Getting the status of your workforce right

Following recent cases against employers in the tech and mobility sectors, we focus on the ramifications of misclassifying employees and workers as self-employed and what employers can do to limit potential claims for holiday pay and unfair dismissal.

The legal framework determining employment status in the UK has been the subject of much confusion. This has resulted in a slew of claims by individuals arguing that they have been misclassified as self-employed when they are in fact workers or employees.

What the law says

The three types of employment status currently recognised in law (self employed, worker and employee) dictate what rights and protections an individual has, which is why it is so critical for employers to attribute the correct status to members of their workforce. The most notable for workers are the rights to receive the National Minimum Wage, statutory holiday pay and automatic pension scheme enrolment, while employees have protection against unfair dismissal if they have two years’ service (as the law currently stands), amongst other rights. Individuals who are genuinely self-employed contractors do not share these employment law rights and protections.

How an individual’s employment is categorised by their employer is only one element that can determine their status for employment law purposes; the reality of their working arrangements must be analysed too. What distinguishes the self-employed from the worker from the employee depends on numerous different factors, including the level of control the employer has, the obligations each party owes to the other and whether the individual delivers the work personally. 

This assessment requires a careful balancing of various elements of the job role.  If, for example, the employer exercises a lot of control over how the individual carries out their work, refuses them the ability to elect a substitute and offers them a minimum amount of work which they must accept, the individual may be considered an employee, subject to other considerations. A self-employed contractor, on the other hand, operates independently and more flexibly, deciding how to carry out the service with the ability to send someone else in their place where necessary. Generally, they pay their own tax and submit invoices to receive payment. 

What happens when an individual is miscategorised?

The consequences of miscategorising workers or employees as self-employed for employment law purposes can be considerable for employers, both financially and reputationally. Any legal claims can result in substantial fees in defending actions in the employment tribunal and compensation awards can be significant for example in respect of unpaid holiday pay, pension contributions and (if the individual is considered an employee) unfair dismissal compensation.

Crucially, if an individual successfully challenges their labelled status and is found to be a worker or an employee by the tribunal, any claim for four weeks’ holiday pay under the Working Time Regulations can be made in respect of their entire period of employment, as the two-year backstop which usually applies to holiday pay claims in the UK does not apply. 

These types of claims have also attracted significant media attention, impacting upon the public image of employers and putting pressure on them to make changes to their operating models. After the Supreme Court decision that Uber drivers were workers and not self-employed contractors, the taxi company introduced a pension scheme, insurance protections and paid holiday for drivers.

Following that decision, delivery drivers in the tech space have spearheaded the recent cases relating to misclassified self-employment, with claims made by Addison Lee and Bolt drivers. In all cases, the drivers have been held to be workers rather than self-employed for employment law purposes as they have undertaken to accept the work offered to them for the duration of the time that they are logged on to the apps which govern their work. As a result, they have been able to pursue claims for backdated holiday pay and the National Minimum Wage. The reported compensation liability is over £200 million.

The UK government has committed to a plan to implement a simpler framework for employment status, proposing just two categories of worker and genuinely self-employed. The Director of Labour Market Enforcement, Margaret Beels, has urged the UK government to finalise their plans in this regard sooner rather than later, claiming that a lack of action on this front will impact upon the effectiveness of its employee rights policies outlined in its Employment Rights Bill.

What does this mean for employers?

With the rise in employer National Insurance contributions coming into force from April 2025, employers will be looking to cut costs where they can, possibly by engaging more self-employed contractors in a bid to reduce the obligations that come with hiring employees. However, employers should take care to avoid engaging contractors on a self-employed basis on paper when the reality of their status is closer to that of a worker or an employee, as the initial cost savings may be outweighed by the potential tribunal compensation liability and the associated reputational damage of misclassification.

To avoid this, employers should:

• carefully assess what type of employment structure each role requires
• ensure that written terms accurately reflect the relationship
• clearly communicate the rights and benefits associated with each role, making it clear what each individual is and is not entitled to
• periodically review the reality of the working arrangements with contractors to ensure they still reflect genuine self-employment.