Is a self-employed workforce the best option if you're building a brand?

The temptation to avoid the regulatory headache of employing people to work for you may prove very strong, particularly if your business is just starting out. However, the alternative – engaging a self-employed workforce – may not always work with the drive to create a strong brand and excellent customer service.

This is particularly the case for many beauty brands. Rather than engaging self-employed workers, it may be commercially preferable to employ workers directly: while this means that they will need to be paid accordingly, an employer is entitled to exercise a degree of control over its workforce, and this could help to protect its brand. Employing people directly manages the risk to the brand of misclassifying the status of self-employed contractors, which can have significant legal, financial and reputational repercussions.

A brief look at the law on employment status – where are we now?

An individual can be an “employee”, "worker”, or an “independent contractor” (self-employed). Anyone who isn't an employee or worker will be self-employed for employment law purposes. Employment status is determined by looking at a variety of factors that have developed in case law.

New structures of working do not fit neatly into the established employee/worker/self-employed categories, making determining employment status a difficult exercise. The starting point is whether the law was intended to protect the individual in question. Recent cases have confirmed that courts look at the reality of the relationship, even though this may differ from what has been contractually agreed.

Employees are entitled to the full suite of employment law protections, such as the right not to be unfairly dismissed, redundancy pay and minimum notice periods. A table summarising more common rights of employees and workers is included at the end of this article. An employee works under a 'contract of service', which can be in writing or orally agreed. Case law has established that there are three fundamental aspects which need to exist to constitute an employee relationship:

• Personal service: the individual is required to perform the work personally and cannot send a substitute to do the work in their place.
• Control: the employer has a sufficient degree of control in relation to how, when and where the individual performs the work.
• Mutuality of obligation: the individual is required to perform the work and the employer is required to provide the work to the employee and pay them accordingly. This is often interpreted as a 'minimum commitment' by both parties.

The binary distinction between employee and self-employed blurred in the mid-1990s when the status of "worker" gained more prominence. Workers sit between self-employed individuals and employees in terms of the protections which employment law affords to them. Workers don't benefit from all of the rights that employees have, but they are entitled to certain basic rights such as protection from discrimination and whistleblowing detriment, holiday pay, national minimum wage and pension contributions.

The development of the gig economy in the 2000s led to more businesses engaging their workforce not as employees or workers, but as self-employed contractors. However, the past decade has seen a rise in the number of cases where individuals have challenged their independent contractor status and argued, sometimes successfully, that they are in fact workers who are therefore entitled to various protections.

The tension between worker status and self-employment in the beauty industry

Many beauty brands engage self-employed beauty technicians, often through online platforms and apps, as well as self-employed influencers who advertise and market beauty products. Engaging self-employed individuals can be an attractive way of building a low-cost workforce, as employers are not liable for employment-related costs such as holiday pay, pension contributions and employer's national insurance. Alongside keeping costs down, a key priority for many beauty brands in the early stages of growth is creating a strong brand identity and a good customer service experience. However, in practice the things that beauty brands often do to achieve brand loyalty can be inconsistent with having a truly self-employed workforce.

Personal service

One key factor determining whether an individual is a worker is personal service. It is a requirement for worker status that an individual is personally required to perform the work. Accordingly, someone with a genuine and unfettered right to send a substitute to work in their place will be self-employed, as they do not have to render personal service themselves. The word 'unfettered' is critical here. The more limited the power of substitution – for example, a power to field a substitute only with the brand's consent – the more unlikely it is that the power of substitution will negate the existence of personal service.

Personal service is at the core of beauty brands. For beauty brands whose business model focuses on providing users with expert beauty services, it is highly unlikely that the business model will work if the beautician has an unfettered right to field whoever they want as a substitute, regardless of suitability. Such an unfettered right risks undermining the very reason many people use beauty services in the first place: to receive expert treatments from trained professionals. Similarly, a beauty brand which engages influencers to advertise and market beauty products is reliant on accessing that very influencer's audience, which would be entirely undermined if the influencer could, in practice, field anyone else to do the online promotion in their place.

Doing business on own account

However, the good news for beauty brands that rely on a business model based on personal service, is that a strong right of substitution is not solely determinative of worker status. Even if an individual is required to perform their work personally, they may still be self-employed.

Case law has established that courts will also take into account a variety of other factors when determining employment status. Where the individual who is performing a personal service is genuinely in business on their own account, they will be self-employed.

Whether an individual is doing business on their own account involves looking at the economic reality of the relationship. In broad terms, this includes looking at the level of control the employer has over the individual, the individual's integration into the employer's business, whether the individual supplies their own equipment and the level of financial risk taken by the individual. A self-employed person doing business on their own account will operate an arm's-length relationship with brand and will be seen as being able to look after themselves, whereas a worker will be in a subordinate and dependent position vis-à-vis the brand.

Typically, a brand takes many steps in its early stages of growth to build a loyal customer base and a strong brand identity which are at odds with genuine self-employment. For example, the following criteria all point to a level of control which, when taken together, indicate worker status rather than an arm's length relationship of self-employment:

• requiring individuals to wear branded uniform (or any uniform at all);
• setting performance standards and expected ways of working;
• penalising individuals for cancelling appointments or providing a bad service;
• prohibiting the individuals from working for or promoting other beauty brands; and
• having clear pay structures and prices for services and rates, which the individual is not allowed to negotiate or personally profit from.

The courts consider employment status as a 'spectrum' and the existence of just one of the factors of control above is unlikely to determine worker status on its own. However, generally speaking, a high concentration of these factors will suggest that these individuals are in a subordinate/dependant position and so have worker status. Beauty brands that want to engage a self-employed workforce should therefore carefully consider the aspects of control that they exert over their workforce, and whether each element of control is strictly necessary or just a 'nice to have'.

What are the risks of misclassifying a worker as a self-employed individual?

The headline liabilities when someone is misclassified as self-employed when they are in fact a worker include:

the individual may bring worker-related claims (for example, rights to unpaid holiday pay potentially dating back to the start of their engagement, national minimum wage and pension contributions);

the brand may be liable to HMRC for the income tax and National Insurance contributions that it has failed to deduct through payroll, as well as interest and penalties. In extreme situations, where the brand has deliberately misclassified its workforce as self-employed, there can also be criminal sanctions for tax fraud; and

adverse media coverage, particularly considering the ongoing general interest in worker treatment in the gig economy.

So what should a beauty brand bear in mind when engaging people?

The requirement that individuals provide personal service is likely to be essential to many beauty brands' business models. For example, it is unlikely that a beauty brand engaging beauticians would be comfortable with the beautician having an unfettered right of substitution. The beauty brand therefore needs to engage individuals who are genuinely in business on their own account, in order to engage them on a self-employed basis. In practice, this means creating an arm's-length relationship between the beauty brand and its workforce which will, for example, reduce the amount of control exerted by the brand. It is likely, particularly in the early stages when a beauty brand is building strong brand loyalty and an excellent customer service experience, that it will want to have a level of control over its workforce which indicates worker status.

Beauty brands that are starting out may therefore want to consider engaging individuals as workers (and paying them accordingly) so that it can exercise a high degree of control while it legitimises running the business as a 'tight ship'. Once customer loyalty and a strong brand is established, the business can review its workforce arrangements and consider moving towards a self-employed model.