The question of who is an employee is one of the most fundamental issues in employment law. Most employment rights, such as the right to minimum notice, the right to the National Minimum Wage, the right to claim unfair dismissal and the right to redundancy pay all require employment status. It is therefore important for both companies and workers to understand their status at the outset of the relationship. The Employment Rights Act has a very circular definition of who is an employee – defining an employee as a person who works under a contract of employment. Many years ago in the Court of Appeal legendary judge Lord Denning said that he would recognise an employee when he saw one, but he didn’t give us much guidance on how this should be done!
There have been a couple of recent important cases on this question, but they probably make the answer to the question less certain than it was before they were decided!
The first of these cases is the recent Supreme Court decision of Autoclenz v Belcher. In this case Autoclenz provided a car valeting service to British Car Auctions. Its agreements with the valeters described the valeters as self employed. Those agreements stated that there was no obligation on Autoclenz to provide the valeters with any work, and if Autoclenz did offer them work, there was no obligation on them to perform it. The agreements also gave the valeters the right, if they wished, send a substitute to perform their role. Both the lack of ‘mutuality of obligation’, and the ability to provide a substitute were pointers toward the valeters being self employed.
Indeed, in 2000, the House of Lords in the case of Carmichael v National Power held that personal service was a prerequisite to employment status, and that if a worker was able to send a substitute to perform their role, they could not be an employee. Their Lordships also held that where there was no mutuality of obligation, then again there could not be an employment relationship. However, since the decision in Carmichael, there have been cases where the tribunals have found that the arrangements set out in the documentation have in fact been a sham, and as such the agreement was not enforceable. This has been a difficult argument for workers to run, because in law a sham is where “all the parties to the agreement have a common intention that the acts or documents are not to create the legal rights and documents which give the appearance of creating.” Given the inequality of bargaining power between the parties, it has in practice been very hard for workers to establish that there was the required common intent by all the parties.
In Autoclenz, the Supreme Court rejected the “sham” test and said that when determining an individual’s status, employment tribunals and courts will be able to set aside express contractual terms which are inconsistent with the reality of the relationship of the parties, without the need for a common intention to mislead. Contractual terms which suggest self-employment (such as substitution clauses and clauses purporting to allow the individual to refuse work) will be disregarded if they do not reflect the actual legal obligations of the parties. The Supreme Court said that one of the ways of doing this is to look at what the parties do in practice. In other words, did the company always provide work? If so, did the worker always do it? Did the worker ever provide a substitute?
There are two main difficulties with this approach. First, how do you assess the legal obligations at the outset? At that stage all you will have is the documentation, and if that makes it clear that the worker is self employed, then it is likely that will be conclusive. If after (say) two years, the worker has never provided a substitute, does their status change to one of employment? If it does, when did that change occur? In addition, is it right that just because someone does not use a right they have (for example to provide a substitute), then they should lose it? Certainly, if an employee had a right to take 6 weeks’ holiday each year, but chose for say three years to only take five weeks, there would be no suggestion that they had lost their right to take six weeks’ holiday going forward.
The decision in Autoclenz certainly makes it harder for companies to set up arrangements with workers on a self employed basis. This uncertainty is not really in the interest of either party – for the company, there is a risk that they may face claims for redundancy etc on the termination of the agreement, and for the workers there is the risk that if they are found to be employees then they may face arrears of tax and National Insurance. However, even that is not certain; just because HMRC decide someone is self employed, the employment tribunals are not bound to reach the same conclusion. This is exactly what happened in Autoclenz where HMRC had accepted the self employed status of the workers some years earlier.
The second recent decision is the case of Johnson-Caswell v MJB (Partnership) Limited. In this case an employment tribunal held that an independent financial adviser (IFA) who was purportedly self-employed was in fact an employee. In the tribunal’s view, a key element pointing to employment status was the need to comply with Financial Service Authority (FSA) requirements. The tribunal considered that the training and supervision obligations that this involved amounted to a sufficient element of control by the company over the IFA’s work. The degree of control a company has over a worker has long been one of the tests of employment status, but the degree of control an employer has over a senior employee is perhaps not that great – for example, an NHS Trust will not tell a surgeon which bits of a patient to remove, or how to remove them! However, what is unusual in the Johnson-Caswell case is that the high degree of control which was exercised was as a result of obligations imposed by the FSA. Notwithstanding this, and the fact that Mr Johnson-Caswell had a large element of discretion over how he worked on a day to day basis, the tribunal found that this did not detract from MJB’s significant degree of control.
Both these cases will make it harder for companies to contract with people on a self employed basis and have any confidence that the arrangements cannot be successfully challenged. There are still steps which can be taken to minimise the risks by careful drafting, and this is something which Pure Employment Law can help with.
If you would like to talk through a situation you are dealing with, or if you need advice on any aspect of employment law, please contact any member of the Pure Employment Law team (01243 836840 or [email protected])