When a company is hiring a person it should decide on the most suitable type of employment to meet its needs. Two types of employment that are commonly used are employment and consultancy (which can include self employed). Both types of employment are for a specific period of time. However, distinguishing between the two types affects the employment status, tax affairs and rights and obligations of both the employer/client and the employee/consultant. It is not sufficient to use an employment agreement, consultancy agreement or a specific label to determine the status of the employee as multiple factors are assessed to define the real relationship between the parties. This article will look at 3 of the key factors in employment law that distinguish a fixed term employment from a consultancy so that you can create the right contracts for your own business.
One of the key factors in determining the type of working relationship is the degree of control the company has over the person. A high degree of control could indicate employment. Conversely, a low degree of control could indicate consultancy. The degree of control can be assessed based on multiple factors such as hours of work, place of work and provision of equipment.
If the company requires the worker to work a specific number of hours per day then there is a higher degree of control. On the other hand, if the person can work at their own pace and determine their working hours then there is a lower degree of control. Similarly, if the person has to work from a specific location rather than work at their own premises then there is a higher degree of control. Another indicator of control is the provision of equipment. If the employer provides the person with the necessary equipment to perform their duties then a higher degree of control over the person as opposed to using their own equipment which could be more suitable for the task. None of the above indicators are definitive on their own, the overall circumstances would be examined to determine whether the company has sufficient control for the worker status to be considered an employment or a consultancy.
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Personal service and substitutability
A second key factor that is used to determining employment status is personal service and substitutability. If there is a requirement for the person to personally perform the service then this could indicate employment. However, a consultant can be required to personally perform the service if the consultant is a specialist in that area and their speciality is the reason why they have been hired to do the service. Similarly, if the person has full discretion to appoint a substitute if they can no longer perform the service then this is an indication that the relationship is that of a consultant and a client. Alternatively, if the company restricts the ability to appoint a substitute then it is more likely that the relationship between them is that of an employee and an employer.
For example, substitutability was one of the deciding factors in an application to the Employment Tribunal to decide whether a plumber was a consultant or not. The company had required the plumber to perform the service personally and if he could not then he had to pass on the job to other plumbers within the company, i.e. he did not have full discretion when it came to the substitute. The tribunal found that due to the limitation on substitutability, among other things, that the plumber was not a consultant.
Mutuality of obligation
A third key factor in determining the relationship between a company and a person is the mutuality of obligation. If the company has to keep providing the person with work for the duration of agreement then it is more likely that they are not consulting. Similarly, if the person is under no obligation to accept the work provided by the company without being in breach of the agreement then it is more likely that they are a consultant.
In conclusion, to determine the relationship between a company and a person the true nature of their relationship must be assessed. Multiple factors could help determine that nature such as the degree of control, personal service and substitutability requirements and the mutuality of obligations. Other factors that could assist in that determination include restriction on other work and the financial risk taken by the employee/consultant. Once you have determined the right arrangement for your business, consider using a software platform like Legislate to create and manage your contracts. Tailor lawyer-approved employment and consultancy agreements to your specific requirements by answering simple questions and invite the counter parties for e-signature. To get started, simply create an account now!
The opinions on this page are for general information purposes only and do not constitute legal or financial advice on which you should rely.