ESM0541 | Guide to determining status: financial risk

A strong indication of self-employment can be the financial risk which the worker runs in doing the job. In general terms, the greater the financial risk the stronger the pointer towards self-employment. Individuals who risk their own money by, for example, buying assets, bearing their running costs, paying for overheads and materials are likely to be self-employed. Employees do not usually need to risk their own capital. In this context investment by the individual as a shareholder is irrelevant. It is perfectly possible for an individual to be an employee of a company and also be a shareholder of that company.

Where a worker is required to and does correct sub-standard work in the workers own time i.e. the worker does not get paid again for correcting the work, then this is a pointer towards self-employment. The pointer to self-employment will be increased where the worker must also, and does, supply replacement materials. For example if a bricklayer has to re-build a wall and supply and pay for the cost of the mortar/bricks etc this would be a stronger pointer to self-employment than if the contractor supplied the replacement materials.

Financial risk may also occur where an individual incurs significant amounts of expenditure on training to provide himself/herself with a skill which is necessary for a particular engagement. This can be treated as a pointer to self-employment if there is a real risk that the investment would not be recovered from income from future engagements.

The absence of financial risk does not always mean the worker is an employee. Nor does the absence of what would normally be regarded as a business organisation. Yet it is fair to say that workers without either are unlikely to be self-employed.

An example of an exceptional case is the session musicians who were held to be working under contracts for services. They did not have their own business structure or risk their own capital. The Court’s decision was based largely on the fact they remained essentially freelance musicians pursuing their own professions as instrumentalists with individual reputations even when playing for an orchestra. [Addison and others v The London Philharmonic Orchestra Society Limited (1981) ICR261 and Midland Sinfonia Concert Society Limited v The Secretary of State for Social Services (1981) ICR454.]