Why does, and why should the law recognise some workers as employees and not others, and what is the effect of such recognition or lack of it?

New patterns of flexible non-standard working characterised by a trinity of ‘casualisation, externalisation and informalisation¹’ have superseded the 1950s-1980s’ Fordist notion of the ‘standard employee²’ which was ‘the conceptual foundation on which post-war risk sharing institutions and social insurance were built.’³ It is clear that with the rise in atypical forms of working – and in particular the ‘semi-dependent worker’ – the ‘black and white’⁴ binary divide between employment and self-employment is now a ‘false one.’⁵ This essay will firstly consider how and why the law only recognises some workers as employees, before considering whether such a distinction is still appropriate and then finally discussing the effect of recognising or denying employee status.

Section I: statute and common law
The legislative response to dealing with the growing number of ‘atypical workers’ whose employment status is located in a ‘grey zone’ between a dependent employee and an independent self-employee,⁶ has been to use two contractual categories; the ’employed person⁷‘ and the ‘worker⁸.’

The three ‘pillars’ of the latter distinction are: a contractual relationship, a ‘personal’ obligation and the lack of an independent business undertaking. The purpose of these restrictions is to protect workers whose ‘degree of dependence’ is essentially the same as that of an employee in order to include such workers in ‘basic labour standards’ such as the minimum wage, protection from arbitrary deductions from pay and protection from excessive working hours⁹.

The task of determining ‘employment status’, is still left to the “insufficiently fine-tuned” common law tests¹⁰ which rest on four dimensions; ‘control’, ‘integration’, ‘business reality’ and ‘mutuality of obligation’. The ‘control’ test¹¹ – introduced initially to distinguish between manual and non-manual workers for social insurance purposes – looks at whether the hirer controls the worker with respect to the time and manner in which the work is done. However with the rise of the skilled, professional workforce, the control test became non-determinative and as a result, the courts adopted ‘economic criteria’ to distinguish workers. This involved looking at where the burden of taking precautions against the risk of a certain type of loss should be allocated¹². It has been said that this ‘shift in risk is the thing most driving the changes in the employment relationship¹³.’ Both the ‘integration test¹⁴’ and ‘economic or business reality test¹⁵’ extended the scope of protective legislation to skilled professionals and part-time and homeworkers respectively. The adoption of ‘economic criteria’ also enabled the court to extend vicarious and tortious liability to employers of independent contractors¹⁶. The ‘mutuality of obligation’ test has become ‘the irreducible minimum’ for the existence of a contract of employment¹⁷ whereby there must be an obligation to offer and accept work. This test causes particular hardship for the ‘semi-dependent worker’ claiming an employee-only right such as unfair dismissal, who, although lacking mutuality of obligation, is economically dependent on the employer but yet cannot be classed as an employee.

SECTION II: Why distinguish?
The original rationale for not treating all workers as employees was addressed in the 1942 Beveridge Report, which considered it unnecessary to protect the self-employed against the risks of unemployment, illness and old age since the self-employed were perceived as ‘businessmen dealing with each other at arm’s length, capable of looking after their own interests in contractual negotiations¹⁸.’ However, this dual dichotomy that persisted was formulated in the context of social insurance considerations as opposed to the context of employee protection rights. Further, the ‘dependency’ argument does not stand with the semi-dependent worker.’ It is therefore arguable that ‘the 1942 logic has been lost¹⁹’ If this is the case, then should the law continue to apply the traditional dual dichotomy of employed and self-employed via the common law? As noted, it was regarded as necessary to protect the contract of service, since there was a ‘trade-off between high levels of subordination and disciplinary control on the part of the employer and high levels of stability and welfare/insurance compensations and guarantees for the employee²⁰’ However, many atypical workers also find themselves in a position of economic, social, psychological and hierarchical²¹ dependence on the employer²² and are subject to the employer’s control in the same way as an ordinary employee. It is questionable whether there should still remain a distinction and if so, whether there is a need for a new boundary. Collins’ notion of ‘vertical integration’ has led to a situation whereby what would traditionally have been the place of employees in the workplace has become the place of atypical workers, which would therefore justify their amalgamation.

There are two key parties to the debate as to whether the law should continue to distinguish between atypical workers and employees. On the one hand are neoclassical economists, who are strongly against any further extension of employment protection rights to other workers on several grounds. First, it is argued that as labour rights constitute a burden on business; this extra cost would translate either as wage cuts or redundancies and would further hinder the creation of new jobs²³, since employers are only likely to create new jobs if they can do so cheaply and without making a long-term commitment. The fear is that were statutory employment rights to be extended to all types of atypical workers, employers would see little advantage in using uncontracted workers and therefore opportunities for atypical forms of work may disappear from the labour market altogether.

Second, the employer is able to shift the risk of a downturn in business to the workers instead of having to shoulder the risk itself by way of ‘numerical flexibility²⁴. In a recent consultation, some respondents feared that any further unnecessary increase in employment protection would make the UK a less attractive place to do business since the ‘key reason for UK business’ continued strength in world markets is the comparatively flexible UK labour market²⁵.’ There is also a growing tension between social insurance (unemployment benefit, sick pay, old age pensions and the like), which is usually financed by contributions, and social assistance, which is there to combat poverty directly and which is generally tax financed. It is a fact that, with globalisation and the single currency, the level of contribution-based social security has produced competition between countries. Where companies have to finance contributions that are linked to employment and salary levels, higher non-wage labour costs are involved than in tax- financed systems, where all revenues contribute to the financing of social security. This is a threat to the traditional system of social insurance. In addition, new forms of employment contracts have eroded the financial base of the system, as many of them are exempted from having to make financial contributions. Much anxiety has been expressed by employers about the coming into force of the Temporary Worker Directive 2008 on the grounds that equal treatment measures for temporary workers may ‘add substantial cost, bureaucracy and uncertainty to the provision of flexible staff²⁶.’ The same argument would most certainly apply if the category of atypical worker were to be abolished completely.

New institutional economists on the other hand argue that since firms should compete not just on the price of their products but on their quality and innovation, the use of technical distinctions between different categories of workers should not be used to deny protection to certain groups who are unable to secure protection through their own bargaining power in the same way as the genuinely independent self-employed²⁷. The Public and Commercial Services Union (PCS) in response to the above consultation²⁸, were also in favour of conferring all rights to atypical workers, since such workers usually cannot complain about unfair treatment or unfair dismissal by the host employer and further, as the trade union at the workplace cannot represent them, there is no incentive for employers to treat them fairly.

In light of the above policy considerations, and the increasing difficulty and uncertainty caused by the common law tests, it is clear that, in pursuit of a flexible yet competitive labour market, it would be inappropriate to grant equal employment protection rights to all types of worker. However there is much support for redrawing the boundary and instituting a unified concept of the ‘personal employment contract’ whereby personal service would give way to a contract of service or other commercial relationship, and where economic dependence—that is to say, the dependence of the worker on a particular enterprise—would be displaced by the presence of a professional relationship or independent business entity²⁹. Another approach would be to replace the current ‘contract of service’ with a broad definition of an ‘employment relationship’, which would cover any agreement to undertake work in return for pay and encompass both the intermittent exchange of work for remuneration, and the single continuous contract³⁰.

SECTION III: The effect of not recognising employee status
There is an argument that since employee status is no longer the ‘gold standard’ on which employment protection rights are exclusively conferred, there is no need to assimilate workers with employees. This is so for several reasons. Firstly, the creation of ‘worker’ status and the widening of the definition of ‘employee’ and ‘employment’ have both had the effect of, by no means assimilating workers and employees, but of narrowing the gap between the two groups. EU law has recently played a significant role in the protection of atypical workers and in particular temporary agency workers. From October this year³¹ agency workers will be entitled to equal treatment after 12 weeks³² of employment with an end-user as if they had been employed directly, granting agency workers rights in respect of ‘basic working conditions³³ such as individual, collective and employability rights and entitlements³⁴

Therefore rather than constituting an ‘inferior status as regards social welfare, ‘atypical work forms are located on a continuum, with the standard of social security provided by a normal employment contract at one end and a high degree of precariousness at the other.’³⁵ Atypical work status is now seen as ‘an intermediate category; a hybrid class of individuals enjoying more legislative protection than the self-employed, but less than employees³⁶.’ The second reason for suggesting being denied employee status is not necessarily detrimental for atypical workers is that employees who lack the requisite continuity of employment required for access to certain employment protection rights such as unfair dismissal and redundancy pay, are in no better position than an atypical worker in any event³⁷. Therefore, the mere fact of having employee status does not per se entitle an individual to claim all employee protection rights³⁸. Not only continuity of employment, but some employeeswho are employed in non-standard employment do not have access to social security or employment protection rights, either because their weekly earnings are below the threshold for national insurance contributions, or because of gaps in their continuous service. This is particularly so in cases where an individual is unable to show a ‘global’ or ‘umbrella’ contract of employment which strongs the gaps between periods of work. Statute has intervened in an attempt to assist workers in this situation. ss210-212 of the Employment Rights Act 1996 provides that continuity of employment can be preserved even though there are periods where there is no contract of employment in existence as long as absences are attributable to either sickness absences (of no more than 26 weeks), temporary cessations of work³⁹, or situations in which continuity is maintained by agreement or custom⁴⁰. It has been pointed out however that s212 only operates to preserve continuity, not to grant ‘employee’ or ‘worker’ status during periods when the individual is not working⁴¹.

The World Health Organisation commented that the fact that an employee cannot claim unfair dismissal in cases where two years of continuous employment have not elapsed, or under contracts for less than 16 hours a week, ‘…there is practically no difference during that time between a normal permanent contract and an atypical fixed-term contract, so far as legal job security is concerned’ therefore ‘… an inferior status in social welfare is not necessarily related to new work forms⁴². With regards to ‘core’ rights there is much legislation in place to bridge the gap between worker and employee status; equal treatment legislation, employment protection legislation, National Minimum Wage Act 1998, Working Time Regulations 1998 (SI 1998/1833), Part-Time Workers (Prevention of Less Favourable Treatment) Regulations 2000 (SI 2000/1551) and the Public Interest Disclosure Act 1998. In these cases and in rights concerning protection from race and sex discrimination and health and safety legislation, the legislature has judged it unnecessary to tie workers’ rights to the status of employment. Davidov divides these rights into two groups; those aimed at ensuring respect for human rights or basic natural justice rules such as ensuring equal treatment at work, and those concerned with the terms of the employment contract itself, which insert some standard terms into this contract as minima.

The counter-argument to this is that although granted the ‘basic’ employment protection rights, workers are denied other rights that could equally be regarded as ‘fundamental’ or ‘core’ such as: statutory notice periods, maternity rights, unfair dismissal, redundancy payments and statutory sick pay. With this in mind, it cannot be denied that the employment status under which a person carries out work has a significant effect on a worker both from a legal and social point of view. Denying employee status in turn denies an individual comprehensive employment protection, social security benefits, paid holidays etc⁴³.

To conclude, there still remains much criticism that British labour law continues to lack an ‘alphabet’ of concepts⁴⁴. In light of the Government’s express intention to ‘increase flexible working opportunities that contribute to career development, while allowing working people to balance work with family and other interests or commitments,⁴⁵ it is likely that the current typology between employees, workers and self-employees will continue since, as discussed above, further assimilation of typical workers and employees may inevitably lead to a detrimental change in the labour market; placing financial and administrative burdens on employees and thus limiting competition. The fact that the power afforded to the Secretary of State under s23 Employment Relations Act 1999 to explicitly include categories of workers within the scope of employment protection legislation, has not yet been used, is illustrative of the Government’s current approach⁴⁶.

¹Theron J., ‘Employment is not what it used to be’ ILJ (2004) p1247 at 1256
²The ‘standard employee’ was employed indefinitely, and the work was usually done at a workplace controlled by the employer’. See Vettori S., The Employment Contract and the Changed World of Work (2007). Ashgate Publishing Limited. Hampshire. p9.
³Stephenson H and Marsden D., Labour Law and Social Insurance in the New Economy: A Debate on the Supiot Report (July 2001) at p5
⁴Protected by the National Minimum Wage Act 1998, Working Time Regulations 1998, Employment Rights Act 1996 Part II (ss13-27), Employment Relations Act 1999 s13(1), Trade Unions and Labour Relations (Consolidation) Act 1992 s296 (1), Part-Time Workers (Prevention of Less Favourable Treatment) Regulations 2000.
⁵Freedland M., The Personal Employment Contract. (2006) Oxford University Press at p18.
⁶For the ways in which other jurisdictions have attempted to ‘redraw the boundaries’, see Countouris N., The Changing Law of the Employment Relationship: Comparative Analyses in the European Context. Ashgate Publishing (2007). Hampshire. p58
⁷s230 (1) Employment Rights Act 1996 This definition applies in areas such as discrimination and equal pay. See Employment Rights Act 1996 Part IVA (ss43A-43L) (protected disclosure), Sex Discrimination Act 1975 s 82(1), Race Relations Act 1976 s 78(1), Equal Pay Act 1970 s 1(6)(a), Disability Discrimination Act 1995 s 68(1), Sex Discrimination Act 1975, Transfer of Undertakings (Protection of Employment) Regulations 2006.
⁸s230(3) Employment Rights Acts 1996
⁹Deakin S and Morris G., Labour Law (5th ed) 2009. Oxford.Hart Publishing at p147.
¹⁰Fredman, S ‘Labour Law in Flux: the changing composition of the workforce’, (1997) Industrial Law Journal, 337 at 345.
¹¹First established in Yewens v Noakes (1880) 6 QBD 530
¹²Deakin S, Burchell B, Honey S, The Employment Status of Individuals in Non-standard Employment (March 1999) p13 – http://www.dti.gov.uk/files/file11628.pdf
¹³Stephenson H and Marsden D., Labour Law and Social Insurance in the New Economy: A Debate on the Supiot Report (July 2001) at p44.
¹⁴Stevenson, Jordan & Harrison v McDonald & Evans [1952] 1 TLR 101
¹⁵See Market Investigations Ltd v Minister for Social Security [1969] 2 QB 173 and Lane v Shire Roofing Company (Oxford) Ltd [1995] Examples of empirical facts of business reality are the method of payment, the freedom to hire others, or the provision of own equipment.
¹⁶ Ferguson v. John Dawson & Partners (Contractors) Ltd. [1976] and IRLR 376; Lane v. Shire Roofing Co. (Oxford) Ltd. [1995] IRLR 493.
¹⁷The first House of Lords’ decision on this was Carmichael v National Power plc [1999] ICR 1226 where the Court refused to accept that ‘casual as required basis’ could be construed as imposing an obligation on to offer and accept work.
¹⁸Bogg A., Sham self-employment in the Court of Appeal. LQR [2010] 166
¹⁹Deakin S., Does the ‘ Personal Employment Contract ’ Provide a Basis for the Reunifi cation of Employment Law?.
²⁰Supiot A., Beyond Employment: Changes in Work and the Future of Labour Law in Europe (2001) Oxford University Press. New York. p. 1
²¹A 2006 Discussion Paper hypothesised that ‘dependent self-employed workers have on average lower or fewer labour market skills, less labour market attachment and, thus, less autonomy than self-employed workers and that workers who have employment contracts that are between employment and self-employment are economically and hierarchically dependent on the firm they contract with. See Böheim R and Muehlberger U., Dependent Forms of Self-employment in the UK: Identifying Workers on the Border between Employment and Self-employment. Discussion Paper Series. Institute for the Study of Labor (February 2006) p7-8.
²²Davidov, G ‘Who is a Worker?’ Industrial Law Journal Vol.34 No1 March 2005 p57. See also Byrne Brothers
(Formwork) Ltd v Baird [2002] IRLR 96 at 101, where it was said that agreed that “The reason why employees were
thought to need protection is that they are in a subordinate and dependent position vis-à-vis their employers. The
purpose of reg. 2(1)(b) is to extend protection to workers who are, substantively and economically, in the same
position. Thus the essence of the intended distinction must be between, on the one hand, workers whose degree of
dependence is essentially the same as that of employees and, on the other, contractors who have a sufficiently arm’s-
length and independent position to be treated as being able to look after themselves…” See also Collins H.,
Independent Contractors and the Challenge of Vertical Disintegration to Employment Protection Laws.’ Oxford Journal
of Legal Studies (1990) Vol. 10, No. 3. p354
²³Davies A.C.L. Perspectives on Labour Law (2nd ed) 2009. Cambridge University Press. p77
²⁴Fredman, S ‘Labour Law in Flux: the changing composition of the workforce’, (1997) Industrial Law Journal, 337 at 339.
²⁵Confederation of British Industry. Employment Status in Relation to Statutory Employment Rights: Summary of Responses to Public Consultation. http://www.delni.gov.uk/employment_status.pdf
²⁶Woods D., Agency Workers Directive is delayed until 2011 but employers continue to raise concerns. 22 January 2010. HR Magazine. http://www.hrmagazine.co.uk/news/979179/Agency-Workers-Directive-delayed-until-2011-employers-continue-raise-concerns/
²⁷Davies A.C.L. Perspectives on Labour Law (2nd ed) 2009. Cambridge University Press. p77-78
^28
29Freedland and also Deakin S., Does the ‘ Personal Employment Contract ’ Provide a Basis for the Reunification of Employment Law? Industrial Law Journal, Vol. 36, No. 1, March 2007 at p70.
³⁰Hepple B., Restructuring Employment Rights Ind Law J (1986) 15 (1): 69-83 at p74.
³¹EU Temporary Workers Directive 2008. Subject to the relevant qualifying period, agency workers will enjoy during any assignment the same terms and conditions regarding working time, overtime, breaks and rest periods, night working, holidays and pay, as if they had been recruited directly by a company into the particular job.
³²Article 5(4), established a ‘qualifying period’ which, after an agreement between the TUC and the CBI in May 2008, was set at twelve weeks. However, according to the statistics provided by BERR in Agency Working in the UK: A Review of the Evidence (2008), the twelve-week qualifying period would immediately render ineligible for equal treatment the 55% of British agency workers that have contracts of less than 12 weeks. It is hard to envisage how a provision which excludes over half of the category of workers the Directive is intended to protect could be compatible with the ‘adequate protection’ requirement. See Countouris, N and Horton, R ‘The Temporary Agency Work Directive: Another Broken Promise?’ (2009) 38 ILJ 329 at 333.
³³Article 5(1) Council Directive 2008/104/EC (the Temporary Agency Work Directive)
³⁴Article 3(1)(f)
³⁵Bielenski H., New Patterns of employment in Europe in Labour Market Changes and Job Insecurity: A challenge for Social Welfare and Health Promotion. WHO Regional Publications, European Series No.81 at p16
³⁶Johnson J, The hybrid class of employment. 157 NLJ 728

³⁷Countouris N., The Changing Law of the Employment Relationship: Comparative Analyses in the European Context. Ashgate Publishing (2007). Hampshire p59.
³⁸An individual must accumulate 12 months’ continuous service in order to bring an ordinary claim of unfair dismissal (unless for dismissed for automatically unfair reasons) and two years’ continuous service to be entitled to a redundancy payment. There are also qualifying periods in respect of sickness, lay-off, maternity, holiday pay and notice of dismissal.
³⁹It should be noted however that ‘temporary cessation of work’ requires a reduction in the work the employer needs to be performed, i.e. because business is quiet, and not simply that the employer chose to offer work to someone else.
⁴⁰ s212(3) Employment Rights Act 1996. For a successful application of this provision, see Cornwall County Council v Prater (CA) [2006] IRLR 362 where a tutor for the council was engaged under separate contracts for each child she tutored as opposed to one single continuous contract of employment. Although there were times when she had no pupils at all, Mummery LJ at para 11 held that within each of Mrs Prater’s engagements, there was mutuality of obligation since once she had agreed to take on the work she was obliged to fulfil her commitment to that particular pupil and the Council was obliged to continue to provide that work until the particular engagement ceased.
⁴¹Collins, H ‘Employment Rights of Casual Workers: Carmichael v National Power plc’ (2000) 29 Industrial Law Journal 73 at 79.
⁴²Bielenski H., New Patterns of employment in Europe in Labour Market Changes and Job Insecurity: A challenge for Social Welfare and Health Promotion. WHO Regional Publications, European Series No.81 at p16
⁴³Böheim R and Muehlberger U., Dependent Forms of Self-employment in the UK: Identifying Workers on the Border between Employment and Self-employment. Discussion Paper Series. Institute for the Study of Labor (February 2006) p13
⁴⁴ Kahn-Freund.
⁴⁵DTI Discussion Document on: Employment status in relation to statutory employment rights. July 2002. (URN 02/1058) para6 p7
⁴⁶