Chapter 12 Employment and other working relationships Flashcards
12.1 Introduction
It is important to distinguish persons who are employees and those who are self-employed as the tax treatment is different.
12.2 Types of worker for tax purposes
For tax purposes the two main types of contracts for workers are contract of service (employment between the employee and the employer) and a contract for services (an individual works as a self-employed person for, rather than as an employee of the business).
12.3 Determining employment status
There is no statutory test to determine an individual working status. The current status to provided is Ready Mixed Concrete Ltd v Minister for Pensions and National Insurance 1968. This state’s conditions for a contract of service to exist. The servant agrees in consideration of a wage, he will provide his own work and skill, the performance of the service is subject to other’s control and the other provisions of the contract are consistent with it being a contract of service.
The first two conditions are said to be irreducible minima, without these conditions a contract of service cannot exist. But if they are met this does not always lead to the conclusion that the individual is an employee. The third test is known as the economic reality test.
The irreducible minima – the first two conditions have four separate factors established by other courts. If any factor is absent then no contract of service can exist.
Mutuality of obligation – one party undertakes to work for the other who pays for the work. The test focuses on the obligations. Where a person is free to decline work, no contract of service exists.
Wage – an agreement to pay a third party for the work performed would not constitute a contract of service.
Personal service – where the worker has a right in the contract to substitute another’s services for their own their contract is not a contract of service.
Control in a sufficient degree – looks at the extent to which the employer has control over the individual’s activities. A total absence of control means the contract cannot be one of service.
Economic reality test – this is a multiple test considering how far the person is integrated into the organisation and whether the person is in business on their own account.
12.3 Determining employment status (2)
Degree of integration – an employee is an integral part of the employer’s undertaking, an individual integrated into an organisation is likely an employee under a contract of service. This can include whether disciplinary procedure is applicable, included in the pension scheme. This test can be used to determine the status of agency workers.
Attributes of self-employment – determines if an individual contracts to perform services as a person in business on their own account. If yes, the contract is one of services. This considers if a worker is independent of an organisation, the following are factors taken into account:
• Provision of equipment – self-employed individuals are likely to provide their own equipment. Occasionally with expensive equipment a self-employed individual may be given equipment
• Basis of payment – self-employed individuals usually send invoices and do not receive sick and holiday pay
• Financial risk – self-employed individuals likely to risk their own money in their business
• Opportunity to profit from effectual management – self-employed individuals more likely to benefit from taking responsibility for effectual management when providing services
• Business organisation – self-employed individuals likely to have set up a business-like organisation of their own
• Number and length of engagements – self-employed individuals likely to work for many businesses.
• Name of the contract and position of parties – court will examine the actual working arrangement in the contract that exists between the parties
The process of classifying a working relationship – classifying the type of contract for services is not a mechanical exercise of running through the checklist items. Detail is accumulated then informed, considered and a qualitative appreciation of the whole must be made.
12.4 Form of an employment contract
Employment contracts are formed like any other contract. It may be expressly negotiated or implied through the conduct of both parties. If the contract is made it may be oral or written or a mixture. There is a statutory requirement in the Employment Rights Act 1996 for employers to give employees written particulars of a number of their main terms of employment. Employment contracts are free to include whatever terms they choose in it subject to limitations by statutes and EU law. No changes in terms may be made by an employer without the employee’s consent, which may be obtained expressly or can be implied in some circumstances.
12.5 terms of an employment contract
The terms of an employee-employer relationship are derived from sources, including
• The terms of the contract of employment itself, both express and implied
• Correspondence between the parties
• Staff handbooks and other documents setting out work rules and practices
• Collective bargaining agreement
• The articles of association
• Any custom and practice applicable to a particular industry
• Employment protection and other legislation
Express terms – these are written into a contract, they maty include a restraint of trade clause that the employee must observe, which curtail the freedoms once an employee leaves. The employer must have a legitimate business interest and the restrictions must be reasonable for this term to be binding.
Terms implied by common law – in the absence of a specific provision in the contract, terms can be implied. Under common law an employee owes their employer:
• A general duty of faithful service
• A duty to obey lawful and reasonable instructions
• A duty to perform the work they are employed to do with reasonable competence, skill and care
• A duty to account for all money and property received during their employment
• A duty of personal service
• A duty not to use for personal benefit or to disclose to others, the employer’s trade secrets or confidential information
An employer has the follow implied common law duties:
• To indemnify the employee against expenses and losses incurred in the course of employment
• To pay reasonable remuneration
• To provide work but only in certain circumstances
• To take care of the employee’s health and safety (also covered by legislation)
• To uphold the relationship of trust and confidence between employer and employee
Terms implied by employment protection legislation – terms are also implied into the relationship between an employer and employee by legislation including:
• Employment rights act 1996
• National minimum wage act 1998
• Working time regulations 1998 (EU regulations)
• Equality act 2010
• Public interest disclosure act 1998 and the Small Business, Enterprise and Employment Act 2015
12.6 Written particulars of an employment contract
Under the Employments Right Act 1996 an employer is required to give an employee a written statement setting out terms in the contract of service. The statement must include:
• The names of the employer and employee
• The date the employment began
• Details of remuneration and when it is paid
• Terms on hours of work, holidays and holiday pay
• Information on where the rules on health and safety can be found
• Length of notice required for termination
• The job title and description of work
• The period of employment
• The place of work
• Collective agreements that affect the terms of employment
• Details of currency in which remuneration is paid
12.7 Significance of employment status
The distinction between an employee and being self-employed is important in that:
• Only employees enjoy rights under employment protection legislation
• Employers can be liable for wrongful acts of employees and not independent contractors
• Only employees are preferential creditors on insolvency
• Only employees are entitled to certain social security benefits, such as maternity pay and statutory redundancy pay
• Employees are charged to income tax on their employment income and NIC is charged. Self-employed individuals pay their tax under the self-assessment scheme and pay class 2 and 4 NIC not class 1
• Only employees can contribute to an employer’s occupational pension scheme
• An independent contractor may have to register for VAT
• Employees receive protection where an employer disposes of part or all of their business due to the Transfer of Undertakings Regulations 2006.
12.8 Termination of a contract of employment
Termination without breach of contract – it can terminate without breach in the following ways:
• By notice – the statutory notice period is on week for each year of continuous employment, up to a maximum of 12 weeks, the contract can have a longer notice period. Common law states the notice period must be reasonable. An employee is entitled to give notice unless the employer is entitled to dismiss the employee summarily (instantly) with cause.
• In accordance with terms – a contract can provide for an employee to be dismissed summarily if the employer makes a payment in lieu of notice to the employee
• By passage of time – a fixed-term contract expires at the end of the agreed period
• By mutual agreement – the parties may, by a way of a separate contract (compromise agreement) agree to end their employment relationship at any time and upon any terms
• By frustration – where the contract of service becomes impossible to perform, can arise on death, ill health, imprisonment or prolonged absence.
• Summary dismissal with cause – an employer may dismiss an employee instantly if they are justified in doing so (misconduct)
Termination of contracts by breach (wrongful termination) – a contract of employment is brought to an end by breach in the following ways:
• Summary dismissal without cause – an employer unjustifiably dismisses the employee without giving the required notice or observing the formalities agreed on
• Constructive dismissal – where an employee is forced to resign and leave employment against their will as their employer’s conduct results in unreasonable changes to the contract of employment as originally agreed.
An employee with a wrongful termination is entitled to damages. They can claim for pay and benefits for their notice period. An employee must take reasonable steps to mitigate their loss. The equitable remedy of specific performance will never be given in the case of a breach of a contract of employment. Payments made to employees at the end of employment are likely to be taxed as residual termination payments and can attract exemptions from income tax and NIC.
An employer in breach of contract may be prevented from holding the employee to other terms of the contract like restrictive covenants. Usually, an employer reserves the power in the contract to terminate it by making a payment in lieu of notice, avoiding a breach of contract. The payment will be made under contract and treated as normal earnings subject to income tax and NIC for the employee.
12.9 Unfair and wrongful dismissal
The right to not be unfairly dismissed is given under the 1996 Employment Rights Act. This occurs when a contract of employment comes to an end as a result of a breach by the employer. The act protects employees who have been working for 2 continuous years, from being unfairly dismissed even if the dismissal occurs without a breach of contract. Unfair dismissal occurs where:
• The procedure for dismissal was not fair or the reason for dismissal was not fair
Automatically unfair reasons include discrimination, trade union membership, compulsory retirement on grounds of age, jury service or pregnancy. These rights normally accrue after 2 continuous years of service, but there is no qualifying period for many of the automatic reasons for dismissal. Fair reasons for dismissal include ability, qualifications, conduct and redundancy. Even when the reason is potentially fair, a tribunal may still find there has been unfair dismissal if reasonable procedures in relation to dismissal were not followed.
An employee notified ACAS (the Advisory, conciliation and arbitration service) if they wish to make a claim for unfair dismissal, this may proceed to tribunal. If dismissal is unfair, awards can take form in re-instalment in the same job, re-engagement in another suitable job with the same employer or compensation.
Compensation may comprise of three elements:
• Basic award – calculated in the same way as statutory redundancy pay.
• Compensatory award – based on employee’s losses, can include future losses, the employee must mitigate their loss
• Punitive additional award – given where the employer has not complied with an order for reinstatement or reengagement.
Compensation for unfair dismissal is not taxed as employee’s earnings but is taxed as a residual termination payment.
12.10 Redundancy
Main reason for redundancy is the employer has ceased or intends to cease the business in which the employee carries out the work. A statutory redundancy payment must be made to an employee with at least 2 years of continuous service, these payments are taxed as residual termination payments not earnings. The employee can also have a claim for unfair dismissal if the redundancy was not fair. Redundant employees have the right to be consulted about the terms of their redundancy and to be offered further opportunity for employment with the employer.
12.11 Office-holders and other workers
A business can engage with independent contractors and other persons such as office-holders, apprentices and agency workers.
Office-holders – generally not ipso facto regarded as being employed, but they can also be an employee. There are three categories of an office-holder
• Rights and duties are determined by the office they hold and not by their contract
• Has the title office-holder but in reality, holds no office and is an employee with a contract of service
• An office-holder who is an employee with a contract of service
An office may be seen as a corporation sole and is an enduring position which has an existence independent from the person who fills it. The rights and duties of an office-holder are defined by the constitution of the organisation. Common examples of office-holders are police officers, MPs, directors, secretaries and clergy. An office-holder is taxed the same way as an employee, unless legislation provides otherwise.
Apprentices – contract of apprentice is different from a contract of service. Under the contract the master trains and educates the apprentice and under the contract they have a formal obligation to provide training.
Agency workers – covers a worker with a contract with an agency but who provides services to the agency’s client which has a separate contract. The client pays the agency for the worker’s services and the agency pays the worker. The arrangement does not amount to a contract of service between the worker and client.
Dependent contractors – workers who are not employees but are strictly not self-employed are recognised as dependent contractors under the Taylor review of modern employment practices in 2017. The review claimed they should have more of the employment protections and benefits currently enjoyed by employees. This has no force of law however.
