Whether or not a worker is an employee (working under a contract of service) or is self-employed (working under a contract for services) is an important distinction for tax as well as employment law purposes and HM Revenue and Customs (HMRC) will challenge the employment status of workers if they consider that the arrangements in place do not reflect the reality of the working relationship.
Whilst all aspects of the nature of the employment relationship should be taken into account, for a contract of service to exist, the following must be present:
In Littlewood (t/a J L Window & Door Services) and anor v HMRC Special Commissioner, Mr and Mrs Littlewood traded in partnership as J L Windows and Doors. HMRC reviewed the partnership's operation of the Construction Industry Scheme and the status of its workers and determined that several individuals were employees rather than independent contractors and that PAYE and NICs were payable on that basis. J L Windows appealed against the decision.
The Special Commissioner supported HMRC's argument that there was mutuality of obligations within each job. However, this finding was not enough to determine the nature of the contract.
As to whether each worker was obliged to carry out the work in person, workers occasionally used their own helpers to assist with a job but the Special Commissioner did not see this as a significant factor.
With regard to control, the workers operated in teams consisting of between two and five people, with an experienced worker appointed by Mr Littlewood as the 'charge hand'. The charge hand acted as spokesperson for the workers in their team and calculated the amount of work required to complete a given contract. They then gave Mr Littlewood a total price for the contract, having agreed prices with the other workers in their team. How the money for a job was divided amongst the team members was up to the charge hand, although the individual payments were made by J L Windows.
Mr Littlewood argued that he had not retained control over the workers. He was not on site overseeing how the work was done and had no control over the hours worked. HMRC argued that the degree of control necessary for there to be a contract of service need only be slight. It was the right to exert to control that was significant. In their view, the charge hand represented Mr Littlewood and acted on his behalf in giving instructions to the other workers.
The Special Commissioner concluded that the workers acted independently of Mr Littlewood and agreed matters within their teams, membership of which was chosen by the charge hands, not Mr Littlewood. Team members had to act on the instructions of the person running the site. Mr Littlewood's site visits were to check on the progress of the job and to see if any changes to the original pricing were necessary to allow for extra work not taken into account when determining the price quoted to the customer.
In the view of the Special Commissioner, therefore, J L Windows did not exercise sufficient control over the workers to make itself master. In the absence of the element of control, the contracts could not be seen as contracts of service and so any other tests became irrelevant.
Contact Dean Parnell for advice on contractual matters.
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