through dividends.

There’s also a tax vehicle for highly paid contractors who may choose to be paid through an EBT (Employee Benefit Trust). This money, instead of being paid to the contractor, is held in trust until such time as they may wish to access it and therefore spend less money in tax. For example when they’re retired or a non-UK resident.

Of course, it’s not really going to impact on you as an employer, however you might be an ethical sort who believes that people shouldn’t avoid tax — if so, you might want to know!

How does this apply to Uber?

Uber have made a firm decision to treat their drivers as ‘partners’ rather than employees. However, the GMB Union argue that the way they operate means they do have the same responsibilities towards their drivers as any employer would have. In doing this they hope to ensure that Uber will pay the minimum wage, provide paid holiday, and generally do more for their drivers.

The union cites the following as reasons for why they believe Uber is an employer in legal terms:

– They control how much passengers are charged

– They require drivers to follow particular routes

– They rate the performance of their drivers

Let’s take a look at these in turn using the criteria we set out earlier, from the point of view of the GMB Union:

– The drivers do not have a final say in how their business is run, as seen in point 4 this would usually be the right of a contractor. So, this might mean they’re an employee.

– The routes that the drivers must take could count as a ‘place of work’ – if this is fixed by Uber, could this mean they are being employed to work there?

– This is more tricky, as the performance of a contractor or employee would determine whether they continue to work with or for someone. However, regular appraisals are a key part of employment.

Therefore it could be shown that Uber is in fact employing these drivers. And if this turns out to be the case, the treatment of their ‘partners’ should be taken in the context of UK employment law. As such, their ability to ‘switch off’ drivers at will, and many more of their practices, could come into question in the future.

Speaking in their defence, an Uber spokesman mentioned that their drivers “love being their own boss”, and that employment status would mean they work “set shifts, earn a fixed hourly wage, and lose the ability to drive elsewhere as well”. It is that key point that defines Uber’s defence – private hire drivers are free to go elsewhere. But when there’s little competition, why would they?

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