Many employment law rights (such as unfair dismissal and statutory redundancy pay) are restricted to “employees” as defined. It is usually obvious whether a person has a contract of employment (i.e. a contract of service between an employer and an employee) or a contract for services (i.e. made by an employer with an independent contractor/self-employed person). Perhaps a simple and straightforward example of the difference is the contrast between the jobs of chauffeur and taxi-driver.
In some ways, the debate over whether someone is an employee (or worker) or self-employed has perhaps become something of an “old chestnut”. Yet no matter how many cases give guidance on how to approach the question, grey areas remain. One such common grey area has been the extent to which any written contract should provide the answer. Many outside the law would be surprised to learn that the contract is, in itself, by no means determinative.
Yet the courts have varied over the extent to which any contract needs to differ from the reality of the situation before it can be ignored. The most extreme view has been that unless the contractual terms can be shown to amount to a “sham”, in the sense that it is intended to deceive third parties such as HMRC, then they should not be disregarded.
With any luck, the Supreme Court has now cleared that one up, in Autoclenz Ltd v Belcher & Others, on 27 July 2011.
The important legal point to be derived from the case is that in deciding whether a person is an employee or self-employed, a written agreement can be disregarded if it does not conform with reality and so does not reflect the real relationship. Specifically, a person working under what appears to be a self-employment contract can in law might nonetheless be an employee if all the factual circumstances of the case point to this being so. And that applies even if there is no question of the agreement between him and the company he is working for being a “sham”.
In this case, Mr Belcher was one of several car valeters who worked for Autoclenz cleaning vehicles for car auctions. The valeters were paid on a piecework basis, submitted weekly invoices for payment, paid their own tax and NI and had written agreements stating that they were self-employed sub-contractors. The agreements suggested that they could provide a substitute to perform their work although none ever did so. Indeed, in 2004 the Inland Revenue had agreed that they were self-employed for tax purposes.
Then, in 2007, Mr Belcher and his colleagues brought claims in an employment tribunal for unpaid wages and holiday pay – yet if they were self-employed as their contracts stated, they would not be entitled to win under either of those two heads of claim. However, an employment judge decided that the valeters were in fact employees of Autoclenz and so they won. In particular the term concerning substitution simply did not reflect the reality of the situation.
Eventually the case came to the Supreme Court, which in essence agreed with the employment judge. Lord Clarke, giving the Court’s judgment, analysed the authorities and concluded that – on the basis of the findings of fact made by the original tribunal – four essential contractual terms had been agreed:
- that the valeters would perform the services defined in the contract for Autoclenz within a reasonable time and in a good and workmanlike manner;
- that the valeters would be paid for that work;
- that the valeters were obliged to carry out the work offered to them and Autoclenz undertook to offer work; and
- that the valeters must personally do the work and could not provide a substitute to do so.
The important point derived from Lord Clarke’s judgment was that the terms of the written documents could be disregarded in so far as they were inconsistent with the above. What mattered was what had really been agreed, and ascertaining that involved consideration of all the circumstances, not just what was written down in a formal contract.
So now it’s clear: establishing the parties’ relationship is simply a case of deciding the true position based on all the circumstances. The written agreement is simply one such “circumstance” which falls to be considered with all the others. None is in itself conclusive, and – in spite of some previous case law suggesting the contrary – the written agreement does not carry any such extra weight whereby it must be shown to be a “sham” before it can be disregarded as not reflecting reality.