|An excerpt from Lawpack's Employment Contracts Kit.|
Any person who works for another person or organisation in return for remuneration has a contractual relationship with it. But an extremely important distinction must be made between an employee and a self-employed person, because their legal rights differ in a number of ways.
An employment contract (sometimes referred to as a ‘contract of service’) is the name given to the agreement an employee has with an employer. A contract for services is the name given to the agreement between a self-employed person (or independent sub-contractor) and the person or organisation to whom s/he is providing the services.
To distinguish between an employment contract and a contract for services it's necessary to look at the reality of the relationship, not merely the name of the agreement.
How to tell an employment contract from a contract for services
Questions to consider in determining whether a person is an employee or is self-employed are:
The greater degree of personal responsibility the person engaged undertakes in any of the above, the more likely s/he is to be considered self-employed rather than an employee.
Other factors may include the method of payment, the method of paying tax and National Insurance, payment during absence for illness or for holidays, membership of company pension schemes and a prohibition on working for other companies or individuals.
Although the above questions are relevant considerations, they will not be appropriate in every case and the answer to the question isn't found by merely using these questions as a checklist. It's important to assess each case individually.
If there is any doubt as to the nature of the relationship, the parties may agree on what the legal situation between them is to be. But it will not be conclusive when questions of tax, social security or statutory employment protection arise.
If the matter goes to a court or tribunal, all the circumstances will be considered to ascertain the true nature of the relationship.
To add to the confusion, some of the more recent legislation (such as the Working Time Regulations) replaces the term ‘employee’ with ‘worker’.
A worker includes both employees and others who provide services personally (although not under a client relationship), but doesn't include a person who is genuinely self-employed. This greatly increases the number of people protected by such legislation.
Practical and legal implications
Rights common to employees and the self-employed:
Obligations of employees:
Obligations of the self-employed:
HM Revenue & Customs has introduced rules to remove opportunities for the avoidance of tax and Class One National Insurance Contributions by the use of intermediaries, such as service companies or partnerships, in circumstances where the individual worker would otherwise be considered to be an employee.
The new rules determine that, where workers meet the definition of employees in relation to work done for their clients, they will pay broadly the same tax and National Insurance contributions as an employee, even if they provide their services through an intermediary.
For further details, please see HM Revenue & Customs website at www.hmrc.gov.uk.
Published on: October 11, 2010