Employee or not employee?
OCTOBER 2009
The recent Court of Appeal case of Autoclenz Limited v Belcher and others serves as a reminder that the question of whether a particular worker is an employee is not determined by the label placed on the individual either by the “employer” or by the individual. Designating a worker as “casual” or “a contractor” or “self-employed” may not reflect the true nature of the relationship. The question of whether a worker is an employee is determined by both the contract and by looking at the facts of the relationship.
In addition, the Autoclenz case provided clarification on the extent to which a Court can look behind the wording of any contract governing the relationship when making their determination of employment status.
There are two main reasons why the determination of the question of employment status may be important. Firstly, various statutory rights such as the right to claim unfair dismissal, are only available to employees not to workers or the self-employed. Secondly, a worker and an “employer” may wish to assert self-employed status so that the “employer” is not obliged to deduct or pay PAYE income tax and Class 1 National Insurance contributions, whilst the worker can minimise his tax liability.
In summary, to determine whether a particular individual is an employee for the purpose of asserting statutory employment rights, an Employment Tribunal will look at the contract and also:
1. whether the individual is obliged to provide personal service to the “employer”, i.e. cannot provide a substitute or subcontract his obligations.
2. whether there is mutuality of obligation in the relationship, i.e. the “employer” has an obligation to provide work and the individual is obliged to accept the work offered.
3. whether the “employer” controls the individual in a manner consistent with an employment relationship, e.g. expects the individual to obey instructions, would discipline the individual for acts of misconduct, etc.
4. whether other elements of the relationship are consistent with employment or not, e.g. in a self-employed arrangement, the individual might provide their own equipment or their own hired help.
The factors which the HMRC would consider in order to establish employment status are similar.
Autoclenz confirmed the extent to which a Tribunal, when making an assessment of employment status, can ignore written contract terms. In that case a group of 20 car valeters were contractually described as “sub-contractors” and therefore, self-employed. The contract also stated, amongst other things, that:
1. the valeters could provide their own staff to complete their work (i.e. were not obliged to provide services personally),
2. were obliged to provide their own cleaning materials, (although these could be purchased from Autoclenz at “competitive rates”).
3. Autoclenz was not obliged to offer work to the valeter and he was not obliged to accept any work offered.
The valeters wished to establish that they were in fact employees in order to claim holiday pay. It was established that in practice:
1. All valeters performed their work personally. Their right of substitution was never exercised.
2. There was no discretion in the purchasing of own cleaning materials, Autoclenz materials were used and 5% was deducted from each valeter’s remuneration in respect of payment for material.
3. Autoclenz expected the valeters to work regular hours, and for notice to be given if a valeter was unable to attend. There was no true discretion to refuse work.
The extent to which the contract must be taken into account when assessing status was stated as being as follows: “Where contractual terms are in writing, they will usually be taken as representing the agreement between the parties, but, if one party to the agreement claims that the written terms do not represent the true agreement, the court will have to decide what the true agreement was.” It will do this by examining all the relevant evidence including the written terms, how the parties conducted themselves in practice and what their expectations of each other were.
There does not have to be any intention on the part of either the employer or the employee that the written contract was a sham and not representative of the true position in order for the Tribunal to look behind it.
As a result of its analysis, the Court of Appeal determined in Autoclenz that the valeters were in fact employees.
Whilst it may be attractive for employer and employee to label their relationship as one of self-employment under a contract for services to attempt to avoid the risk of employment claims or to minimise tax or NI exposure, as the Autoclenz case demonstrates, this will not be effective in avoiding either statutory employment claims such as unfair dismissal when the relationship ends, or the employer becoming liable for tax and NICs which should have been paid in respect of the relationship (going back 6 years), together with interests and penalties, in the event that the label is in fact, wrong.
Therefore, best practice is to acknowledge the true nature of the working relationship and to document it appropriately from the outset.
If you would like any further information about the issues raised in this newsletter, or any other aspect of employment law, please contact Helen Wyatt on 0207 404 0606, or any other member of Goodman Derrick LLPs Employment Department.
This guide is for general information and interest only and should not be relied upon as providing specific legal advice. |
