In the recent case of Autoclenz v Belcher, the court made it clear that if in reality an individual is working as an employee, then no amount of skilfully crafted verbiage in their “consultancy contract” will change their status. Jenny Wotherspoon and Chris Stack look at the case’s implications for marketing agencies.
Who: Autoclenz Limited v Belcher and others
Where: Supreme Court
When: 27 July 2011
Law stated as at: 1 September 2011
Many businesses in the marketing and advertising sectors commonly engage "self-employed" contractors/freelancers on a regular basis. Such arrangements are generally considered to be more flexible than taking on the burdens associated with direct employment.
Employers often strive to ensure that such individuals sign robust consultancy contracts which clearly specify, for example, that they are not employees and have no obligation to provide personal service (a central requirement of employment status). However, it has long been the case that the Courts and HMRC have been permitted to look behind the wording of those contracts to assess whether the reality of the arrangement is in actual fact one of "disguised" employment.
The Supreme Court has now given guidance on the approach to be taken where the genuineness of a contract is called into question and has confirmed that:
- the written terms of a contract can be disregarded where they do not reflect the intention of the parties; and
- in such circumstances, the Court will assess the actual legal obligations of the parties to determine whether the employment is genuinely one of employment or self employment.
The Claimants were engaged by Autoclenz as car valeters. The Claimants signed contracts, which in summary, stated that they:
- were engaged on a "subcontract" basis;
- could provide a substitute provided that this person met Autoclenz's requirements; and
- could refuse work on any particular occasion.
However, in reality the Claimants did not refuse work and did not provide a substitute. The Claimants were paid on a piecework basis depending on the number of cars they cleaned. They were required to wear overalls provided by Autoclenz and had been provided with training. Autoclenz provided the Claimants with the necessary equipment to carry out their roles (although from 2007 a small charge was made to the individuals in respect of these materials).
In 2004 HMRC carried out an audit of these working arrangements and concluded, on balance, that the contracts leaned more towards independent contractor status rather than PAYE employee status.
However, in Novemeber 2007 the Claimants brought an Employment Tribunal claim seeking a declaration that they were in fact workers and as such were entitled to holiday pay under the Working Time Regulations and the national minimum wage (neither of which they had previously received).
The Employment Tribunal upheld the Claimants' claims and further held that not only were they workers, they were actually employees. The Employment Tribunal found that the Claimants were not in business on their own account: they had no control over the way they did their work or the hours that they worked. The Claimants were at all times subject to the direction and control of Autoclenz. The Employment Tribunal was satisified that the Claimants were required to provide personal service notwithstanding the existence of the substitution clause, finding that this clause did not in fact reflect what was actually agreed between the parties.
The case progressed through a series of appeals finally ending up at the Supreme Court. The Supreme Court upheld the decision of the Employment Tribunal and also made the following findings:
- the Supreme Court overturned a finding made in the earlier Court of Appeal case of Consistent Group Limited v Kalwak , which held that in order for a Tribunal to be able to disregard the express terms in a contract (in this case the substitution clause), there had to be a common intention to mislead. This was found to be too narrow and it is now sufficient for the Tribunal to conclude that no-one sensibly expects the terms, or a particular term, of the contract to be implemented;
- if the Tribunal is entitled to disregard the express terms in a contract, it should look to assess the reality of the arrangement by reference to the actual legal obligations of the parties (both at the start of the contract and throughout the course of the relationship);
- the Tribunal should take into account the terms of the contract, how the parties conducted themselves and their expectations of each other;
- the fact that the contract contains a clause which is not used (such as a right of substitution) does not necessarily mean that the contract itself is a sham. However, if no-one sensibly expects the individual to provide a substitute, then the fact that this clause exists will not alter the reality of the arrangement;
- the Tribunal will be more ready to question the genuineness of an employment contract (as opposed to a commercial contract) because it will always need to bear in mind the inequality of bargaining power between the individual and employer in that scenario when negotiating the contract.
This case illustrates the significant employment risks that employers face when entering into "consultancy" contracts which do not reflect the reality of the underlying relationship. Whilst it is important to ensure that robust contracts are in place, employers should also ensure that the working relationship is consistent in practice with the terms of that contract. This is likely to require an employer to carry out regular "audits" of the relevant relationships.
The case also confirms that in some cases an individual may be in the unusual situation of enjoying the status of "employee" and the associated rights for employment law purposes whilst still retaining "self-employed" status for tax purposes, meaning that he will continue to be responsible to HMRC for his tax and national insurance contribution obligations.
This working relationship issue is likely to become all the more significant when the Agency Workers Regulations (the "AWR") come into force on 1 October 2011. The AWR provide, amongst other things, that on completion of a 12 week qualification period, agency workers will be entitled to the same basic working and employment conditions as a comparable employee/worker employed in the end user's business. Independent contractors who are genuinely in business on their own account will not fall within scope of these regulations. However, in line with the approach above, an Employment Tribunal will look beyond the contractual arrangements to the reality of the working relationship with the contractor to assess whether that individual genuinely runs their own business. Watch this space for further news on the implications of the AWR for employers in the marketing and advertising sectors….