Who is an employee?

The importance of employment status

Employment status continues to be a dynamic and contentious area of law. From an insolvency perspective, establishing an individual’s employment status is paramount as only employees can make a claim to the Redundancy Payment Service (the RPS) for unpaid payments. Employees often have limited prospects of recovery directly against their insolvent employer, therefore making a claim through the RPS a vital lifeline. 

The issue of someone’s employment status becomes all the more contentious when directors and shareholders try to make claims via the RPS on the basis that they are employees of the company.

To further complicate the issue, there are actually three categories of employment status in UK employment law: employee, worker, and self-employed and determining which category someone falls into is not always a straightforward task.

The term “employee” is not defined in the Insolvency Act 1986, and whilst statutory definitions of “employee” and “worker” exist in employment legislation, they are notoriously unhelpful. As such, the current legal position has been defined by case law over many years and there is still no definitive list of criteria which make a person an employee or a worker as opposed to genuinely self-employed.

Who is an “employee”?

The starting point is the definition in section 230 of the Employment Rights Act, which defines an employee as: “an individual who has entered into or works under (or, where the employment has ceased, worked under) a contract of employment.”  A contract of employment is then defined as a: “contract of service or apprenticeship, whether express or implied, and (if it is express) whether oral or in writing.”

Case law has then established three key elements for determining the presence of a contract of employment. These are:

1. Personal service: Employees and workers do not have an unfettered right to ask a substitute to carry out the work on their behalf; they must perform the work themselves. Where personal service is not required and the individual is free to send a substitute in their place, this is consistent with the individual being self-employed.
2. Control: Older cases often refer to control in terms of a “master” and “servant” relationship. Employers will exert a greater level of control over their employees and have less control over individuals who are self-employed who are usually free to choose when, where and how they perform the work.
3. Mutuality of obligation: Mutuality of obligation is the obligation on an employer to provide work and the obligation on an individual to accept and perform that work. If the individual can refuse work, there is no mutuality.

Distinguishing “employees” from “ workers” is more difficult as the two are not mutually exclusive; all employees are workers but not all workers are employees. In most cases, workers are required to perform work personally but are not subject to the same degree of control as an employee would be and there is no obligation to accept the work offered.

When it comes to company directors, they are office holders and don’t automatically qualify as employees of a company. Traditionally, directors and other office holders were not considered to be employees, however, it is now very commonly the case that officeholders also have a contract of employment and therefore are employees of the company. If they meet the criteria, a director can make claims from the NIF in the same way as any other employee.

You can read more information on directors, their status as employees and director claims to the RPS here.

For further information on this article, please contact  Kirsty Cooke or another member of our Employment or Restructuring & Insolvency  teams.