Employee or self-employed, and the words of a contract

23rd August 2011 Distinguishing between an employee and a person that is providing services on a self-employed basis is often difficult. In the recent case of Autoclenz v Belcher the Supreme Court has given an important ruling on the approach to be taken in determining if an individual is an "employee" or is "self-employed". 

The distinction is a vital one in ascertaining the legal rights of the individual concerned. Many employment law rights are restricted to "employees". For example, only employees can be protected against unfair dismissal, only employees have rights to paid maternity leave, adoption and paternity leave. Only employees have a right to statutory redundancy payments. Therefore in a time of economic hardship it is easy to see the advantages for many people in "employee" status, providing a degree of job protection that does not arise automatically for the self-employed.
 
Often is can be easy to tell if a person is an employee or is self-employed, but this is not always the case. Historically problems in determining the status of an individual arise when the person provides work exclusively (or almost exclusively) to one organisation, under their direction, and using their tools or equipment, but pays his/her own tax and National Insurance, and only works when requrested by the organisation. Grey areas in this part of the law have been a problem for business for many years. Some years ago HM Revenue became more aware of the greater tax and National Insurance opportunities in treating individuals as employees rather than as self-employed, and the headache that became IR35 was the response of HM Revenue to this issue.

Partly as a means of reducung the risks posed by IR35, and partly as an attempt to reduce the risk of individuals taking businesses to Employment Tribunals claiming unfair dismissal (and other employment rights), there has been a greater emphasis in recent years on businesses making greater efforts to use written contracts with such individuals that make explicit reference to the status of the individual as "self-employed".In this situation the business that has used the services of the individual will always refer the Employment Tribunal (and HM Revenue for that matter) to the wording of such a contract to pursuade them that the person concerned is not an employee. In recent years there have been a number of cases which have considered this point. In particular there has been a line of cases which suggest that unless both the parties to the agreement know that the expressed status of "self-employed" is a sham, then the wording of the agreement (and the status of the individual quoted in that agreement) should usually determine the true legal status of the individual and soleve the question as to whether he or she is an "employee" or is "self-employed". The Supreme Court has now considered how far the wording of a written contract between the two parties should be used in finding the answer to the question of employment status.

The case involved a group of people that valeted cars for Autoclenz. The people concerned worked in teams, and were provided with a uniform by the business. They had to use their own materials (although they could buy these from Autoclenz). These people all paid their own insurance, and their own tax (having to submit weekly invoices to Autoclenz), albeit this was calulated by the business' own accounts and payroll. The people were paid on a piecework basis (not a set weekly or monthly salary). Importantly the contracts between the business and the individuals defined them as self-employed subcontractors. In addition, the contracts also stated that they were under no obligationto attend work. Furthermore the contracts stated that these people had the right to provide a substitute to perform their work.

However, as a matter of fact they did not use substitutes, and in reality they were expected to attend work and provide services personally. The Employment Tribunal that originally heard the case also concluded that these people were in fact obliged to carry out the work that was offered to them.
 
The Employment Tribunal and the Supreme Court agreed that in fact these people were "employees" of Autoclenz. The Supreme Court ruled that the "reality" of how these people carried out the work was conclusive, and that the terms of the written contract  could be disregarded in so far as those terms failed to reflect the reality of the work and working practices of the individuals. Therefore it is now clear that in determining the true legal status of an individual itis really a case of deciding the true position based on all the circumstances. The written contract is therefore just one of the factors to be considered in reaching a decision on this question, and it does not carry any extra weight requiring it to be shown to be a deliberate "sham" before it can be disregarded as not reflecting reality and the true status of the individual carrying out the work.

The outcome of this case is that careful wording of a written contract alone cannot prevent an Employment Tribunal ruling that a person providing work for a business is not an "employee" of that business. The whole picture must be considered, including the terms of the contract as simply a part of that picture. This may be worrying for some employers. However, this case does not, in essence, change the traditional advice on this question:- which is to look at how the work is done, how it is managed, who controls and supervises the work, who provides to tools or equipment to do the job,and how the payment for the work is arranged and paid, as well as to consider the wording of any written agreement. The Supreme Court has therefore returned the law firmly and clearly to requiring a real and full analysis of the facts of how the work is done and all the surrounding circumstances, instead of relying on a short-cut of simply emphasising the wording of a written agreement to determine if the individual is providing work as an employee or a self-employed person. 

At Hallett Employment Law Services we can help you in writing an agreement that accurately reflects the real agreement between a business and its workers, and advising you when any dispute arises over this issue. If you need any further assistance on this matter do not hesitate to contact us.