Sept 2014 - Court Case of The Month

Published on: 02 September 2014

Self Employed Contractor or Employee?

In the last two months the Employment Relations Authority (“Authority”) has considered a number of claims by individuals purportedly engaged as contractors who subsequently challenged that status and sought a ruling from the Authority that their status was one of employment.  If the relationship is determined to be one of employment, then obligations in relation to pay, holiday leave, sick leave, PAYE and other entitlements of employment arise.

In the recent decision of Lundh and Alpha Construction Limited, the Authority was asked to determine whether Mr Lundh was engaged as a contractor or employed as an employee of Alpha Construction Limited.  There was no written contract between the parties.  If it was determined that Mr Lundh was an employee then he would be entitled to holiday pay under the Holidays Act 2003.

The tests applied to determine whether an individual is an employee or an independent contractor are the control test, the integration test and the fundamental or economic reality test.  The starting point is always to examine the terms and conditions of any contract between the parties and how it has operated in practice.  However the terms of the contract are not determinative.

The Authority first considered the control test and examined the extent to which the activities of Mr Lundh were controlled by the company.  Mr Lundh gave evidence that Alpha Construction had contracted him out to other companies such as Fletchers and Leigh Construction.  He was required to report on those building sites at the times directed by the client (Fletchers and Leigh Construction) and to finish work when everyone else on site finished.  He was not free to decide when he started and finished and he was not free to decline work.  Because of his experience as a carpenter Mr Lundh did not require a great deal of direction.  As such the Authority considered that the control test did not greatly assist in deciding whether Mr Lundh was an employee or a contractor.

The integration test examined the extent to which Mr Lundh was integrated into the company’s business.  Mr Lundh’s evidence was that he was not treated any differently to other workers who were employees of the company.  Mr Lundh used his own tools like all carpenters, and also borrowed tools from the company.  The Authority considered that the integration test did not appear to be strongly determinative of Mr Lundh’s status one way or the other.  It acknowledged that the fact that he used his own tools was not of great assistance as it was commonplace for employed carpenters and tradesmen to use their own tools.

The third test applied was the fundamental or economic reality test.  This test examined the extent to which Mr Lundh took on financial risk himself in providing his services to the company.  The evidence was clear that Mr Lundh took no financial risk.  He did not submit invoices, but rather submitted timesheets like other workers and was paid for his time.  As he was not taking on any economic risk in the provision of his services, the Authority determined that in applying the fundamental test Mr Lundh was an employee rather than a contractor.  The Authority determined that looking at the arrangement as a whole, the real nature of the relationship was one of employment.  Having determined that he was an employee, the company became liable to pay holiday pay.  Due to the short period of his employment, the holiday pay for which the company was liable was not substantial.  If the relationship had been on foot for a longer period the company would have faced significant liability for holiday pay.

It is very important that parties turn their mind to the correct nature of the relationship at the commencement of any engagement of a contractor or employment of an employee.  The financial consequences for a company of not correctly documenting the real nature of the relationship between the parties can be significant.