The Existence of an Employment Contract

Employment law is fundamentally a contractual relationship, heavily influence by EC law. It concerns a relationship between employee and employer. It is concerned with the relationship between employer and employee. It comprises a common law basis of the contract of employment and a range of statutory provisions. In many cases it is believed that it is not difficult to determine whether or not a contract of employment is in existence. This is distinctly true where there is a written contract, although it is not essential for there to be a contract in writing as the contract could be through expressed or implied terms. It is therefore often vital to determine the status of employment with a person, in terms of whether they are employees or self employed because certain employment rights derive from the result of the person being an employee. The assessment of what is required in law for a worker to be considered to be an employee and what types of workers are not starts with the several common law tests that have been developed by the courts for the purposes of identifying the existence of a contract of employment.

An employee is employed under a contract of employment, which is a legal form of contract of service. The parties are employer and employee. However, people who are contracted to provide work or service but who are not employees are employed under contract for service. It is vital to make this distinction due to employee’s rights, more generally since, for example, only an employee may bring claims for unfair dismissal, or be made redundant and claim statutory redundancy payments, they are the only ones that qualify for employment protection rights, protection of wages on their employer’s insolvency, the benefit of their common law duty of care, and protection under the health and safety legislation, The distinction is most important on a day-to-day basis for taxation, since employees are taxed differently from the self-employed.

The aforementioned common law tests were first devised to decide, under common law principle of vicarious liability, when employers may be held liable for the tortious acts of their employees but may not be held liable for the acts of the self-employed, i.e. independent contractors. The three tests created by courts to determine the status of employment, in chronological order, are the control test, integral test and more recently created was the multiple test. In the 19th century the first test was seen used in courts to examine the amount of control the employer held over the employee. Under this test, the employer was referred to as the master and the employee the servant. the court examine whether the master controlled or had the right to control not only what the worker did but also the manner in which he did it. This was set out in Yewens v Noake [1] where Bramwell LJ stated: “A Servant is a person subject to the command of his master as to the manner in which he shall do his work.” The greater the degree of control exerted by the ‘master’ over the way in which the ‘servant’ performs the job, the more likely that the relationship is one of employment. In the past, an indication of whether or not a contract of employment was in existence would be concluded from if an employer was able to tell an employee not only what to do, but stipulate how to do it and when, as this shows a great amount of control of the employer over employee, therefore a smaller degree of control would suggest towards the worker being self-employed. This test ran began to run into problems in the 20th century, as there was a rapid increase in specialised and skilled workers. It therefore became unquestionably impractical to understand the employer having the knowledge to control many of his increasingly high skilled employees, ie managers could not always control the methods used by their workers. For example, in any real sense while a pilot is carrying out his work, it cannot be said that the pilot is ‘controlled’ by the airline. Therefore, although the control test is often considered crucial, it is no longer considered to be necessarily conclusive due to the advanced skills of the employers’ works resulting in the test being regarded to being outmoded as the exclusive gauge for judgement.

In an attempted for an alternative approach, a second test, known as the integral test, was created by courts after a series of cases in the late 1940s and early 1950s seen the hospitals being held vicariously liable for the acts of its surgeons, radiographers and other specialists. This test saw the courts beginning to look at how the worker was integrated into the organisation. It was first identified by Somervell and Denning LJJ in Cassidy v Ministry of Health [2] , Cassidy was brought into hospital with a broken wrist. The wrist never healed properly due to the wrist being improperly set in plaster. The court had to decide who was to be held liable for acts of negligence – the nurse, the doctor or the plaster setter? Furthermore it has to be decided was the doctor considered an employee, since hospital management did not control the methods used to carry out his job? It was therefore held the doctor working within the NHS was an employee of the Health Authority. Again in 1952 Denning LJ referred to this test in Stevenson, Jordan and Harrison Ltd v Macdonald and Evans [3] where it was considered that the decisive question was whether the person is employed as part of the business, whether his or her work is done as ‘an integral part of the business’ or whether it is merely an accessory to it. An individual whose work is done as an integral part of a business is deemed to be an employee of that business. Although the integral test is deemed to be a fairly straightforward test, which is advantageous, failure to define exactly what is meant by ‘integration’ and ‘organisation’ seemed to be its greatest drawback. This test held clear advantages over the test of control – skilled workers who enjoyed high levels of autonomy (such as the airline pilot considered) would be found to be employees using the test of integration.

Gradually the courts have recognised that no one test or set of criteria can be conclusive when determining employment status, due to the various ways in which people work under both a contract of service and a contract for services as there seems to be a high degree of overlap between the two. This resulted in the courts now looking at all elements of a contract to decide whether a worker is an employee or an independent contractor. The modern test adopted by courts is known as the multiple test, which is used to decide whether a contract is of or for service. This test is three fold: a contract of service requires duty to give personal service, the existence of a sufficient degree of control and the terms of the contract being consistent with service. The correct approach of establishing whether or not there is a relationship of employment is to consider all factors relevant to the relationship. If the evidence reveals the existence of an employment contract or if such consideration indicates the presence of a determining factor, the worker concerned will be deemed to be an employee. A clear illustration of the test being used is in Ready Mixed Concrete (SE) ltd v Minster of Pensions and National Insurance [4] , the case concerned the appellant company’s liability for social security contributions of their worker which arose only if they had contracts of service. The worker who delivered concrete for the company on a ready mixed concrete lorry, was buying his lorry on hire purchase from the company but was found to be employed under a contract for service, not a contract of service. In his judgment, MacKenna J considered what is meant by a contract of service. He said:

“A contract of service exists if these three conditions are fulfilled.

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.

As to (i). There must be a wage or other remuneration. Otherwise there will be no consideration, and without consideration no contract of any kind. The servant must be obliged to provide his own work and skill. Freedom to do a job by one’s own hands or by another’s is inconsistent with a contract of service, though a limited or occasional power of delegation may not be….” [5]

The ‘multiple’ test leaves a lot of room for interpretation, not least the third condition where there is no prescribed list of factors which are consistent and inconsistent, but a matter of common sense in each case.

Market Investigations ltd v Minister of Social Security [6] identified the underlying element of being in business on one’s own account in relation to the ‘multiple’ test as Cooke J stated that the fundamental question was: “is the person who has engaged himself to perform these services performing them as a person in business on his own account?”, if the answer was found to be yes then the contract was for services; however in this case the market researcher was found to be employed under a contract of service. The factors relevant in this case The degree of control taken by the employer, The degree of risk taken by the worker, Ownership of tools and equipment, Regularity and method of payment, Regularity of Obligations, Ability to provide a substitute, and the Terms used.

The flexibility of the ‘multiple’ test have proved useful in cases such Lee v Lee Air Farming ltd [7] , where directors are concerned. Mr Lee had formed a company; Lee’s Air Farming Limited and held the majority of the company shares. Although he was the managing director, by profession he was a pilot. It was then held a limited company is a separate legal entity; that a sole shareholder can be an employee and when Lee died on the aircraft, it was held that the widow could claim under workman’s compensation.

In contrast, Fleming v Secretary of State for Trade and Industry [8] , illustrates how problems may arise where the director is also a controlling shareholder, where it was held that a majority shareholder could never be held to be an employee.

The multiple test holds clear advantages over the previously mentioned tests as it proves to be particularly beneficial for the courts when faced with contradictory evidence as it allows room for assessment of all relevant factors. Therefore when considering all relevant factors, a balanced approached is needed, and if necessary, on the basis of the circumstances of each individual case a ‘determining’ factor must be selected. This is illustrated in Ready mixed Concrete where the appeal court held the claimants not to be employees but to be self-employed contractors as the workers concerned had the potential to hire substitute drivers to perform duties on their behalf.

Over all, it is clear the cases put forth do not hold rigid rules and appear to be only there for guidance, there is considerable variation in the approaches adopted by the courts. It would seem the correct approach for identifying the existence of an employment contract would be to consider all relevant factors to the relationship. If a determining factor is present and it is held that a contract of employment is in existence the evidence would prove the worker concerned will be deemed to be an employee. Although the control test was held to be crucial, it was no longer sustainable to be the sole criterion. For a contract of service to be identified it should be noted that mutuality of obligation and a degree of personal service obligations are essential requirements.

WORD COUNT: 2135

BIBLIOGRAPHY

McFadzean (ed), Scots Law for Students: An Introduction, (DUP, 2007), Chapter 13.

Busby et al, Scots Law: A Student Guide, (Tottel, 2006), 3rd edition (Chapter 14)

Selwyn N., Selwyn’s Law of Employment, (OUP, Oxford, 2008), 15th Edition

Benny R, Sargeant M, Jefferson M, Q&A Employment Law (Oxford, 2008), 3rd edition