With a whole host of different working arrangements now commonplace, determining what employment status an individual holds is more important than ever. Whether someone is an employee, worker or self-employed is crucial to the question of employment rights, as each category confers different rights and obligations. However, deciding which status applies is not always straightforward.
Employment Rights Act 1996
Section 230 of the Employment Rights Act 1996 defines an employee as “an individual who has entered into or works under (or where the employment has ceased, worked under) a contract of employment.”
What constitutes a “contract of employment” is widely acknowledged to be set out in the decision of Ready-Mixed Concrete (South East) Limited v the Minister of Pensions and National Insurance , which determined that the key factors for the existence of a contract of employment were:
- Personal service: an obligation on behalf of the individual to provide work personally;
- Mutuality of obligations: the employee is obliged to perform work and the employer is obliged to provide and pay for that work; and
- Control: the individual must be under the control of the other party.
In considering the existence of these factors – although they may not necessarily be determinative – the Employment Tribunal will often begin by looking at the terms of the contract.
The Employment Tribunal have for some time been prepared to discount the terms of a contract in circumstances where the contract is deemed to be a sham. More recently, the Supreme Court has gone further than this and set aside express contractual terms that are inconsistent with the reality of the relationship of the parties, in circumstances where no common intention to mislead has been established.
This is what happened in Autoclenz Ltd v Belcher & Others , where the Supreme Court considered whether car valets were employees or workers, even though the express terms of their contracts indicated that they were self-employed and the HMRC, which undertook a review in 2004, was satisfied by this definition.
In this case, Autoclenz had a contract with British Car Auctions. It advertised for self-employed valets and successful applicants were referred to as “sub-contractors” in their contracts. The terms of these contracts stated that the valets could provide a substitute, that there was no mutuality of obligation and they could refuse work.
However, despite these terms, the Employment Tribunal considered the reality of the relationship, finding the express contractual terms inconsistent with the actual relationship between the parties and therefore that the valets were employees.
This case not only demonstrates that the HMRC and Employment Tribunal can make different decisions on an individual’s employment status, but also paves the way for the Employment Tribunal to disregard contractual terms that suggest self-employment if they do not reflect the actual legal obligations of the parties, a point employment agencies and companies engaging workers in novel or unusual ways should be conscious of.
Lyons Davidson’s employment teams are happy to provide advice on this or any other employment matters. For more information, please contact our Employment Law specialists or call us on 0117 904 6000.