With the recent Uber appeal decision, it’s a timely reminder that having an agreement which defines someone as a contractor doesn’t mean that they cannot still be an employee.
So, what do businesses need to do to ensure their contractor engagements are robust and stand up to scrutiny?
Ultimately, there is no bulletproof, set-and-forget approach. What is in the agreement will be relevant but the question of whether someone is a contractor or an employee will very much depend on how the working relationship operates in practice.
To unpack this further, it is important to first understand the distinction between an employee and a contractor.
Employee vs Contractor
Generally speaking, an employee is a person who provides a personal service in return for wages or a salary. They will typically work under the control and direction of another person or entity and will perform work that is ‘part and parcel’ of the business (e.g. a waiter at a restaurant). The formal legal term for such an engagement is a ‘contract of service’.
A contractor, on the other hand, is someone who is self-employed (including someone who operates through their own company), and who provides services to clients or customers in the hope of turning a profit. A contractor will usually have a high degree of flexibility as to the way they provide their services. A traditional example of a contractor is the plumber you hire to fix your broken pipes. Legally speaking, such an engagement is known as a ‘contract for service’.
While these are two different concepts, the line between employment and contracting will often be blurred. This is particularly so in today’s rising gig economy where we increasingly see work engagements that have a mix of employment and contracting features.
How does the law distinguish between an employee and a contractor?
Although it can be temping to take a ‘gut-feel’ approach to assessing who is and isn’t an employee, there are well-established legal tests for determining a worker’s true status. These tests were re-affirmed by the Court of Appeal in the Uber decision.
The first step is to determine the rights and obligations of the worker and the principle based on the written and verbal agreements, and what actually happens day to day.
Once those rights and obligations are clear, they are then assessed against three well-established tests for determining whether an individual is a contractor or an employee:
- The Control Test: How much control is exercised over the worker? The higher the degree of control, the more this points to employment. Conversely, the worker having greater independence and freedom is more in line with a contractor relationship.
- The Integral Test: Is the worker integrated into the principal’s business and performing work that is fundamental to the organisation? If yes then this may indicate employment. If not, and the services they are providing are more of a supplementary nature (for example providing cleaning services to a range of office-based employers), this may align more with a contractor relationship.
- The Fundamental test: This involves looking at the economic reality of the situation and whether the worker is truly in business on their own account. In the case of an employer, they will generally be paid wages or a salary with tax deducted by the employer. Contractors on the other hand will generally invoice for their services, be responsible for paying their own tax and will generally own the equipment that is necessary to deliver their services. They will also often have the ability to influence the profit that is generated from their services.
Why were Uber drivers found to be employees?
In simple terms, the Court of Appeal looked at Uber’s written agreements, it looked at the actual practice and it formed the view that the four uber applicant drivers were in reality employees.
As part of its analysis, the Court of Appeal undertook a deep-dive into the terms of Uber’s driver agreements, and how they aligned with what happens in practice. A key takeaway from this analysis was the Court’s view that many of the provisions in the written driver agreements were simply ‘window dressing’ and did not mean anything in reality.
A clear example of this were provisions in driver agreements which allowed them to effectively drive for multiple ride-share apps (including competitors of Uber) at the same time. If this were to be true, such a freedom would be a strong indicator of a contractor relationship. However, the Court was not persuaded that this was something that was a genuine option for drivers based on the evidence that was presented.
Once the reality of the drivers’ relationships with Uber was clear, the three tests played out in the following way:
- The Control test pointed towards the drivers being employees. Although the drivers had the choice as to when they worked, Uber was able to exercise a high degree of control over drivers once they logged into the app, including sanctioning drivers who repeatedly declined ride requests, and dictating the prices for each ride a driver accepts.
- The Integral test was something of a mixed bag. The Court acknowledged that drivers did not have to wear uniforms or display Uber signage like an employee may be expected to. Against this, drivers were integral in these sense that without the drivers, Uber would be unable to provide its service to the public.
- Ultimately, it was the Fundamental Test that seems to have been the most decisive of the three tests. While the Court did acknowledge that drivers operated their own businesses to an extent including by providing their own car and phone, this was outweighed by other aspects of the relationship which showed that the drivers were not truly in business on their own account and that they were in reality employees. Reasons for this included:
- Uber’s control and ability to unilaterally modify agreements that drivers needed to accept in order to access the Uber app;
- The control Uber was able to exercise over pricing, including setting standard rates and in unilaterally determining any adjustments following a customer or driver complaint;
- The inability of Uber drivers to employ someone to provide services on their behalf;
- The inability of Uber drivers to generate their own business goodwill or to influence the quantity or quality of the work they receive.
Concerned About Your Contractor Arrangements?
If you have concerns about your contractor arrangements, some initial questions to ask yourself include:
- To what extent are you controlling your contractors and how they provide their services? If there is a high degree of control, do you really need it? Or could the contractor be given more autonomy and flexibility in how they provide their services?
- Are your contractors ‘part and parcel’ of the operation or are they providing supplementary services?
- Are your contractors representing your organisation when they are providing services?
- Are your contractors engaged in a personal capacity, or do they operate through a company?
- Does any goodwill generated by your contractor go to them or your business?
- Is your contractor actually able to grow their business and influence whether they make a loss or a profit?
- Do your contractor agreements reflect the reality of how the contractor operates in practice? Or do the arrangements simply give the illusion of flexibility and freedom?
What to Bear in Mind
Contractors play an essential role for many businesses in providing specialist skills that may not exist within their employee workforce. However they can also be a source of considerable risk and uncertainty when used inappropriately.
We recommend regularly reviewing the nature of your contractor agreements and how those agreements play out in real life. If you are concerned about your contractor engagements, get in touch with our specialist employment team.
Disclaimer: The content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.
