Legal Definition of an Employee

What is the legal definition of an employee?

The way you work - and the way people work for you - have very important legal implications. In simple terms, there are five categories of employment recognised by the law and the tax system.

A person could be classed as:

1. a self-employed person
2. a worker
3. an employee
4. a director
5. a contractor

There are also essential tax and National Insurance contribution differences that come with different ways of working. As an employer, you must recognise the category to which the people who work for you belong, to ensure you fulfil your legal and tax obligations to them. If someone is classified as self-employed for tax purposes they are usually classified as employed (worker or employee) for employment rights purposes.

Below is a general overview of the different employment status categories and what they mean.

Workers and Employees

All employees are entitled to employment protection rights - though some rights require a minimum period of continuous service.

A number of core rights, such as the National Minimum Wage and regulations on working time, including rest and paid annual leave, are available to employees and those deemed to be workers.

The Difference Between and Employee And a Worker

A person's employment status will depend on whether their contract is a contract of employment, a contract for the personal performance of work or a contract for services.

The legal definition of an employee is someone who works for you under the terms of an employment contract. A contract of employment could be written, oral or implied.

A worker is a wider category - it includes any individual person who works for you, whether under a contract of employment or other type of contract, but is not self-employed. This category can include casual workers, agency workers or some freelance workers but the terms of the contract will determine their employment status.

For the purposes of income tax and National Insurance Contributions (NIC's), the agency providing an agency worker or casual worker is responsible for operating PAYE (Pay As You Earn) and accounting for NIC's for that worker.

In the event of a dispute about employment status as it relates to employment rights (or taxation), this can ultimately only be decided by the courts. The courts have devised a number of tests which examine the individual circumstances and consider all aspects of the relationship - including what a contract may or may not say - to establish employment status.

However, there are five key tests the courts will consider:-
1. control - whether you as an employer can instruct them how and which tasks to perform
2. integration - whether they are part and parcel of your organisation
3. mutuality of obligations - whether the worker is personally obliged to carry out the work and whether you as an employer are obliged to pay the worker for the work
4. substitution - whether someone else can be sent to do the job
5. economic reality - whether they are in business on their own account, eg where they bear the financial risks of failure to deliver the service.

Recent trends have been towards the application of a "composite test" which takes account of all relevant factors. However, if you are unsure of the employment status of someone who works for you or have concerns, you should seek advice.

Am I Legally Classed as Self-Employed?

Whether you can be classed as self-employed - as opposed to an employee or a worker - often depends on the level of your independence. Although there is no individual test that is decisive, you are likely to be classed as self-employed if you:

1. have the final say in how your business is run
2. risk your own money in the business
3. are responsible for the losses as well as profits of your business
4. provide the main items of equipment you need to do your job
5. are free to hire other people on your own terms to do the work you have taken on and pay them at your own expense
6. are responsible for correcting unsatisfactory work in your own time and at your own expense

You can be employed and self-employed at the same time. For example, you may work for an employer during the day but run your own part-time business in the evening. You must tell HM Revenue & Customs (HMRC) you are self-employed within three months of the end of the calendar month in which you became self-employed. If you don't, you could face a penalty.

Special rules apply for contractors and subcontractors in the construction industry. If you sell your own services through a third party, such as a limited company or partnership, IR35 rules may apply. Special rules also apply to individuals who provide their services through a managed service company. See the page in this guide on IR35 and other special rules.

You should take advice if you are unsure of your employment status or that of someone who works for you.

Employment Status of Company Directors

Executive directors of limited companies are classed as office holders for the purposes of tax and National Insurance contributions (NIC's). The rules for calculating NIC's for directors are different to those for other employees. Class 1 employee and employer NICs must still be paid if the director earns over the primary threshold, but unlike employees the directors are taxed on a cumulative basis. This means that you have to recalculate their NICs every time they are paid based on their total earnings to date.

Non-executive directors may be regarded as employed by the company or self-employed under a contract for services, depending on the terms and conditions of engagement. However, regardless of their executive or non-executive status, company directors have a number of additional responsibilities under company law and in relation to the completion of self-assessment tax returns.

Self-employed people who convert their business to a limited company usually become directors of the company as well as employees of the company.

For the purposes of employment law, a director of a limited company has the status of an office holder. While employees' rights and duties are defined by an employment contract, the rights and duties of an office holder are defined by the Companies Acts and the articles of association of the company. Office holders are not usually covered by employment legislation unless specifically mentioned.

However, it is not unusual for a company director to also have a contract of employment with the company and so be both an office holder and employee, and therefore benefit from the employment rights of an employee.

You should take advice if you are unsure of your employment status or that of someone who works for you.

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