Worker status - an explainer

This is part of a series of explainers on topical tax issues produced by the Chartered Institute of Taxation

What is worker status?  

Under the current system worker status is one of three employment statuses that dictate what type of employment rights and protections someone is entitled to:  

• Employee – most employment rights  
• ‘Worker’ – basic suite of rights  
• Self-employed - very few employment rights at all 

Employment status is also important for tax law purposes. However, there are only two statuses for tax law – employee (pay tax via Pay As You Earn) or self-employed (pay tax via self-assessment).  

Individuals regarded by employment law as ‘workers’ may be either employed or self-employed for tax purposes, depending on the circumstances. 

Who has worker status?  

A ‘worker’ is basically someone who provides work or a service to someone, but not as part of running their own business. For example, an electrician working for a single building contractor as opposed to his own domestic customers, could be a ‘worker’ for employment law purposes. 

Their work arrangements tend to be midway between self-employment and employment in that they do not have the ‘master/servant’ relationship that an employee has with their engager (the person or company taking them on). But neither are they entirely their own bosses, deciding how much to charge for their work, how much holiday to give themselves, and so on. 

People with worker status may have little autonomy and may derive all or most of their income from the business they work for, so will likely be in an unequal bargaining position. This is why ‘workers’ have a minimum set of employment rights to help protect them, including the right to be paid the minimum wage, to a workplace pension and to paid annual leave.  

Is it hard to work out worker status? 

Yes, it can be.  

Under the main definition of ‘worker’ per the Employment Rights Act 1996 (note ‘workers’ can sometimes be defined slightly differently depending on the right in question), there are three strands to ‘worker’ status: 

• There has to be a contract between the worker and engager. 
• The worker generally must carry out their work personally, rather than being able to send someone in their place.  
• The worker must not really be in business on their own account (so, the engager isn’t a client or customer of the worker’s own business). 

The last bullet point is where things get difficult and technical, because working out whether people are in business on their own account for worker status purposes starts at the same point as working out if people are in business on their own account for employee versus self-employed purposes. 

The factors that will be considered in doing this are set out on our Low Incomes Tax Reform Group (LITRG) website page: Employed, self-employed or neither. Worker status is basically for those who do not reach the ‘pass mark’ for acquiring employee status - but there is a lack of clarity over where the line is (or should be) drawn. 

Tribunals will usually take the same type of factors into account when deciding employment status for tax law or employment law purposes, however recently there has been some divergence.   

How common is worker status?  

Quite common, particularly in non-traditional forms of work such as where people sell their services through online platforms. However, these people can often be classified as self-employed by their engager, even if that might not be the true nature of their working relationship. 

In a high profile case on this, the Supreme Court found that some ‘self-employed’ Uber drivers were ‘workers’ rather than self-employed for employment law purposes. This was because the drivers had little or no say over their pay and working conditions (as they were in a subordinate and dependent position in relation to Uber) and had little or no ability to improve their economic position through professional or entrepreneurial skill (thus, were not in business on their own account). In practice, the only way in which they could increase their earnings was by working longer hours while constantly meeting Uber’s measures of performance. 

Although we understand that Uber have now shifted their business model in response, with the growth of the gig economy and other ‘dependent’ self-employment, it seems likely that this situation could apply more widely.  

What is the problem with worker status?  

Where to start! 

• As stated above, working out someone’s employment status can be difficult and technical. Indeed, Matthew Taylor’s Good Work Review noted that determining which category you are in – and your access to various employment rights and protections – requires knowledge of complex legal tests and an “encyclopaedic knowledge of case law”.  
• Furthermore, despite it being a very valuable status, and despite there being some good guidance now available on GOV.UK, there is a lack of awareness about this status – both at engager level and worker level. People can therefore miss out on the rights and protections that go with worker status because it is not understood and applied properly.
• Even where someone’s worker status is quite clear and certain, some engagers prefer to treat their staff as self-employed when they are not, because it can save them money. This is called bogus or false self-employment.
• Although a person's employment status is not a matter of choice by their engager and depends on the true nature of the relationship, typically individuals need to go to an employment tribunal to enforce their position – something out of reach to many. As there is no state enforcement body really looking at status issues, businesses may have little fear of action being taken against them.
• Moreover if workers successfully challenge businesses and argue that they are ‘workers’, the judgments only apply to the specific workers and businesses under consideration; there are no automatic consequences for others in similar situations.

Sounds like a mess?! 

Yes indeed, it is a mess.  

There have been numerous efforts to address these issues in the past, including from 2017 when the Work and Pensions Committee recommended a default ‘worker status’. They argued that this would protect both workers and the public purse given practices like bogus self-employment are potentially creating an extra burden on the welfare state while simultaneously reducing the tax contributions that sustain it. However, in 2024, we find ourselves no further forward.  

It is also worth noting that, on 24 April 2024, in response to increasing numbers of online platform workers in the EU, the Platform Work Directive was adopted. The Directive includes a presumption of employment status in certain circumstances. Estimates are that about 5.5 million people may be wrongly classified as self-employed and that between 1.7 - 4.1 million people will be reclassified under this Directive. 

Although we are no longer in the EU, the Directive may have provided inspiration to some of the UK’s political parties to try to finally tackle these issues.  

What do Labour propose about worker status?  

Acknowledging issues like those set out above, Labour plan to introduce a single status of worker with a carve out for the genuinely self-employed, saying: 

‘…we will move towards a single status of worker and transition towards a simpler two-part framework for employment status… We will consult in detail on how a simpler framework that differentiates between workers and the genuinely self-employed could properly capture the breadth of employment relationships in the UK, adapt to changing forms of employment and guard against a minority of employers using novel contractual forms to avoid legal obligations, while ensuring that workers can benefit from flexible working where they choose to do so.’ 

Although it is not entirely clear, we imagine this will result in the merging of ‘worker’ and employee status with an expansion of existing employee rights to ‘workers’. Alongside this, Labour are also proposing to extend employment rights, for instance to make protection from unfair dismissal a day one right. It is important to loop these together to understand the significance of what is being proposed.  

What do other parties say?  

The SNP say they want to ‘amend the definition of worker to strengthen protections for those with unfair contracts by creating a single status of “worker” for all but the genuinely self-employed’. 

The Green Party say that ‘Gig economy’ workers – like those working for Uber and Deliveroo – are excluded from fundamental workers’ rights. Every worker deserves equal protection. We will bring platform workers under a single legal status of ‘worker’, with full and equal rights from the first day of employment.’ 

The Lib Dems propose establishing a new employment status called "dependent contractor," positioned between traditional employment and self-employment. This status would grant basic rights such as minimum earnings levels, sick pay, and holiday entitlement. They also say they want to shift the burden of proof from the individual to the employer in employment tribunals concerning employment status.  

Although all slightly different, it is interesting that there is a point of unity here around ‘fixing’ worker status which speaks to the significance of the issue.  

Worker status does not feature in the Conservative, Plaid Cymru or Reform manifestos.  

Is single worker status a good idea?  

As set out above, workers are often not aware of their employment status and therefore what employment rights they are entitled to. Even if they can be sure of their rights, they often have no practical way of securing them. The Labour proposals could reduce ambiguity and extend employment rights to a broader range of individuals, including many of those in the gig economy who are potentially vulnerable and who may currently be classified as self-employed incorrectly. ​ 

What are the downsides? 

Unless businesses can manoeuvre their workers into the safe harbour of ‘genuine self-employment’, this will lead to increased employment costs and administration, as they will be responsible for providing rights that they may not have had to before. Increased costs may be absorbed, displaced or passed on - consumers may end up having to pay more.  

It may impact on business models. For instance, if more individuals are ‘workers’ with attendant protections, this may limit businesses’ ability to quickly adjust their workforce in response to changing business needs.  

There may also be reservations about how something like single worker status might work in practice – for example in the past, Matthew Taylor has said: ‘I would worry about the situation in which ordinary citizens asking self-employed people to take on odd jobs and things like that would find themselves liable to the full panoply of employment law...’, He did, however, then go on to suggest a way that this could be addressed.   

What will happen to the tax position of workers?  

Probably nothing - unless further changes are envisaged, for example to align employment law status with tax law status.   

Individuals who are treated as self-employed will typically be treated as self-employed for both employment law and tax law purposes. However, under the current framework, you can actually have different statuses for each. There is no automatic read across.  

As such, an individual’s employment law status changing from self-employed to ‘worker’, in and of itself, would not change their self-employed tax position. However, on the facts, it would be open to HMRC/a tax tribunal to decide that someone who was not ‘genuinely self-employed’ for employment law purposes, would be an employee for tax purposes and should have had PAYE operated by their engagers.  

There is a small possibility that these reforms will prompt engagers to reassess their approach to workers for tax purposes themselves and to start to operate PAYE off their own back. Perhaps counterintuitively, some workers may welcome the certainty of having their taxes dealt with via PAYE. For example, LITRG know from their work in this area that many in the gig economy struggle with the complex self-assessment system and can easily fall into non-compliance and debt. Universal credit for ‘employees’ can also be less burdensome/more generous than for the ‘self-employed’, although it is worth noting that definitions here aren’t fully aligned with tax either!   

Would there be other impacts on the tax system?  

There could be.  

For instance, Labour allude that as part of their new deal for workers, they want to reform and make sick pay available for all workers. 

However, entitlement to statutory payments like sick pay and maternity pay is currently connected to the tax system. Secondary contributors (those responsible for paying employer’s National Insurance) are responsible for administering and part-financing statutory payments under the Social Security Contributions and Benefits Act 1992. If ‘workers’ continue to be treated as self-employed for tax purposes and are paid gross, then there will be no secondary contributor.  

Ensuring that ‘workers’ receive things like sick pay and maternity pay will therefore require a change in the law, for instance to make the engagers secondary contributors somehow or to disconnect statutory payments from the tax system and attach them to the employment law system as a ‘worker’ right.   

Any final thoughts?  

Given the ‘genuine self-employed’ carve out in the Labour proposals and the fact that various differentials between the statuses will continue to make some distortive hiring behaviour inevitable, it is likely we will still see businesses continuing to treat people as self-employed. It is also likely that we will continue to see individuals disputing their classification as self-employed. Which brings us back to all the inherent problems in the employment status regime.  

In the 64-question-long 2018 employment status consultation, which discussed reforms to clarify the issue of status, the main problems were summarised as:  

• open to interpretation – that there can be ambiguity in the application of the case law tests when determining status  
• complex – the difficulty in applying the rules to novel circumstances, and the lack of clarity between statuses 
• difficulties in resolving disputes – the difficulties individuals can face when seeking a final decision on status, and the cost to all parties of resolving these disagreements.  

Few, if any respondents, appear to have disagreed with this! However, four years later, the government concluded that the ‘benefits of creating a new framework for employment status are currently outweighed by the potential disruption associated with legislative reform. While such reform could help bring clarity in the long term, it might create cost and uncertainty for business in the short term, at a time when they are focusing on recovering from the pandemic’.  Now that we are moving beyond the pandemic, it may be that the time is right to return to this thorny subject. 

Should they win the election, Labour have said they will consult in detail on a simpler framework that differentiates between workers and the genuinely self-employed. Some stakeholders will no doubt be pressing the next government, whatever form it takes, to ambitiously and holistically revisit this enormous and complex topic. And with a tax/benefits, as well as an employment law, focus!  

This explainer was written by:
Meredith McCammond, Technical Officer, CIOT Low Incomes Tax Reform Group