Personal service is at the heart of the employment relationship

As a rule of thumb, where there is no requirement for an individual to provide their services personally, then they cannot be a worker or an employee.  Where the contract for services contains a substitution clause that gives the contractor an unqualified right to provide a substitute contractor of their choice i.e. at any time and for any reason, this indicates that the contractor is genuinely self-employed, rather than a worker or employee.  This is assuming the clause reflects the reality of the working arrangement. 

What is present in recent employment status caselaw in those cases where worker status has been proven, is that the worker has only a limited right to provide a substitute (e.g. such as to cover a short period of prearranged absence only). 

In 2017, European case law determined that if someone has been treated as self-employed and therefore not given worker rights, including the right to statutory paid holiday, they could claim compensation for annual leave going back to the beginning of their engagement and that the worker is entitled to claim the accrued holiday pay on termination. This is because the European Court of Justice determined that the employer should not be rewarded for its wrongdoing by incorrectly treating a worker as self-employed. As the employer was “at fault” by only permitting unpaid leave to be taken, the worker was in principle entitled to claim unpaid annual leave for the full 13 years he worked for the company.  This can be distinguished from the cases where a worker cannot take holiday due to circumstances beyond both parties’ control, such as in the case of long-term sickness absence, where holiday carry over is limited to 15 months from the end of the leave year to which it relates in respect of the 20 days’ Working Time Directive leave for full-time workers. 

Clearly, this caselaw had far reaching financial implications for businesses reliant on contractors.  Workers engaged by employers in the public sector may directly rely on this judgment, as European caselaw (and, in this case, the Working Time Directive) may be directly applied for public sector employees and workers in the UK courts and tribunals.  However, UK caselaw to determine this issue was settled out of court, so there is no domestic ruling.  For now, therefore, UK businesses in the private sector may rely on UK statute which imposes a limit of two years on any holiday back-pay claim.  Currently and until this question is further addressed by the UK courts, it seems that this remains the case even where the employer has incorrectly classified the contractor as “self-employed” when they are in reality a worker or an employee.   

As part of a risk analysis, businesses should carry out an audit of their contractors to determine their true employment status, bearing in mind the 2-year limitation period for arrears of unpaid holiday pay.  Generally speaking, a claim in the employment tribunal for holiday pay arrears must be brought within 3 months of the end of the employment/worker relationship, or the last arrears of pay.  The 3-month time limit may be extended where the tribunal considers it was not reasonably practicable for the complaint to be presented before the end of the 3-month period.