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Implications of worker status - A guide for companies

Posted on 16 November 2017

Implications of worker status - A guide for companies

The modern workforce is complex. Many different models exist to facilitate new ways of working. The rise of the "gig economy" has driven an increase in casual work and many companies no longer want employees, they want a ready and willing pool of self-employed contractors to minimise operating costs and ensure maximum flexibility.

However, it's clear from the current legal and political climate that companies operating this way will face increased scrutiny. Earlier this year, the Government published an independent review (The Taylor Review of Modern Working Practices). This explores the concept of 'Good Work' and questions whether the current legal framework provides adequate protection for a vulnerable workforce.  Consistent with this, there is a wave of case law on 'worker' status. The trend in these cases is that, despite being labelled as 'self-employed', individuals are in fact held to be workers so entitled to worker rights. The Uber decision released by the Employment Appeal Tribunal [last week] is the latest in this line of cases.

Getting worker status wrong can lead to significant costs for businesses. This guide will explain the key implications of a finding of worker status. It will focus on the impact on operating costs going forward and the potential for significant historic liabilities. It will also offer some practical tips for businesses which are concerned about the status of their workforce.

What are worker rights?

Workers are entitled to a range of statutory protections that do not apply to self-employed contractors.

This is a narrower range of rights than those afforded to 'employees'. Accordingly, workers are not able to bring unfair dismissal claims and are not entitled to redundancy payments. Similarly, they do not qualify for the so-called 'family friendly rights' such as maternity/paternity/shared parental leave and pay and flexible working.

However, workers are entitled to various important (and potentially costly) protections such as:

  • the right to paid holiday;
  • the right to receive the national minimum wage;
  • the right to be auto-enrolled into a pension scheme and receive an employer contribution;
  • protection against workplace discrimination, harassment and victimisation;
  • protection following protected disclosure (whistleblowing);
  • working time protections such as rest breaks and maximum working week; and
  • statutory sick pay (in some cases).

The above is not an exhaustive list of worker rights but it includes those key rights that are likely to give rise to significant liabilities for companies. These liabilities arise in two key ways: firstly, in the form of increased ongoing operating costs going forward and, secondly, in the form of expensive claims or enforcement action for historic failures to comply. Both of these are explained below.

Impact on operating costs

Firstly, there are generally higher operating costs associated with workers than with self-employed contractors. Current rates of pay may need to increase to ensure compliance with the national minimum wage (currently £7.50 per hour for workers over aged 25). Underpayment might not be obvious in atypical working arrangements - companies will need to carefully assess how total pay breaks down into an hourly wage. Any payments made directly to the worker from e.g. a client or end-user may not be capable of counting towards the company's national minimum wage obligation.

Similarly, the requirement to give workers paid annual leave may add a significant sum to overall payroll costs. The exact amount will accrue depending on how many hours/days are worked and should be calculated as a pro-rated portion of a full-time annual holiday entitlement (generally 28 days).

Pension contributions will cost companies further, with the minimum statutory employer contribution being set at between 1% and 3%. Some workers (those whose earnings are liable for class 1 National Insurance contributions) will also be entitled to receive statutory sick pay for up to 28 weeks of absence.

In order to ensure compliance going forward, companies will need to put in place new contractual arrangements with any newly identified workers. However, it may not be enough for the company to simply 'fix' the problem going forward. The second cost implication is historic liabilities (see below).

Historic liabilities

If an individual can successfully establish worker status, it is likely to apply retrospectively (i.e. they have always been a worker). It follows that they are potentially able to bring legal claims in respect of the full period during which they have ostensibly been self-employed. If a company engages a pool of workers on the same or very similar terms, it may only take one successful claim by an individual within the pool to effectively establish worker status for the entire group.

Companies will want to understand how far back these claims can go. Unfortunately the law in this area is complex and it is difficult to quantify potential liabilities. For example, it had previously been understood that unpaid holiday pay claims should go back no further than two years (meaning a maximum of 56 days' pay for each affected worker on a full-time basis). However, recent case law has potentially opened the door for claimants to go back even further than two years. We are waiting to see whether the European Court of Justice will follow the opinion of the Advocate General in King v The Sash Window Workshop Ltd. In this case it was stated that the worker should be able to bring claims over a longer period since he was provided with no 'adequate facility' to take holiday.

Claims for failure to pay the minimum wage should generally go back no further than two years in respect of any workers who continue to be engaged by the company. However, any workers who have left the company may bring breach of contract claims in respect of any underpayments over the prior six year period.

Potential pension liabilities will depend in part on how long the company has been required to comply with auto-enrolment duties (i.e. when its 'staging date' occurred). Currently, contributions are only required when an 'earnings trigger' (currently set at £10,000) is reached so companies should not have historic pension liabilities for workers earning below this level.

Government/Regulatory Issues

As well as facing legal claims, companies may also face action from Government or regulatory bodies who have jurisdiction to look back over long periods and enforce different aspects of worker rights. Relevant regulators include HMRC and the Pensions Regulator, who may take direct enforcement action in respect of failure to pay the minimum wage or to auto-enrol into pension schemes.

Available sanctions include compliance and enforcement notices, fines and 'naming and shaming'. In such cases, it may be the reputational damage which costs the business most dearly. In the most serious examples of non-compliance, it is also possible for criminal sanctions to be imposed - although this is unlikely to be the case except in the most egregious cases.

Practical tips for a concerned company

Given the current climate, many companies will have concerns about their workforce and whether their 'self-employed' arrangements stand up to scrutiny. It is always best to take a proactive approach rather than being caught on the back foot. 

The first step is to understand whether there is actually a problem: many self-employed relationships have been correctly classified and are perfectly legitimate. Legal advice may be sought on a privileged and confidential basis as part of an audit into the working arrangements within the company. In the event that the audit identifies significant risks of worker status, companies can work with advisers to quantify estimated potential costs and consider what changes are needed to ensure compliance going forward.

Companies will be relieved to know that many of the key claims identified above will be subject to three month time limits for continuing workers from the point at which the remedial action takes effect. This means that the risk of hefty historic liabilities can be greatly reduced fairly quickly after any problem is identified.

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