The Status Tests

JOLYON MAUGHAM, barrister and STAN DUNN chart a path through the maze of common law and statutory tests for the status of construction industry workers.

THE ADVANTAGES OF self-employed status are well known: a more generous deductions régime, considerably discounted National Insurance contributions and tax flow advantages on income tax. So important are these benefits that, in a competitive labour market, the ability of a construction industry contractor to offer self-employed status will often be the key to its ability to attract and retain skilled and reliable labour.

The question whether self-employed status was available used to be answered by applying the well-known tests for employment set out in the case law and sanctified by time. However, Tax Inspectors, concerned to maximise tax revenues, can now also pray in aid a variety of statutory provisions in addition to an (in some cases, overly) aggressive application of those common law tests.

The purpose of this article is to outline the key elements of the common law and statutory tests with reference to the construction industry.

The common law tests

Answering the question whether a worker is an employee requires a full consideration of the relationship between worker and contractor. The one certainty is that there is no single factor which is determinative of employment status. Any suggestion by an Inspector that if a worker works for a single contractor for a fixed period - 13 weeks is frequently suggested - he will necessarily be an employee should, therefore, be vigorously resisted.

The case law reveals, broadly speaking, three sets of criteria which need to be examined: the mutual obligations test, the economic reality or integration test and the control test. Before considering each of these tests, it will be useful to make a number of preliminary observations.

First, the parties cannot change a contract which, properly analysed, is one of employment into a contract of self-employment just by describing it as such. Nevertheless, second, the contract will be highly persuasive evidence as to what the parties envisaged as being the nature of the relationship. Third, although the Revenue insists that it is not bound by decisions of employment tribunals as to the employment status of individuals, there are dicta in the case law which suggest that these decisions are highly persuasive. In the authors' view, such decisions are de facto binding (at least as to the application of the common law tests) save in the most unusual of circumstances.

Mutual obligations

Under the mutual obligations test, a worker will properly be regarded as an employee where the contract between him and the contractor imposes certain minimum obligations upon both parties. So if the worker is obliged to accept and carry out various duties allocated to him by the contractor and if the contractor is obliged to offer such duties to the worker, it is likely that there will be a relationship of employment. It should also be noted that it is possible that, over a period of time, an expectation that work will be offered and accepted is capable of maturing into a contractual obligation such that a contract which is initially one of self employment may evolve into a contract of employment.

Integration

In applying the economic reality/integration test (whether considered separately or, more commonly, as one), a court will ask whether a particular worker has become so integrated into the business of a contractor such that he or she has become a part of that business rather than merely someone who provides services to it. In reaching such a determination, the court will look at such factors as whether that worker has become part of a sick pay scheme, whether he receives holiday pay and participates in work place social activities.

Another way of looking at this test - approaching the matter from an economic point of view - is to ask whether the worker can be said to be on business on his own account or whether he has surrendered that independence to become part of the contractor's business. Here a court would look to such factors as whether the worker takes financial risk by quoting prices for a job to the contractor, whether he has responsibility for the management of his activities, whether he has the opportunity to profit from the efficient performance of his duties, whether he or she provides additional or substitute workers, and whether he provides his own equipment. Also of relevance will be such factors as the way in which the worker is remunerated (does he receive a regular pay cheque or is his remuneration calculated by reference to the job as a whole) and the number of hours worked (is there a set number to be worked or does the contract simply require the performance of a job by a fixed deadline).

Control

The third test is the control test. This looks to whether the provision by the worker of his services is under the control of another to such an extent as to render the relationship one of employer and employee.

There are two aspects to this test: first, whether a person is obliged to do the work himself (or whether he is able, as a self-employed person usually would be, to substitute another to perform the service on his behalf). And, second, whether, in carrying out the obligations under the contract the person has no practical freedom as to how the work is to be done.

It should be noted that changes in working practices in recent years have tended to render this control test less important.

The statutory tests

There are also two statutory tests which apply to deem a worker who would be self-employed under the common law to be treated for the purposes of National Insurance and income tax respectively as self employed. For income tax purposes, the test is set out in section 134, Taxes Act 1988 and for the purposes of National Insurance contributions it is contained within the Social Security (Categorisation of Earner) Regulations 1978.

These tests are, in essence, anti-avoidance provisions which treat a worker who is engaged by an agency - but would be an employee if engaged directly - as an employee. They achieve this result by fixing upon certain tests derived from the common law and asking whether, if the agency was ignored, those tests would be satisfied.

The manner in which those tests operate is intricate and they will not always succeed in mimicking the common law position. However, broadly speaking, they ask:

(i) whether the worker renders personal service to the contractor;

(ii) whether he is subject to a right of control over how he exercises those services; and

(iii) whether he is supplied to the ultimate client by the agency.

The first of these three tests reproduces the distinction - which will be familiar to employment specialists - between a contract of service and a contract for services. In other words, it seeks to ascertain whether the worker is to provide his own labour or whether he is merely to provide labour which may or may not be his own. In the authors' view, any evidence that the worker substitutes others for himself or, indeed, supplements his own labour with that of others will mean that this test is not satisfied.

The second test strikes in a different way at a very similar distinction. Essentially it asks whether the worker agrees to provide a result ('I will erect scaffolding') or whether he merely provides his labour and agrees to be controlled by another ('tell me how you want to utilise my skill as a scaffolder'). The test has been paraphrased in the case law to ask whether management has the right to tell the worker not only what job to do but how he should do it.

The third test seeks to identify the necessary relationship between the worker and the contractor. The worker must be supplied to the contractor by another, i.e. the agency. The notion of supply is complex. However, the authors have successfully persuaded the General Commissioners that the notion of 'supply' connotes more than the mere payment to the worker by the agency (which in turn receives that money from the contractor).

Summary

The question whether a construction industry worker is entitled to the beneficial treatment which follows from self-employed status is one which hinges upon a consideration of the full factual matrix within which that worker operates. However, what is clear is that simplistic approaches - based upon such rules of thumb as 13 weeks continuous employment - are eminently amenable to challenge.

The authors recently brought a successful challenge in the General Commissioners against an Inland Revenue determination that certain individuals were employees. Jolyon Maugham practises at 11 New Square's tax chambers and is the author of 'Tax for Employment Specialists,' Butterworths, 2000. Stan Dunn is at Lloyd Dowson Ltd, chartered accountants in Bridlington.

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