News -

- October 2011

Challenging the status of self-employed contractors

The Supreme Court has restated that the label that the parties apply to a work contract is not determinative of the worker’s status if it does not reflect the reality.  The Court went on to say that a tribunal/court can disregard any express terms which do not reflect the actual intentions of the parties, even where there is no attempt to mislead.

Background

This case involved a group of car valeters who were engaged under written contracts which stated that they were self-employed.  These contracts also said that the valeters did not have to accept offers of work, that they could send a substitute in their place and that they were responsible for their own income tax.

Some of the valeters brought a case claiming a right to the national minimum wage and holiday pay.  In order to be entitled to these the valeters had to effectively establish that they were employees.

It is established law that to qualify as an employee a number of criteria must be satisfied.  These are:

  • The individual must provide his personal services
  • The employer must have a sufficient degree of control over the employee
  • There must be an obligation on the employer to provide work and on the employee to do this work.

Although it appeared that the valeters were not employees, as their contracts contained terms which would preclude an employer/employee relationship, the Supreme Court said that tribunals and courts are not constrained by written terms of an agreement and that they may examine the reality of the situation.

It was decided that individuals who had been treated as self-employed were actually employees.  In practice they had no control over what they did, were subject to the direction of the company’s employees and could not source their own work materials.

It is interesting to note that HMRC had previously determined that the valeters were self-employed.

What are the implications of this decision?

The real lesson of case is that the written documents must reflect the reality of the situation.  A contract which is drafted on the basis of self-employed status will not prevent the workers having the status of employees if that is how they are treated in practice.  The consequences of that can be significant.  Not only will the workers have access to a number of statutory rights such as unfair dismissal, redundancy payments and maternity/paternity rights, but there will be obligation to account for PAYE income tax and NIC social security contributions.  In addition employers have duties under the prevention of illegal working legislation not to employ anybody who does not have the right to work in the UK (there are both civil and criminal sanctions for failing to do so, including a maximum civil fine of up to £10,000 per illegal worker).  This does not apply to self-employed or agency workers.

Commentary

This is an area in which there has been a considerable amount of litigation over recent years and is to be welcomed as a definitive statement of the law.  Employers should now review their contractual documentation relating to contractor staff and compare that with the relationship those individuals in fact have with the organisation.  If there appears to be a significant disparity then remedial action will need to be taken either to restore what is happening on the ground to what was originally envisaged or acknowledge the current situation and change the individual’s status.

For further information or to discuss the issues raised, please contact David Widdowson or Stephen Wright on +44 20 3051 5711.