Employee Status - Coursework Example

Question: The common law tests used to determine employee status are not able to deal with the variety of types of employment relationship in the modern labour market. There is an urgent need for radical reform of the law in this area. Employee Status Introduction The European Union Committee of the House of Lords characterised employee status in the UK as “confusing” and “contentious”.1 No single factor determines employee status under UK law and often times, only recourse to an Employment Tribunal will be able to determine employee status. This fact alone speaks to the “unsatisfactory nature of employment status” in an era where employment rights and benefits are increasingly important.2 This paper identifies the confusing and contentious issues associated with employee status in the UK and at the same time illustrates why employee status is important, particularly in more recent times where employees are increasingly dependent on employee benefits. The emphasis is on the common law tests used to determine employee status. This is a particularly contentious area in the modern labour markets where the lines between the employed and self-employed are increasingly “blurred”.3 This paper demonstrates that the common law tests developed to determine the employee status is unsatisfactory and why. I. Significance of Determining Employee Status Initially, the courts treated the employee status as one defined around the concept of master and servant. As a result, during the 19th century, the employment relationship was primarily regarded as one of service in which the emphasis was on the servant’s (employee’s) duty to remain loyal and subservient rather than the master’s (employer’s) duty to “provide continuing employment.”4 In more recent times the word “worker” continues to gain currency in legislation and regulations suggesting the modernisation of employee status.5 For instance, Section 230(3) of the Employment Rights Act 1996 provides that: In this Act ‘worker’ (except in the phrases ‘shop worker’ and ‘betting worker’) means an individual who has entered into or works (or, where the employment has ceased, worked under) – (a) A contract of employment, or (b) Any other contract, whether express or implied and (if it is express) whether oral or in writing, whereby the individual undertakes to do or perform personally any work or services for another party to the contract whose status is not by virtue of the contract that or a client or customer of any profession or business undertaking carried on by the individual.6 In other words, the term worker is used interchangeably with the word employee, reflecting the varying forms of employment that can take place in modern times. For instance the individual who works from home may not be under the kind of control that the workplace employee is, but should not be denied employee status.7 The use of the word worker immediately draws attention to the changing nature of the employee status and carries with it the identification of the significance of the employee in today’s labour market. The employee is no longer a servant, but a source of human capital. In this regard, the common law tests for determining the master servant relationship which necessarily flow from the older notion of master and servant, is no longer compatible with modern notions of the employee/employer relationship. There are essentially four primary reasons justifying a more robust test for determining employee status in more recent times. To begin with, the predominance of the contract of employment as a basis for identifying the employee’s status does not take into account the relative inequality of bargaining power between the employee (the weaker party) and the employer.8 These inequities compromise the extent to which the employee may bargain for and obtain specific benefits under the contract of employment. The fact is, a self-employed worker will obviously be responsible for its own salary and health and safety at work.9 Secondly, the doctrine of vicarious liability ensures that the employer may not escape liability for the conduct of the employee during the course of the employee’s work duties.10 Thirdly, the employer’s various duties of good faith and fair treatment are tied up in the contractual relationship with the employee.11 Fourthly, statutory provisions provide certain rights and benefits to a worker whose status is one of employee. For instance Section 94(1) of the Employment Rights Act 1996 provides that “an employee has the right not to be unfairly dismissed by his employer.” 12 In other words, employee status is significant for setting the parameters and limitations to when an employer is vicarious liable for the wrongdoing of the employee and for the manner in which the employee is treated on the job. In this regard, employee status needs a far fairer and more precise test than that provided for at common law. The lack of clarity and precision leaves far too much room for interpretation with the result that the employer can rely on the tenuous nature for determining employee status as a means of avoiding contractual duties and for escaping liability. Employees properly denied employee status can also be denied significant employee benefits such as unemployment and vacation increments. In today’s world where unemployment benefits are increasingly requested and human capital is becoming more and more competitive, the need for fortifying employee status is all the more important. The common law tests for determining employee status is therefore important. However, as illustrated below, there is a lot of room for conjecture. II. The Common Law Test for Determining Employee Status A. The Control Test UK courts will look to the control test as one of the important elements to take into account when determining an employee’s status or rather whether a the contractual relationship is one of employee/employer.13 In Ready Mixed Concrete (South East) Ltd v Ministers of Pensions and National Insurance [1968], Mackenna J. discussed the control test at great length. McKenna J. first set forth what amounts to employee status in the context of determining the existence of an employment contract. In this regard three requirements had to be fulfilled. They are: 1. The ‘employee’ agrees to provide work and skill for the employer in consideration of a salary or some form of compensation. 2. The employee either explicitly or implicitly agreed that in the course of the quid pro quo arrangement (wage for work) the employee is under the employer’s control to the extent that the control divides the relationship along employee/employer lines. 3. All of the other terms and conditions under the contract point to the contract being one of service.14 With respect to control, Mckenna J stated that: Control includes the power of deciding the thing to be done, the way in which it shall be done, the means to be employed in doing it, the time when, and the place where it shall be done. All these aspects of control must be considered in deciding whether the right exists in a sufficient degree to make one party the master and the other his servant. The right need not be unrestricted.15 Essentially what matters it the employer’s power to direct in the sense that the relationship permits it. Even if that authority is only “incidental” or confined to “collateral matters”, control will be said to exist for the purpose of conferring employee status.16 It would therefore appear that the control criteria is a tenuous one at best and is designed to blur the line between employment and self-employment even farther. The blurred line is evidenced by the decision in Motorola Ltd. v Davidson (1) and Melville Craig Group Ltd (2) [2001]. In Motorola Davidson was outsourced by Melville Craig, an employment agency to Motorola. It was agreed between Melville Craig and Motorola that Melville would terminate Davidson’s tenure with Motorola at the latter’s request. However, Melville commenced termination proceedings against Davidson. It was held the Motorola had enough control over Davidson since upon his report for work, Motorola ascertained his duties, therefore, Davidson was Motorola’s employee and not Melville’s. The fact is, there was a practical element attached to the control despite the lack of a legal relationship.17 The control test is therefore far from perfect. It engages control in situations where the legal relationship is minimal or non-existent. In the Motorola case it was obvious that Melville was Davidson’s employer in the strict sense, making the control test unsuitable for responding to situations in which an employee or servant was accountable to principle agency and under that agency’s legal control. In response to this shortcoming in the control test, the courts developed the organization test. The reality is, although the agency is the primary employer, the agency has little if any control over the worker’s performance of his/her duties.18 The fact is, the 19th century emphasis of control and subordination was fast outgrowing its utility in modern times where skilled workers had greater control over their performance than their respective employers may have had.19 There was an obvious need for modifying the test for determining employee status. The organization or integral part of the business test was thought to be an improvement on the control test. B. The Organization Test Lord Denning initially addressed the difficulties associated with the control test in situations where a worker might be under the legal control of one party and under the practical control of an employer. Lord Denning formulated what has come to be known as the organization test in Stevenson, Jordan & Harrison Ltd v MacDonald and Evans [1952]. In this case Lord Denning expressed the opinion that: One feature which seems to me to run through the instances is that, under a contract of service, a man is employed as part of the business and his work is done as an integral part of the business, whereas under a contract for services, his work, although done for the business, is not integrated into it but is only accessory to it.20 Lord Denning’s observation on the line between employment (the contract of service) and contract for service is significant for the employee’s status. If the contract for service integrates the worker into the integral part of the business operation then that person is for all intents and purposes an employee. However if that person’s work is not an integral part of the business operation but merely incidental to the business operation then he/she will be treated as self-employed or an independent contractor.21 This test itself has its difficulties as today’s penchant for outsourcing indicates that individuals outsourced in a contract for service may very well form an integral part of the business operation. It became necessary to expound on the organization test by looking for evidence of factors such as the worker’s ability to hire his/her own help or to place a substitute in his/her place.22 The difficulties with applying the organization test in modern times is reflected in the fact that it has rarely been used by the courts. The fact therefore remains that the control test with its emphasis on the master servant relationship was not significantly altered by the organisation test. The inadequacy of the control test and the organisation test are manifestations of the fact that no set criteria can satisfactorily determine employee status when one takes account of the modern commercial and labour conditions. The emergence of the multiple test is reflective of the need to develop a more rigid test for the determination of employee status at common law. The multiple test acknowledges that no single criteria can be applied for the determination of employee status. C. Multiple Test The multiple test comes closest to adjusting the distinction between a contract of services and a contract for services than the control and organization test in the context of modern labour market conditions. The multiple test which was formulated by McKenna J in Ready Mixed Concrete readily acknowledges that no one single criteria or set of factors can adequately determine a worker’s status. McKenna acknowledges that there are any number of factors that could distinguish between whether or not a worker is an employee or is self-employed or otherwise an independent contractor.23 The facts of Ready Mixed Concrete reveals the various factors that could arise and therefore make the application of either a control test or an organisation test entirely inadequate for determining employee status in modern times. In Ready Mixed Concrete lorry drivers acquired the appellant’s ready mixed concrete trucks on hire purchase and agreed to bear the company’s logo and to use the trucks only for the appellant’s business. The trucks were also subject to maintenance pursuant to the appellant’s instructions. The workers were also required to comply with orders from the appellant that were made within reason. Workers would also be entitled to a minimum annual salary. However, there were no set work hours and the workers were at liberty to hire out their trucks to carry out the appellant’s orders for the transfer or concrete.24 As previously noted, McKenna J formulated a three-prong test in which there had to be wage for work; control and a contract that was generally consistent with a contract of service. The first condition however, appears to be inadequate in that there is reference to the some form of compensation which in and of itself does not distinguish an employee from any other kind of worker. The reality is, all forms of workers whether under a contract of service or a contract for service will be compensated in one form or another for services rendered. The third prong in McKenna’s test however proved to be an onerous one in Market Investigations Ltd. v Minister of Social Security [1969] 2 QB 173. In this case the primary question was whether or not an interviewer who was only casually involved was subject to contracts for services or contracts of services. Market Investigations Ltd was in fact a market research organization and employed a variety of interviewers on a full-time basis. The interviewers dealt with a designated number of casual interviewers, the subject matter of the case.25 On the facts of the case, each of the interviewers had access to the firm’s Guide for interviewing. They were not under a duty to take on work offered. In general, the interviewers were requested to work up to three days over a two-week term. Substitutes could not be used without the firm’s prior permission. Occasionally, meetings were held briefing the interviewers just before assignments took off. Time off, vacation and sick pay were not parts of the contract. Clearly, both sides intended to formulate contracts for services. Cooke J felt that the more appropriate test was whether or not the person was performing business for his or her own account. If so, the contract was better characterized as a contract for services. Cooke J specifically noted that it was impossible to devise a complete list of relevant factors rendering a strict list of what factors should have what level of weight attached to it.26 Perhaps the best approach is to take up the suggestion made in Withers v Flackwell Heath Football Supporters Club [1981] IRLR 307. In this case the court ruled that the only certainty with respect to adopting a test for the determination of employee status was to consider the question from the perspective of the ordinary and reasonable person. Would that person form the impression that the worker’s status was one that could be characterized as a contract for service or a contract of service.27 However, even this approach appears to be inadequate as it is impossible to ascertain a universal criteria by which to view the contract for service and the contract of service. In today’s world where capital and humans beings are increasingly mobile, there is indeed a thing line between perceptions of contracts for service and contracts of service. An outsourced person from another jurisdiction may be entirely independent and on business on his own account, but may be subject to terms and conditions that would normally be applied to an ordinary employee, but only out of convenience as a result of obtaining alien status. In other words, the alien worker may have to meet certain immigration requirements in order to gain entry into the jurisdiction. However, those immigration requirements may be consistent with an employment contract of service although in reality the worker is engaging with the firm under a contract for service. An independence test was formulated as an alternative to the multiple test in WHPT Housing Association Ltd v Secretary of State for Social Services [1981]. In this case, Webster J offered up what can be described as the distinction between a worker who offers himself/herself to serve or the worker who offers his service. The former is for all intents and purposes an employee while the latter is an independent worker.28 However, this case does not offer a solution to the difficulties with the common law tests for determining employee status as it is not clear when or how a worker is merely offering his or her services or when a worker is actually serving. Conclusion There are a number of difficulties with the current state of the common law test for determining employee status. The problems have been generated however by the changing business environment and the changing nature of human capital resources and business structures. Capital and individuals are increasingly crossing borders and changing the concepts of business organizations and business relationships. Cross-cultural factors have also contributed to the changing nature of employee and employer relationships. Essentially, there was no single formula that can satisfactorily apply to every conceivable situation. Neither can the criteria in one case be all-inclusive enough to anticipate any and all working relationships that might arise in the future. At this point the best approach to take is a flexible approach with some emphasis on the control test. Ultimately, the degree of control over the worker and the level of independence accorded the worker is more likely than not to determine the worker’s status more than any other factor. Courts are also required to keep in mind that tax benefits to the self-employed and the ability to escape liability for employees will operate to compromise a determination of the employee and the employer’s true intention. Unfortunately, a full investigation of all the facts will ultimately be required. However, drawing on the observations made by Cooke J that it was impossible to compile a complete list of factors to take into account when determining employee status,29 it is perhaps best to leave the issue open. The courts should merely approach the issue anew in each case and merely rely on the facts of each case. While this may lead to further confusion, it will certainly dispense with the formulation of tests that continually fail to be appropriate and applicable in future cases. Bibliography Textbooks Countouris, N. The Changing Law of the Employment Relationship. (Ashgate Publishing 2007). Cowling, A. and Mailer, C. Managing Human Resources. (Butterworth-Heinemann 1998). Great Britain: Parliament: House of Lords: European Union Committee. Modernising European Union Labour Law: Has the UK Anything to Gain? 22nd Report of Session 2006-07. (The Stationery Shop 2007). Articles/Journals Davidov, G. ‘Who is a Worker?’ (2005) 34(1) Industrial Law Journal, 57-71. Deakin, S. ‘Labour Law and the Developing Employment Relationship in the UK.’ (1986) 10 Cambridge Journal of Economics, 225-246. Dickens, L. and Hall, M. ‘Labour Law and Industrial Relations: A New Settlement?’ cited in P. Edwards, Industrial Relations: Theory and Practice. (Wiley Blackwell 2003). Meager, N. and Bates, P. ‘Self-Employment in the United Kingdom During the 1980s and the 1990s.’ Cited in R. Arum and W. Muller (Eds) The Reermergence of Self-Employment, (Princeton University Press 2004) Ch. 5. Table of Cases Airfix Footwear Ltd v Cope [1978] IRLR 396. Honeywill and Stein Ltd. v Larkin Brothers Ltd. [1934] 1 KB 191. Lister v Hesley Hall Ltd.[2001] UKHL 22. Market Investigations Ltd. v Minister of Social Security [1969] 2 QB 173. Motorola Ltd. v Davidson and Melville Craig Group Ltd [2001] IRLR 4. Ready Mixed Concrete (South East) Ltd v Ministers of Pensions and National Insurance [1968] 2 QB 497. R v Hertfordshire CC ex Parte NUPE and Others [1985] IRLR 258. Staffordshire Snetinel Newspaper Ltd. v Potter [2004] IRLR 752. Stevenson, Jordan & Harrison Ltd v MacDonald and Evans [1952] 1 TLR 101. WHPT Housing Association Ltd v Secretary of State for Social Services [1981] ICR 737. Withers v Flackwell Heath Football Supporters Club [1981] IRLR 307 Zuijus v Wirth Brothers Pty Ltd. [1955] 93 CLR 561. Table of Statutes Employment Rights Act 1996. Read More