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contract terms employment law

employee or self-employed?

The tension and frequent confusion which results from different perceptions of whether workers are employed or self-employed from tax and employment law perspectives has kept the courts busy for many years. The latest foray into this problematic topic by the Court of Appeal is in the interesting and significant case of Autoclenz Limited -v- Belcher. In commencing the introduction to her judgment Lady Justice Smith stated “This appeal raises a difficult point in employment law” and she has set out in her judgment an informative and very helpful analysis of the long sequence of important judgments about the issue, from both the tax and employment law perspectives.

The factual background is that 20 valeters worked from Autoclenz at their premises in Measham, Derbyshire. They claimed in the tribunal that they were workers or employees and should therefore be entitled to, for example, holiday pay. Autoclenz maintained that they were self-employed and therefore had no such entitlements. In the tribunal they were found to be employees. The Employment Appeal Tribunal disagreed but held that they were workers (as defined in section 230(3) of the Employment Rights Act 1996).

Lady Justice Smith began with the classic definition of a contract of employment in Ready Mixed Concrete (South East) Limited v Ministry of Pensions [1968]:

“A contract of service exists if these three conditions are fulfilled. (i) the servant agrees that, in consideration of a wage or other remuneration, he will provide his own work and skill in the performance of some service for his master. (ii) He agrees, expressly or impliedly, that in the performance of that service he will be subject to the other’s control in a sufficient degree to make that other master. (iii) The other provisions of the contract are consistent with its being a contract of service”.

In Protectacoat Firthglow Ltd v Szilagyi Lady Justice Smith herself identified that the necessary next step is to consider relevant documents:

“In a case involving a written contract, the tribunal will ordinarily regard the documents as the starting point and will ask itself what legal rights and obligations the written agreement creates. But it may then have to ask whether the parties ever realistically intended or envisaged that its terms, particularly the essential terms, would be carried out as written. By the essential terms, I mean those terms which are central to the nature of the relationship, namely mutuality of obligation: Carmichael v National Power [2000] IRLR 43 and the obligation of personal performance of the work.”

Employment lawyers are familiar with the “irreducible minimum of mutuality of obligation” which is a wordy way of saying that an essential characteristic of a contract of employment is that it requires the individual named person to carry out the work so that it is not possible for that person to choose to send someone in their place. This is what was again confirmed in Autoclenz to be the key requirement of a contract of employment. However, the importance of the decision is in making it very clear that, in doing so, it is necessary to look behind what the documents say about this and other matters and instead to look at the reality of the working arrangements in practice.

In 2004 the Inland Revenue conducted an investigation and declared that it was satisfied that the valeters were self-employed for the purpose of assessment for income tax under Schedule D. In 2007. No doubt wishing to reinforce the point Autoclenz issued all valeters with new contracts which included the following:

For the purpose of providing car valeting services to its client’s garages, Autoclenz wishes to engage the services of car valeters FROM TIME TO TIME on a sub-contract basis.

We understand that YOU ARE AN EXPERIENCED CAR VALETER and might be prepared to offer your services to Autoclenz. If so would you please complete and return to us the form of agreement set out below, which is intended to confirm that any contractual relationship between Autoclenz and yourself is one of client and independent contractor and not of employer/employee and to protect Autoclenz against any claim on Autoclenz for Income Tax and/or National Insurance contributions in respect of payments made to yourself.

For the avoidance of doubt, as an independent contractor, you are entitled to engage one or more individuals to carry out the valeting on your behalf, provided that such an individual is compliant with Autoclenz’s requirements of sub-contractors as set out in this agreement, including, in particular, that the individual:

  • Is capable of providing the services and has been fully trained to valet a vehicle
  • Holds a current full UK Driving Licence free of endorsements DR10 and IN10 and provides a copy to Autoclenz prior to carrying out work
  • Complies with the Health & Safety guidance in operation at the site at which he/she will work and
  • Has permission to work in the UK

Please note that:
(a) For security reasons, when working on the premises of a client’s garage you, and those who work for you, are required to wear a protective overall, which will identify you/them as a contractor of Autoclenz. Overalls may be purchased from Autoclenz.
(b) You are required to provide cleaning materials for yourself and those who work for you. Autoclenz has negotiated the supply of a range of high quality materials, which are available for purchase at competitive rates. Details will be given to you at the garage by the Autoclenz representative.
(c) Given the nature of the work it may be necessary for you/those who work for you to drive motor vehicles, which are the property of or in possession of clients garages. Accordingly you/they must hold a current valid Driving Licence free of endorsements DR10 and IN10. If you/they do not hold a current valid Driving Licence, under no circumstances should you/they drive any motor vehicle whilst providing services for Autoclenz. Should you/they do so, you will be held fully liable for any damage caused

If you wish to provide services to Autoclenz would you please sign and return to Autoclenz the form agreement attached.

YOU WILL NOT BE OBLIGED TO PROVIDE YOUR SERVICES ON ANY PARTICULAR OCCASION NOR, IN ENTERING INTO SUCH AGREEMENT, DOES AUTOCLENZ UNDERTAKE ANY OBLIGATION TO ENGAGE YOUR SERVICES ON ANY PARTICULAR OCCASION.

Lady Justice Smith noted that this invitation to work (signed by all the valeters) allowed for the provision of suitable qualified substitutes. However, she also took the view that this did not reflect the true nature of the relationship between the parties. There was no real expectation that a valet would provide a substitute if they were unable to work, notwithstanding what the contract provided. The named valeters were integrated into the business and subject to its control, so they were employees.

Tribunals have always been alert to the existence of sham agreements, particularly those intended to reduce tax liabilities by indicating self-employment. However, the importance of this decision is that it makes clear that tribunals should be concerned to establish the true nature of the relationship in practice, not only at the start of the contract but also as it continues and to take into account any variations.

Martin Malone

By Martin Malone

I'm a solicitor and the chief operating officer at Canter Levin & Berg. I was formerly head of the employment department.
I maintain this website so if you have any suggestions, criticisms or recommendations please email me at martinmalone@canter-law.co.uk.
Outside work my interests include national hunt horse racing, France and French wine and current affairs. I also design and maintain websites.