Many contractors, who are really employees, wrongly pretend to HMRC that they have self-employed status. Yet they turn up to work every day, are controlled by the employer, not allowed to substitute a different person to undertake the work and have all the hallmarks of being employed. In a recent Court of Appeal case it was held that two such workers could later argue they were employed when it suited them.
This case should serve as a warning to employers to be absolutely sure that workers are really self-employed, otherwise their contractors might later bring unfair dismissal claims if their contract is terminated, which is only possible for employees who have worked for a year for that employer. It is also worth, on a regular basis, having lawyers check your consultancy and contractor agreements and also advise on whether individuals really are employees or not.
The interesting legal point in this case was that the employer was saying the employees (Mr Payne and Mr Grace) could not, in effect, lie about their legal status when it suited them for tax purposes. Then completely change their view when it suited them to bring an unfair dismissal claim against the employer, arguing that they were employees all along. The employers tried to argue that the contract was “tainted with illegality” as the individuals had misrepresented to HMRC that they were self-employed when they were employed. The court found that the individuals were originally taken on a self-employed basis but later the employer had suggested to them they were employed. Obviously, if an employer can avoid making any such suggestions that will put the employer on much stronger ground. The court thought there was an error of categorisation of the employment contract rather than an illegality or misrepresentation by the employees and they could bring claims as if they were employees.
It is important that contracts are correct and the distinction does matter between employees and contractors. For example, if the contractor is producing work protected by copyright or patents the contractors will retain ownership unless the contract says otherwise, whereas with an employee, copyright and patent rights automatically rest with the employer.