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Contract of employment

What is a contract of employment?

1. The key question in determining whether or not a person is an employee is the following - what is a contract of employment?

2. The term "contract of employment" has not been comprehensively defined either in legislation or case law. Over the years, the courts have adopted various tests in order to determine whether or not a certain relationship amounts to a relationship of employment. The modern approach adopted by the courts is to consider all the factors relevant to the issue of employment and to weigh up those factors that point towards the existence of a contract of employment and those that point away from such a contract. 1

3. The presence or absence of any one factor is not conclusive, as the decision depends on the combined effect of all the relevant information. The factors given should not be treated as a checklist to identify those factors that appear to point one way and those which point the other, from which a result can be calculated It is the overall effect of the relationship between the parties involved that will lead a court to decide whether or not a person is employed.

4. You should be aware that a "contract of employment" is also known as a "contract of service". However, a contract for services is a contract whereby a person is merely under an obligation to perform some work or service for another person, without an employment relationship being created between the two. People working under a "contract for services" are usually contractors or self-employed.

5. When examining the factors relevant to whether there is a contract of employment, you should be concerned not only with the written terms (if a written contract exists) but also with the practical circumstances of the relationship between the parties. This is because the terms of the contract can be express (e.g. written or orally agreed) or implied (e.g. from actual practice).

Relevant factors in relation to contract of employment

The degree of control exercised over the worker

6. The relationship of employment was traditionally known as the "master and servant" relationship. This implies a right for the employer to give the orders and the employee to carry them out. An employee is therefore subject to a significantly greater degree of control than an independent contractor/self employed person.

7. The following question is therefore important: who is entitled to give the orders as to how the work should be done? 2 The greater the amount of control exercised over the details of the work to be done, the more likely the relationship is to be one of employment 3.

8. Generally, a self-employed person is told what to do, but not how to do it. In one case 4 it was considered important that the `employer determined "the thing to be done, the way in which it is done, the means to be employed in doing it, the time when and the place where it shall be done".

9. Even so, it should be noted that the question of control will carry less weight in relation to professional and skilled employees as such employees often have the discretion to decide how their work should be done.

Whether the worker can properly be regarded as part of the employer's organisation

10. An employee is normally part and parcel of the employer's organisation and does their work as an integral part of the business whereas an independent contractor is not usually integrated into the organisation but is accessory to it. 5 A question to consider is whether the worker is performing services as a person in business on their own account. 6

11. Also relevant is:

12. The question of whether or not a person is in business on their own account is particularly important when you are considering the status of professional and skilled employees.

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Whether the `employer' has the power to select and appoint the individuals doing the work?

13. The fact that the `employer' has the power to select and appoint the individuals to do the work is an indication of a contract of employment.

Whether the `employer' has the power to dismiss or suspend the worker

14. The power of dismissal or suspension indicates a relationship of employment. If the `employer' can dispense with the worker's services by giving a certain period of notice, this points to a contract of employment as an independent contractor cannot be "dismissed". 7

Whether wages/salary/holiday pay are paid

15. The way in which a worker is paid is a useful indication of whether that person is employed. Normally an employee is paid a regular, fixed sum although this is not always the case (e.g. where commission is payable). Where a person receives holiday pay and sick pay, it can indicate the likelihood of an employment relationship. On the other hand, payment by the job i.e. in relation to a complete task, may point away from employment, depending on the other factors / tests.

Supplier of equipment

16. If one party to the contract in question supplies the tools, machines or equipment used by the other party, this points to a contract of employment. 8 Independent contractors or self-employed people normally provide such equipment for themselves. 9

The person who fixes the times and place of work

17. The power to fix hours and/or times when is a person is to work is suggestive of a contract of employment. 10 The power to direct where the person is to work can also indicate a contract of employment. 11

Whether personal service is provided

18. A person will not normally be an employee if they are entitled to delegate the entire performance of the work to another person. 12

The extent of the obligation to work and mutual obligations

19. If the contract entitles a person to the full-time services of another, this indicates a contract of employment. 13 However, if it is left entirely to one party to the contract to choose whether or not to do any work, it is unlikely to be a contract of employment. 14

20. The courts have said that it is possible to have a continuing (`global') contract of employment linking up intermittent periods of employment. This will only apply where there is a degree of continuing mutual obligation on the employer to offer employment and on the employee to accept it. 15. The court found such a situation where there was regular course of dealing for years between the parties under which the `employer' supplied work daily to homeworkers, and collected and paid for finished work. 16 The length of the relationship (three years) and the continuity and regularity of the dealings between the parties were important factors in reaching this decision. These principles are particularly relevant in considering whether casual workers are employees (see below).

Payment of income tax and National Insurance contributions

21. Where the `employer' deducts income tax and social security contributions under the PAYE system, this indicates that the parties themselves view their relationship as one of employment. As with all the factors, this (or the failure to deduct) is not conclusive as to the true nature of the relationship.

22. An arrangement to pay income tax and social security contributions outside the PAYE system does not, in itself, indicate that the payee is self-employed.

The intention of the parties

23. The intention of the parties as to the contract that they intend to create is a relevant factor to consider but, as with all other factors, is not conclusive as to the true nature of the contract. 17

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Safety at Work: Case Example

Lane v Shire Roofing Company Oxford Ltd [1995] IRLR 493

24. An good example of a case relating to health and safety at work is Lane v Shire Roofing Company Oxford Ltd. Mr Lane was a builder/roofer/carpenter who traded as a one-man firm. He was categorised as self employed for tax purposes. He initially was contracted directly by clients but this work dried up and he usually worked for other contractors.

25. Shire Roofing was a new company who hired Mr Lane at a daily rate in relation to a specific roofing job. The new company did not want to take on many long-term employees and therefore mostly hired men for individual jobs. When the roofing work was nearly complete Mr Lane was asked to re-roof a porch at a private house.

26. Shire Roofing agreed a price of £389 with the householders and then agreed an all-in-fee of £200 with Mr Lane following a site visit where plant and equipment were discussed. The hire of scaffolding would have made the job unprofitable and Mr Lane was offered a trestle-type platform or tower scaffold to work from. Mr Lane refused, stating that he preferred to work from his own ladder.

27. Whilst carrying out the work Mr Lane fell from the ladder and sustained serious brain damage. He claimed damages from Shire Roofing on the basis that they failed to comply with their duty of care as his employer.

28. The key question for the Court of Appeal was whether Mr Lane was an employee of Shire Roofing or whether he was self-employed/an independent contractor. The Court noted that there are perceived advantages for workers and employers in the relationship between them not being one of employment (for the worker tax advantages; for the employer the avoidance of legal duties to employees).

29. There were therefore good policy reasons in the field of safety at work to ensure that the law properly categorises between employees and independent contractors.

30. The Court recognised that there are many factors to take into account depending on the facts of each case. The Court identified a number of questions/principles, relevant to this particular case, that could be used to determine whether a person was an employee or an independent contractor. These were:

Who had control?

Whose business was it?

Who had overall responsibility for safety?

31. On this basis the Court of Appeal decided the Mr Lane was an employee of Shire Roofing. The court considered that although the degree of control by the company would depend on the need to supervise and direct Mr Lane, it was quite clear that the job at the house was the business of the company and not Mr Lane's. The Court felt that the factual situation was much closer to the situation where an employer engages men simply to do labouring work than where a specialist sub contractor is employed to perform some part of a general building contract.

32. It can be seen from this decision that where a court is considering the issue of whether or not a person is an employee in the context of health and safety at work, they may take a wide view of what constitutes employment. As stated in the Lane v Shire Roofing judgment, "When it comes to the question of safety at work, there is a real public interest in recognising the employer/employee relationship when it exists, because of the responsibilities that the common law and statutes place on the employer".


Footnotes

  1. Carmichael v National Power plc [2000] IRLR 43 approved 3 questions posed by the judge in Readymix Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497: (1) did the worker undertake to provide their work and skill in return for remuneration?; (2) was there a sufficient degree of control to enable the worker to fairly be called a servant?; (3) were there any other factors inconsistent with the existence of a contract of service?
  2. Mersey Docks and Harbour Board v Coggins and Griffith (Liverpool) Ltd [1947] AC 1
  3. Simmons v Heath Laundry [1910] 1 K.B. 543
  4. Ready-Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497
  5. Stevenson Jordan and Harrison v MacDonald and Evans [1952] 1 TLR 101
  6. Market Investigations ltd v Minister of Social Security [1969] 2 QB 173
  7. Ferguson v John Dawson Ltd [1976] IRLR 346
  8. Binding v Great Yarmouth Port and Haven Commissioners (1923) 16 BWCC 28
  9. Humberstone v Northern Timber Mill (1949) 79 CLR 389
  10. M'Cready v D J Dunlop & Co (1900) 2 F. 1027
  11. Simmons v Heath Laundry [1910] 1 KB 543
  12. Braddell v Baker (1911) 104 LT 672
  13. Bauman v Hulton Press Ltd [1952] 2 All ER 1121
  14. Eggington v Reader [1936] 1 All ER 7
  15. Nethermere (St Neots) Ltd v Gardiner [1984] ICR 612; Hellyer Bros v McLeod [1987] ICR 526
  16. Nethermere (St Neots) Ltd v Gardiner [1984] ICR 612
  17. Ferguson v John Dawson Ltd [1976] IRLR 346
Updated 2009-07-07