Employment status is the status of an individual for the purposes of tax or employment law, i.e. whether they are employed or self-employed. For tax purposes it might just as well be called ‘tax status’, but it has become known as employment status. Employment status is established ultimately by case law but, on an everyday basis, it is up to the business or individual to figure out whether they are employed or self-employed.
The consequences of incorrect classification of employment status, however, can be very costly to a business. If a business engages with self-employed sole traders and HMRC seeks to reclassify them as disguised employees, the tax bill can be huge, going back six years and could also include fines and penalties.
A self-employed individual could also make a claim for employment rights and seek re-classification as an employee.