Mondaq who provide regulatory information to over 70 countries have recently published a helpful article to clarify considerations when categorising “self-employed contractors” and how to best position yourselves as organisations to avoid “misclassification”. This comes as a result of the European Court of Justice ruling on the 27th November 2017, that misclassified self-employed contractors who are really workers or employees could claim back holiday pay all the way back to 1996, the year of the introduction of the European Union’s Working Time Directive. Previously, liability was limited to one or two years’ back pay in most cases that came before employment tribunals.
The article goes on:
“In all EU countries, workers and employees have the right to at least 4 weeks’ paid annual leave—in the United Kingdom, the Working Time Regulations are more generous, providing 5.6 weeks’ leave. By contrast self-employed contractors do not enjoy the right to paid annual leave or other benefits that depend on “worker” or “employee” status.
As recent cases in the “gig economy” have demonstrated, this can be a big issue when a contractor successfully challenges his or her status and is found to be a worker or employee. There can then be a back bill for the employer for the benefits that were not provided. In the past, these tended to be limited to the last two years—but this important judgment effectively removes that limit, so claims can go back to the commencement of the right.
The case—King v The Sash Windows Workshop Ltd—involved a window cleaner who now has £27,000 to compensate him for paid annual leave to which he would have been entitled had he been classified as a worker or employee.
The takeaway for those that use contractors is to look at their arrangements and assess the risk of misclassification. The factors courts consider include (1) whether the individual has his or her own business, which he or she manages and in which he or she invests; (2) whether the individual is paid a wage or by results; (3) the extent to which the individual is integrated into the business; (4) whether the individual is working on defined specific tasks; and (5) the extent of control exercised over what they do.
Preparing a good independent contractor contract will help, but it will not avoid a misclassification finding when used for someone who is in reality working as an employee/worker. As the saying goes—”if it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck”. However, when most of the above factors support contractor status, there are some sensible practical steps organisations can take to minimise risks when drafting their contractor contracts:
- State in the contract that the contractor is registered as an independent service provider and include the local business registration number where applicable.
- Make explicit in the contract that the contractor will comply with all local laws and taxation requirements.
- Do not include the contractor in employee compensation, bonus, or benefit plans.
- Ensure that any badge, business card, or email address that you provide to a contractor clearly states that he or she is a contractor.
- Be careful with terminology. Use terms such as “services” rather than “work”, “liaison” instead of “supervisor”, and “defect in performance” instead of “discipline”.
- Include indemnities such as where a contractor agrees to indemnify the company or pay a certain amount if the contractor ever claims to be an employee. The legality of such clauses is a grey area, but it may serve to deter legal actions regardless.
- It can be a good idea to require the individual to set up his or her own company and contract with that company. This generally reduces the risk of misclassification”.
Please contact your Elcons Advisor to discuss matters on a case by case basis.