What employment status do I have? Your contract may not provide the answer!

Recently we reported on the very important Supreme Court 2011 legal judgement on Autoclenz Ltd v Belcher and Others and how this may affect freelancers and contractors who have IR35 concerns.  As this case is so important for all employees, workers and freelancers in deciding their employment status, we thought we’d explain this in more detail.

The case highlights the importance the Courts now give to finding clarity in employment relationships, not by looking at what is written down in a contract, but what is actually happening in the working relationship.

What happened?

The case first came to Employment Tribunal in 2007.  Autoclenz Ltd offer car valeting services to motor retailers and auctioneers and employed 20 valeters on what the company considered to be sub-contractor (freelance) contracts.  The valeters, however thought they were workers and were so entitled to (at least) the National Minimum Wage and holiday entitlements under the Working Time Regulations (which they did not receive).

The case was complicated by the fact that two written contracts existed, the first signed by the valeters which described them as sub-contractors but did not contain any clause permitting the individual to provide a substitute to perform their services, nor did it have an obligation for them to perform work that was provided or that Autoclenz was or was not obliged to provide work (we’ll explain why this is important later).

The second contract issued in 2007 was different and said:

• “Autoclenz wished to engage the services of the valets from time to time on a sub-contractor basis.
• As an independent contractor you are entitled to engage one or more individuals to carry out valeting on your behalf.

It was not felt by the Courts, however, that all the valeters had actually read this new contract or understood it properly (they did not receive a copy and were not involved in the negotiation of its terms). The Supreme Court felt that “the relative bargaining power of the parties must be taken into account in deciding whether the terms of any written agreement in truth represent what was agreed.”

The first Employment Tribunal found that the valeters were employees, regardless of what their contracts said, because they had no real control over:

• The way they did their work
• The hours that they worked (most worked on a full-time basis and very rarely was no work available for them)
• The way in which the work was organised
• Sourcing materials to use

And also found they were employees because they:

• Were subject to the direction and control of Autoclenz and its employees on site
• Worked in teams and not as individuals
• Had no real say in the terms or contracts with Autoclenz clients for who they had to perform the work
• Had their pay rates determined by Autoclenz who had increased or decreased these rates unilaterally, so they couldn’t make their ‘own’ businesses any more profitable
• Were required to provide a personal service.  The ‘substitution’ clause introduced in the 2007 contract did not reflect what actually happened, which was that the valeters turned up for work every day and Autoclenz confirmed, in evidence given, that the work could not be done if the valeters could not be relied up on to turn up for work and that Autoclenz required the valeters to let them know if they were not available for work
• Had mutual obligations with Autoclenz (the provision of work in return for pay)

The Court of Appeal agreed and said ‘the elaborate protestations in the contractual documents that the men were self-employed… bore no practical relation to the reality of the relationship’. The Supreme Court agreed with these judgements and held the valeters were employees.

Deciding someone’s employment ‘status’ is always complicated and can only ever be fully decided by a Court.  There are tests that are used which are:

• Mutuality of Obligation – is the employer under an obligation to offer work and is the ‘employee’ under an obligation to accept it?
• Master/Servant relationship  – can the employer tell the ‘employee’ how and when to do the work? can they ‘substitute‘ another person to do their work?
• Integration – is the ‘employee’ operating as part of, or leading, a team? Are they part of the employer’s internal organisational matters (including training and meetings)?
• Economic Reality – does it look like the individual is self-employed, e.g. Do they provide their own tools? Do they work for a number of clients? Are they responsible for the profit and loss of their business?

However, none of these on their own will decide someone’s status – one judge said you need to ‘paint a picture’ of all the details and look at it from a distance.

What is important about this case is that the Courts looked at how the working relationship between the ‘employee’ and employer actually operated and not what the written agreement/contracts described.

Therefore, for example, if a Recruitment Agency agrees a contract with a client to supply someone as a Contractor to the client, rather than as an employee where this is not true, the contract will be disregarded by the Courts if it is clear that an actual different relationship is in place.

This judgement is important for:

• Businesses employing sub-contractors and also for freelancers – all of whom should review the details of their contracts on a regular basis, taking into account the natural changes over time to what was agreed at the outset.
• Everyone, as some businesses try to portray their relationship with the people they employ as something different to what it actually is – e.g. in order to avoid giving people who should be  workers their proper legal rights and entitlements to holiday pay, the national minimum wage, sick pay and the new rights for Agency Workers.

And in Summer 2014 an employment tribunal considered what ‘control’ means – in the context of the old ‘false’ self-employment legislation – in the case of Oziegbe V HRMC.