#3644 - The Employment Relationship - Labour Law

The employment relationship

Identifying dependent labour

Classifying labour as ‘dependent’ or ‘independent’

All systems of labour law draw a fundamental distinction between employment which is categorised as ‘dependent’ or ‘subordinate’, or that which is independent or autonomous.

= employees v self-employed or independent contractors.

Employees are subject to the employer’s common law powers of direction and control which, if they do not take the form of express contract terms, tend to be read into the contract as implied terms (e.g. Sim). In return employees come under the scope of employment protection and social security legislation: they may benefit from statutory rights to wage protection, limits of working time, income maintenance and compensation for loss of employment.

By contrast, few of the burdens or benefits of dependent status apply to a relationship in which the worker is self-employed.

Qualifications to this basic picture:

1) there is lack of consensus on the appropriate criteria for identifying dependence or subordination. The English courts have had occasion to use many different and potentially contradictory tests for this purpose including “control”, “integration”, “economic reality”, and “mutuality of obligation”.

This problem is unique neither to English law nor to the common law in general. In most systems there is a conflict or tension between the use of criteria of formal or personal subordination, and those of economic subordination as the principal tests of dependence. The use of economic criteria tends to result in a widening of the scope of statutory protection, encompassing relationships in which the worker retains extensive discretion over the manner and timing of performance of the work but is nevertheless bound to the employer through dependence on wages or salary for subsistence.

In English law, a move towards the adoption of economic criteria occurred when the courts used the integration test to extend employee status to certain professionals such as doctors or accountants who were employed within large organisations (Stevenson, Jordon and Harrison, and Beloff) and also when they invoked the ‘economic reality; test to extend the scope of protective legislation to include certain part-time workers and homeworkers (Market Investigations, and Airfix Footwear).

But in general it cannot be said that economic criteria have successfully displaced rival tests: although control ‘can no longer be regarded as the sole determining factor’ (Cooke J in Market Investigations), it must still be taken into account and the more modern test of mutuality of obligation has led to a renewed emphasis on formality of commitment between the parties (O’Kelly) which has placed the status of many casual workers in doubt

2) the boundary between dependent and independent labour shifts according to the particular statutory context which is being considered. There is no universal dividing line of general application between employees who are protected by legislation, and the rest who are not.

Thus, while it is the case that only employees may qualify for most rights under ERA 1996, other statutes explicitly cover certain categories of the self-employed. In particular, protective legislation may be applicable to individuals who are independent contractors without having an identifiable business of their own. Some provisions of health and safety legislation apply to this group, as do equal pay and anti-discrimination legislation and legislation for basic labour standards in relation to minimum wages and working time.

Moreover, although the self employed have no protection against dismissal in the context of industrial action, a dispute between self-employed workers and their employer may form the basis for a legitimate trade dispute which may enable the individual organisers of industrial action and their trade union to avoid liability in tort.

Thus the self employed are very far from being excluded completely from labour law regulation. The growing inclusion within protective labour statutes of certain categories of the self-employed, together with the difficulties faced by the courts in applying the distinction between employment and self-employment, led Freedland to argue for a unified concept of the “personal employment contract” in place of the existing scheme of classification of employment relationships.

3) the process of classification is complicated by the lack of a uniform terminology in the different Acts of Parliament which regulate the employment relationship. In ERA 1996 the term ‘employee’ is used to describe dependent labour, but the equivalent term for most of the benefits provided by SSCBA 1992 is ‘employed earner’.

Employees and employed earners

Under ERA 1996, an employee is defined as an “individual who has entered into or works under...a contract of employment” and “contract of employment” is defined to mean “a contract of service or apprenticeship, whether express or implied, and (if it is express) whether in oral or in writing.

No further definition is offered: the scope of the legislation, in effect, rests upon the common law tests as developed and applied over time by the courts. The principal rights which are thereby confined to employees concern unfair dismissal protection, redundancy compensation, minimum notice upon termination, guaranteed pay, the right to maternity, paternity and parental leave, and the right to return to work after taking such leave.

EU directives in the employment protection field are mostly stated to apply to employees: this is the case, for example, with Directive 2001/23 on the protection of acquired rights in relation to transfers of undertakings, and Directive 91/533 on information concerning terms and conditions of employment.

The ECH has decided that national courts are entitled to apply their own national definitions of employment status when transposing these employment protection directives, even if this results in some inconsistency in the implementation of directives in the different Member States.

By contrast, the Court has insisted on widely-phrased definitions and greater conformity to a single standard throughout the Member States for the term ‘worker’ set by EU law in cases concerning freedom of movement (Levin) and equal opportunities (Allonby), on the grounds that these two areas are concerned with fundamental rights contained in the EC Treaty and recognised as such by the jurisprudence of the Court.

Income taxation and social security legislation also divide the labour force into the two principal groups of employees and the self-employed. Income from employment under a contract of service is taxable under schedule E which means that the employer is responsible for making the relevant deduction at source and paying the amounts over to the tax authorities under the PAYE system. Workers who are self-employed arrange their own payments of income tax = adoption of self-employment may bring significant tax and contribution savings.

It might be thought that since the same concept of the contract of employment or service underlies the definitions used in employment, social security and tax legislation, a common test should be applied which would result in an individual having a single status for these different purposes. This would also seem to accord with the philosophy underlying the division between employees and the self-employed. Employment protection and social security legislation are forms of regulation aimed at protecting the employee against risks arising from loss of income and/or employment. They are designed for relationships characterised by a high degree of personal and economic dependence between employer and worker; they work less satisfactorily in cases of self-employment where the worker is not so highly dependent upon a single employer over a substantial period of time. In determining employee status, courts and tribunals frequently have resource to precedents deriving from legislation of a different kind from that which is immediately at issue, as well as from the cases concerning the vicarious liability of the employer at common law.

BUT it cannot be assumed as a general rule that a decision from one area of law will necessarily determine the outcome in another, and the recent practice of the courts tends to suggest that they will not pay much regard to the tax or social security law status of the worker when deciding on their status for employment law purposes.

They may be good reasons for treating each area of law separately e.g. it is arguable that in cases of tax and national insurance, the public interest in ensuring the efficient collection of revenue should weigh strongly against any attempts by the parties to adopt the form of self-employment in order simply to avoid paying the normal incidence of tax. In cases involving vicarious liability, the interests of third parties – tort victims – are at stake. Where no third party is directly affected by the parties’ own determination of the worker’s status, as will tend to be the case with regard to employment protection, the courts might be justified in paying greater regard to the parties’ expressed wish to adopt self employment.

But to take this view would be to assume that the worker has made a conscious choice to weigh up the costs and benefits of employee status when it practice it may well be the case that he or she has been presented by the employer with a standard form agreement which there has been no effective opportunity to modify.

Moreover, fragmenting the status...