As a business owner, you may be preparing to employ staff for the first time. Today's labour market is more flexible and varied than ever before, and employees work different hours and have different rights. Before you make any job offers, it is important to get familiar with what constitutes employment and how to determine employment status. In the UK, employment status determines core employment rights and the mutual obligations owed by both parties in an employment relationship. There are also significant implications relating to tax and national insurance contributions.
What is employment?
A contract of employment refers to a legally binding verbal or written agreement of service between two parties, the employer and the employee. The Employment Rights Act 1996 defines a contract of employment as a contract of service or apprenticeship that the employee has entered. The employer takes on the employee under particular stipulations known as express or implied terms which are set out in employment contracts and typically include:
- Details of employment conditions
- Payments, including salary and bonus payments (if applicable)
- Rights of the employee e.g. whether the employee is eligible for holiday pay, sick pay, sick leave, shared parental leave etc.
- Duties of the employee
Generally, an employer and an employee can enter into an agreement together on whatever terms they choose. However, an employee cannot agree to contractual terms that provide fewer rights than those already granted under the law.
What are express terms?
The express terms are explicitly agreed between the employer and employee. In the past, most workers were hired under oral contracts, but today it is standard procedure for many companies, including small businesses, to issue written contracts for their employees to sign. An employee's contractual documents typically include the terms and conditions of employment and the principal guide to the employee's rights and obligations.
The express terms include:
- The parties’ details
- The duration of continuous service and notice of termination of employment
- The hours of work, including overtime hours
- The job title and place of employment
- Benefits and remuneration
- Sick pay, redundancy pay and holiday pay
Before drafting the express terms, employers must be familiar with the relevant statutory provisions, such as employment status, equal pay and the minimum wage and must comply with the minimum legal standards to avoid legal action brought by employees.
What are implied terms?
Implied terms are presumed to form part of every contract of employment unless there are express terms that directly contradict what has already been agreed. Implied terms of the contract of employment and the implied obligations include:
- An employer’s duty to take reasonable care of the health and safety of employees and provide a safe work environment
- A duty of mutual trust and respect between employer and employee
- The right to receive at least the national minimum wage
- The employee’s and employer’s right to a minimum notice of termination of the contract
- An employee's duty to serve the employer faithfully and in the best interest of the employer
These implied terms are typically deemed to be necessary in order to give the employment contract business efficacy and arise out of the context of work relations. They are presumed to supplement and qualify the express terms.
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What is an employment contract?
If you are employed, there is a contract between you and your employer. Like other contracts, certain requirements must be fulfilled in order to give rise to a legally binding and valid contract. These include:
- An offer made by the employer for a contract of employment which is clear and unequivocal;
- An acceptance of that offer by the employee;
- Consideration of the agreement by way of services provided by the employee in return for remuneration by the employer; and
- An intention to create a legally binding contract
Failing to provide an employment contract to an employee can create significant risks for the employer.
What are the main types of employment statuses?
Under employment law in the UK, determining the status of an employee is instrumental in identifying both the employee’s rights and the employer’s responsibilities. UK law currently recognises three main types of employment status:
- Employee
- Worker
- Self-employed and independent contractor
An employer may have written terms to describe and determine the status of the employment; however, it is ultimately how the employee and the business organisation work together that will determine the employee’s rights and status of employment.
Worker
A person is more likely classed as a worker if:
- They have an agreement to do work or services personally for a reward
- The work done for their employer is irregular and unstructured
- The worker is not offered guaranteed hours of work by the employer
- The worker has limited power to send someone else to do the work in their place
- The employer provides the tools or materials needed to get the work done
Workers have employment rights including:
- Receiving the National Minimum Wage
- Paid holiday
- Protection by law for ‘whistleblowing’
- Protection against discrimination
- Protection against unlawful deductions in remuneration
- Health and safety protection
Workers are not usually entitled to:
- A minimum notice period for the termination of an agreement
- Protection against unfair dismissal
- Statutory redundancy pay
Employees
An employee is someone who works under an employment contract. An employee might have a different status for tax purposes, though there is no statutory test to determine an individual’s employment status for tax purposes. Employers are therefore responsible for working out the worker’s status for the purposes of employment law and tax law.
Employees have all the rights available to workers, and also benefit from additional statutory rights which include:
- Statutory sick pay
- Statutory maternity pay and leave
- Statutory paternity pay and leave
- Parental bereavement pay and leave
- Minimum notice period if the employment contract is terminated
- The right to request flexible working
- Protection against unfair dismissal
Self-employed and independent contractor
A person is likely to be classed as self-employed or an independent contractor if:
- They are responsible for how and when they work
- They are the owner of a business and take responsibility for any success and failure
- They are a freelancer
- They invoice for work rather than collect wages
In most cases, employment law does not extend protection to the self-employed as they are their own bosses and are therefore responsible for their own health and safety and for protection against discrimination.
Why does employment status matter?
An employee is therefore someone who works under the employment agreement. An employment contract draws a binary distinction between employees and independent contractors or between contracts of service and contracts for services. This distinction is paramount in connection with the scope of vicarious liability of employers. This means if an employee causes loss to another person by committing a tortious act that causes harm to another during the course of employment, the employer would be legally liable. Contrastingly, such liability is not imposed on torts committed by independent contractors due to the lack of sufficient connection between both parties.
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The opinions on this page are for general information purposes only and do not constitute legal or financial advice on which you should rely.