Status issues - Contract of service or for services

Are you working under a contract of service (employed) or a contract for services (self employed)?  If you are a business using sub contract labour and verifying the status of your contractors monthly, a subcontractor providing your services to another party or a company contracting through an agency to an end user, the following is of paramount importance to you.  The penalties for getting this wrong could bankrupt many businesses.

What governs employment status is a combination of the written contract terms, which is the basis of the understanding as to how an engagement will operate, and what in reality is actually happening.  A written contract will be overturned if it is a sham purely put together to show a self employed status.

The case determining what must be present for a contract of service to exist is Ready Mix Concrete (South East) Ltd v Minister of Pensions and National Insurance in1968.  In this case, the judge, McKenna J, set out the criteria for what must exist in order for a contract of employment to exist.  These three criteria are personal service, control and mutuality of obligations.  These areas have been examined and re-examined in many subsequent cases since Ready Mix Concrete, but are still considered today to be the important factors that will decide the status of a contract or engagement.

Personal service and Substitution

In order for a contract of service to be present, a worker must be required to provide personal service.  If there is a genuine right of substitution in the contract, that is, another person can be sent in the place of the usual operative, it is likely that a contract of service is in place.  If you have a genuine unfettered right of substitution and can to send someone in your place then you will be acting under a contract for services and therefore not an employee.  A right of substitution will be fettered if the client has the right to refuse a substitute or attaches qualifications to the right of substitution making it difficult to send another person to carry out the work.

In order for a substitution clause in a contract to be valid, it does not mean that a substitute has been sent during the contract.  It is that a genuine unfettered right to send a substitute exists in the contract.

Control

The control test comes from the old master and servant relationship whereby one party had direct control over the actions of the other.  The main question to be decided here is, do you decide how you will perform the work or are you told?  The important factor to look for here is the 'how' the work is done.  You may be instructed as to the when and where, but are you told how?  Is the client relying on the expertise you have in your field of work? If you have control over what you do, you should not be under a contract of service.

It will be important to have written into the contact that it is the case that the contractor decides how the work is carried out.  Another point to make here is that people should not be named in the contract, if you are working through a limited company, that is the name that should appear in the contract.

Mutuality of Obligations

This basically asks does the person providing the work have an obligation to provide further work for the contractor and does the contractor doing the work have an obligation to carry out this future work.  If the client the contractor provides services for asks you to do a job and you can you say no, you should not be under a contract of service.

It will be important that the contract states this fact so as to avoid any confusion to the reader of the contract.  Another important point is that there is a separate contract for each engagement which clearly states the services to be provided as well as the start and end date (if the end date is known).

There are other secondary issues which will also be taken into account relating to the financial risk which a business has such as, can you profit from your own financial management?  Is a business required to correct faulty or substandard work at its own expense?  Does the business have its own insurance? Provision of tools and equipment may also be taken into account.

If you have any issues relating to status, contact me at Duncan.forsyth@lambert-chapman.co.uk or Chris.harman@lambert-chapman.co.uk if you would like to establish your tax status. We look forward to hearing from you.

© 2009 All rights reserved. Reproduction in whole or in part without permission is prohibited.
Image: Confused chimp by Tambako the Jaguar