The Test for Employment Status

Employment status is largely a question of fact for the employment tribunal and Courts to decide and its decision can only be overturned where it has erred in law or when the decision is perverse. The question will only become one of law if the construction of a written document is in issue. The test for employment status has developed and evolved over the years due to its highly discretionary nature.

S230(1) Employment Rights Act 1996 (‘ERA’) and S295 Trade Union and Labour Relations (Consolidation) Act 1992 vaguely defines an employee as a person who enters into or works under a contract of employment (‘CoE’) and a CoE is defined in S230(2) ERA as an express or implied contract of service. The definition of a contract of service however, is not given in the Act and was deliberately left to the Courts and employment tribunal to decide who is an employee for any particular purposes. [i] Employees work under a contract of service whereas the self-employed work under a contract for services. A valid contract of service or contract for services requires an intention to create legal relations, an offer of work and its acceptance as well as consideration which can be in the form of remuneration. Given Bert’s position as a legally qualified Board member, he would have known the legal implications of drafting a binding contract and as such proves his intention to create legal relations. The receipt of £2000 per month as remuneration is the consideration in this contract thereby establishing a valid contract. It is then necessary to identify the factors which are in favour of Dave being an employee and those which are not. To do so we have to look at a wide range of cases to determine his employment status.

The modern approach of the Courts in finding that a contract of service exists is from the case of Ready Mix Concrete (South East) Ltd v Minister of Pensions and NI [ii] where three conditions would have to be fulfilled. Firstly, if the servant agreed in consideration of a wage to provide his own work and skill in the performance of some service for his master. Secondly, if the servant agreed expressly or impliedly that, in performance of the service, he would be subject to some degree of control sufficient to make the other the master. Lastly, if the other provisions of the contract were consistent with its being a contract of service. [iii] The first condition, known as mutuality of obligations has been summarized by Courts as an ‘irreducible minimum of obligation’ without which a CoE cannot be said to exist [iv] . Even though Dave’s contract states that he will be paid in arrears, it is still remuneration for the performance of his work and skill under the direction of Anita thus satisfying this condition. The second condition is the long developed ‘control test’ [v] whereby the Courts are concerned with who exercises the discretion in the operation of the contract. In particular, to what extent does the employer control who does the work as personal service is essential. Hence if Dave can delegate or use replacements he might not be an employee. [vi] As the owner of Brendaspoons, it can be implied that Anita has control of what, how, when and where Dave performs his work even though it is not expressly stated in the contract. However, with greater numbers of professional and skilled people being in salaried employment, it soon became obvious that the test was insufficient. As a result, the ‘integration test’ was introduced which examines if the person was fully integrated into a part and parcel of the enterprise and if so would likely be a contract of service [vii] . However, this approach raised a few concerns as a person who performed a single task for a short time might be considered integral but would presumably be on a contract for services as it was unlikely that they would be provided benefits of holiday pay or sick leave [viii] . It could be said that Dave is an integral part of the business as the pub is losing money and it is his job to save the pub by making profits hence the most vital part of the business. Even though this test is not viewed as a sufficient one, it is still regarded as a potential factor. The final condition licences the Courts to weigh all relevant factors for and against the finding of a CoE and in particular exclude contracts with provisions that are contrary to a CoE so that the Court can conclude that a CoE exists even if the inconsistent facts outnumber the consistent ones as the Court is exercising a balance of these features. [ix] The approach taken by the Courts now has been to abandon the search for a single test and instead take a multiple of pragmatic approach, weighing up all the factors for and against a CoE and determining on which side the scales eventually settle where two key questions are posed. Firstly, in Market Investigation Ltd v Minister of Social Security, [x] Cook J said that the ultimate question is whether the person is performing the services as “a person in business on his own account” and listed factors which are important such as input of capital with regards to equipment and profits, power to select and dismiss, remuneration as well as tax and national insurance (‘NI’) contributions. Dave is not on a business on his own account as he is hired by Anita and there is no mention of him taking up any personal financial risk. However, this list is not exhaustive so the Court must still look at the overall picture. Secondly, whether the course of dealings between parties demonstrates sufficient mutuality for there to be an overall employment relationship. It is clear that what parties call their relationship, or what they consider it to be, is not conclusive but rather one factor to be taken into consideration.

Factors in the contract pointing towards a finding that Dave is an employee is the remuneration, bonus, fixed-term employment for 9 months as well as the restraint clause in clause 5. If Dave is self-employed, his income would be dependent upon whether he successfully helps Anita to make a profit for the pub. However, Dave’s income is a fixed monthly remuneration regardless of whether he succeeds in making a profit or not. In addition, an employee would normally be entitled to bonuses when the company makes a profit at the end of the financial year whereas a self-employed person would not. A fixed-term contract is defined as a contract that terminates on the expiry of a specific term [xi] so as Dave is engaged to work as a manager for 9 months, he is deemed to be a fixed term employee for the specified months hence pointing towards him being an employee. Under S94 ERA, every employee has the right not to be unfairly dismissed (‘UD’) if two principal qualifications are satisfied. The employee must be dismissed and must on the effective date of termination been continuously employed by his employer for a year. [xii] Therefore, in the event that ‘Cuthbert’ fails to renew the contract after nine months without a fair reason giving rise to a dismissal, [xiii] Dave would still be unable to file an UD claim as he failed the second condition. The non-competition restraint clause in clause 5 is designed to stifle competition from ex-employees which prevents Dave from working in the pub industry within two miles of the ‘Cuthbert’ for six months. It can be said that such restraint clauses only applies to employees as it would be ridiculous to apply to the self-employed because to restrain them from working in an industry would be to completely deprive them of any work opportunity thereby contravening human rights. [xiv] In addition, the restraint clause can be viewed as Anita exercising some control over Dave which points towards an employer-employee relationship. The only factor which might point towards being self-employed is the responsibility of paying Dave’s own tax and NI. However, in Davis v New England College of Arundel [xv] it was stated that although deduction of tax and NI contributions are a potent factor, it is not decisive so non-deduction of these sums does not inevitably point to an independent contractor if the other factors are against it. Moreover, in Reid v North West Ceilings [xvi] it was held that non-deduction of tax and NI was determined by a worker’s status but not determinative of that status. Furthermore, if the clause was deliberately inserted by Bert to make the contract seem like Dave is self-employed to evade legal liabilities, the Courts can avoid the clause and conclude it as a sham. [xvii]

Therefore, in evaluating the overall effect of the details in the contract, [xviii] it seems highly likely that Dave would be an employee. As such, ‘Cuthbert’ can be held vicariously liable for any actions done by Dave during his employment. In addition, as an employee he would be entitled to claim wrongful dismissal for breach of contract resulting in the dismissal or repudiation of the contract by the employer as it does not require any minimum employment period. However, at the end of the day the tribunal and Courts have the final say as they have a wide discretion to find otherwise.

(b) In deciding whether all workers should be classified as employees, one needs to differentiate between a worker and an employee and the rights they have as well as the advantages of being an employee. An employee is a worker with a valid contract of employment (‘CoE’) and all employees are workers as per S230(3)(a) ERA 1996. [xix]

As a worker, they benefit from some minimum rights such as national minimum wage, [xx] discrimination against sex, race and disability [xxi] and many other rights. [xxii] These provisions show a deliberate extension of statutory coverage to protect the rights of workers as opposed to the traditional position of limited protection. [xxiii] However, this wider definition of workers still does not cover the self-employed. Common law has established fundamental criteria for determining the issue of employment status between an employee and self-employed but there is less case law on the distinctions between workers and those who are not. In the leading authority of Mirror Group Newspapers Ltd v Gunning, [xxiv] Court of Appeal (CA) emphasized personal service which formed part of the suggested approach in Byrne Brothers [xxv] and Cotswold Development v Williams. [xxvi] As it is very fact based much discretion is left to the Courts. [xxvii] Thus, in an attempt to bring clarity, Employment Appeals Tribunal (‘EAT’) set out guidelines on spotting a worker in James v Redcats (Brands) Ltd, [xxviii] where two key factors were identified: is there an irreducible minimum of obligations when the worker undertakes work for the employer and is the personal service involved the dominant purpose of the contract? If so, the individual is likely to be a worker. However, this classification is unsatisfactory as it does not adequately protect atypical workers e.g. homemakers, agency and casual workers. Arguably, the worker definition is more inclusive, prima facie covering atypical work unless there is good reason not to. [xxix]

The argument for all workers to be classified as employees would encourage equality to all and provide a sense of certainty in law by adopting a coherent approach. In turn, help legal advisors accurately advice on the worker’s position as well as reduce risk of abuse on either side of the contractual relationship. Agency workers are constantly under this abuse as they are in a triangular relationship between the worker, the agency and the end-user. The agency has a contract with the client while the worker under the control of the client has a contract with the agency. This leads to difficulties in determining whether the agency worker is an employee and who their employer is, without which the worker cannot seek any employment claim. In Montgomery v Johnson Underwood Ltd, [xxx] after working 2 years for a client subject to little or no control, direction or supervision by the agency he was held not to be employed due to insufficient control and also not an employee of the hirer as there was insufficient mutuality of obligation. [xxxi] In similar circumstances, a self-employed who ends up working permanently for that client can transmute over time into an employee. For a few years, it seemed possible that consistent use over time of an agency worker could lead to a formal employment relationship with the client as approved in Motorola Ltd v Davidson, [xxxii] Dacas v B Book Street Bureau [xxxiii] and Cable & Wireless plc v Muscat. [xxxiv] But James v Greenwich [xxxv] reversed this possibility and stopped all movement towards direct client-employment of agency workers. In this case, the agency worker worked 3 years consistently for the client and tried to claim unfair dismissal but was held by EAT not to be the client’s employee. CA upheld EAT’s decision saying that Dacas and Cable had laid down no general principle. In addition, CA held that the test for transmutation into an employee is not merely that the worker ends up looking like a direct employee, but the much harder test that it must be necessary to find such an implied contract. This came as a major relief to large-scale users of agency workers and a major disappointment to those wanting greater employment rights. Some case law even said that the worker is neither employed nor self-employed but rather a ‘sui generis’ relationship [xxxvi] which further reflects the inconsistencies in the agency worker’s employment status. Nonetheless, the minimum rights mentioned above applies regardless of whether the employer can be identified. By extending this protection, casual workers would also benefit as their employment status are often hard to predict because they are generally supplied for a short-term or specific need with periods of employment and breaks in between where no work is performed. In some cases, Courts have considered casual workers as employees, if they can point to the existence of an umbrella CoE, where the work is of such long-standing nature that a degree of mutuality of obligation exists [xxxvii] or worked under a succession of short term contracts. [xxxviii] Unfortunately, in a great deal of cases, casual workers have failed to establish an umbrella CoE because of the absence of mutuality of obligation between engagements [xxxix] as was the case in Carmichael v National Power. [xl] More bizarrely, the Courts allowed carefully drafted provisions in contracts to overrule the reality of the relationship thus creating a new status of unprotected workers even where there are powerful requirements to be available for work as to be in the position of an employee as per Stevedoring and Haulage Services Ltd v Fuller. [xli] Mr Fuller worked only for 1 employer, was offered work first before offering agency workers, was provided training and uniforms and was closely supervised. [xlii] CA held that he was not an employee due to lack of mutuality of obligations but more so because it was set out in the express terms of the written agreement. [xliii] These contradicting cases coupled with the wide discretion given to the Courts made it highly uncertain and unsatisfactory for casual workers seeking protection. Homeworkers too suffer from this lack of protection. They work from home, may or may not use tools or equipment supplied by the employer hence may lack personal service. In Airfix Footwear Ltd v Cope, [xliv] a homeworker was held to be an employee although tax and NI were not deducted, due to the long standing arrangement of providing and undertaking work. Similarly, umbrella contracts have been found where homeworkers work on a part-time irregular basis with the employer under continuing obligation to provide work and homeworkers obligated to accept and carry out work. However, the requirement of mutuality of obligation has prevented most homeworkers from having a CoE thus being self-employed. PCU [xlv] argued that because workers cannot complain about unfair treatment or dismissal and the inability of trade unions to represent them, it has led to zero incentive for workers to be treated fairly. In addition, this change would provide all workers with time off, protection from transfer of undertaking, redundancy payments and etc. [xlvi]

The argument against classification is the ‘floodgate theory’ but can be easily countered by setting requirements for e.g. being in employment for more than a year. SMC [xlvii] and DFP [xlviii] felt that employers will see little advantage in using uncontracted workers which would completely change UK agency worker model hence removing vital employment opportunity thereby restricting labour market flexibility resulting in lesser agency jobs. Moreover, the position on agency workers will improve when the Temporary Agency Work Directive transposes into domestic law [xlix] which ensures equal treatment between agency worker and workers directly employed in terms of working and employment conditions if they have worked for at least 12 weeks thus giving them access to employment rights. Art 2 also recognise temporary worker agencies as employers and will question the relationship between end-user and worker if needed. At present, there is no rule of law preventing directors from being employees as it is a question of fact and public policy with the burden of proof on the Secretary of State. [l] The change of status would unjustly favour directors who are controlling shareholders as it would enable them to claim for debts owed when the company becomes insolvent as well as redundancy claims which follows even though the director was the directing mind and will whose decisions led to insolvency as in SoS for Business, Enterprise and Regulatory Reform v Neufield. [li]

Therefore, instead of classifying all workers as employees, a better solution would be to recognise the intermediate group of workers as Canada does. [lii] In recognising different levels of mutuality, [liii] it determines the degree of a worker’s dependency [liv] hence the more reliance placed on an employer for livelihood, the more the relationship is characterised by dependency and this vulnerability justifies some protection. Instead of leaving decisions entirely up to the tribunals and Courts’ discretions which arguably favours the employers, a Code of Practice can be introduced to guide findings of a CoE. In addition, implementing the Dutch’s regulation will recognise more atypical work by granting CoE for work carried out for at least 20 hours a month or 3 months giving them the protections they deserve. [lv]