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I’m a Barrister at Atlantic Chambers looking at various aspects of Employment Law including new developments in case law and legislation.

Employment Status and Sham Agreements - Autoclenz Ltd v Belcher [2010] IRLR 70 on appeal to the Supreme Court

Introduction

The Supreme Court heard an appeal last week from the Court of Appeal’s decision in Autoclenz Ltd v Belcher [2010] IRLR 70.  The Supreme Court’s Judgment is likely to be an important decision regarding employment status and in particular the circumstances in which an Employment Tribunal or Court is entitled to find that a purported self-employment contract should be considered a ‘sham’.

Arguably the most important employment rights available to employees, including the right not to be not to be unfairly dismissed are granted only to those who are ‘employees’ under section 230 of the Employment Rights Act 1996.  Under section 230(1) an employee is defined as ‘an individual who has entered into or works under … a contract of employment’.  Under section 230(2) a ‘contract of employment’ is defined as ‘a contract of service or apprenticeship, whether express or implied, and (if it is express) whether oral or in writing’.

Under section 230(3) there is also provision for an intermediary category between that of employee and a self-employed individual, of ‘worker’.  Workers are entitled to some rights, such as the right not to suffer unlawful deductions from pay.  Section 230(3) defines a ‘worker’ as an individual who has entered into or works under either a contract of employment, or:

any other contract, whether express or implied and (if it is express) whether oral or in writing, whereby the individual undertakes to do or perform personally any work or services for another party to the contract whose status is not by virtue of the contract that of a client or customer of any profession or business undertaking carried on by the individual.

This or a very similar definition has been widely used and, for example, grants workers rights to minimum wage and rights regarding working time, rest breaks and annual leave under section 54 of the National Minimum Wage Act 1998 and Regulation 2 of the Working Time Regulations 1998 respectively.

As there is very little statutory guidance it has been for the Courts to provide guidance by way of the common law as to discerning employment status.

The Background to Autoclenz – Sham Agreements in Kalwak and Szilagyi

In the Court of Appeal case of Consistent Group Ltd v Kalwak [2008] IRLR 505 the Claimants had signed contracts which on the face of it appeared to show that they had been engaged as self-employed subcontractors. 

Before Kalwak was appealed to the Court of Appeal, Elias J in the EAT (Consistent Group Ltd v Kalwak [2007] IRLR 560) had held that the Employment Tribunal had been entitled to find there was no ‘realistic possibility’ that the Claimants could reject work or to work for someone else given their dependence on the Respondent’s economic power.  Elias J held that where an express agreement provided for ‘unrealistic possibilities’ this would not change ‘the true nature of the relationship’.

However in the Court of Appeal, Rimer LJ criticised Elias J’s approach and held that it was impossible to imply in such clauses to the parties’ agreement, as such terms would be contrary to express clauses within the written agreement.  In accordance with Snook v London and West Riding Investment Ltd [1967] 2 QB 786 (CA), Rimer LJ held that to make a finding of ‘sham’ both parties would have had to intend to portray a false picture as to the real contractual obligations.

In Protectacoat Firthglow Ltd v Szilagyi [2009] IRLR 365 the Claimant claimed unfair dismissal on health and safety grounds. Upon commencing work for the Respondent the Claimant signed documents which purported to create a partnership agreement between the Claimant and another individual.

The Employment Tribunal originally determined that the Claimant was an employee as the documents did not represent the ‘true relationship’ between the parties and therefore concluded that the agreement was therefore a sham. The Employment Tribunal found that there were many features in the reality of the working relationship which diverged from the documents.

Smith LJ, in her leading Court of Appeal Judgment, upheld the Employment Tribunal’s decision that the Claimant was an employee. Smith LJ decided that the Employment Tribunal were entitled to hold that both partnership and service agreements were shams ‘in that they did not describe or represent the true intentions and expectations of the parties’.

Autoclenz

The Autoclenz case involved 20 Claimants who had been engaged by the Respondent as car valeters. The Claimants sought declarations that they were employees and brought claims for unpaid wages, holiday pay and other sums.

The Claimants had originally signed a written agreement which described them as sub-contractors. In 2004 the HMRC concluded that the arrangements were consistent with self-employment. In 2007 the Claimants were given new contracts which included a substitution clause which purported to entitle the Claimants to not attend work if they could find a substitute to replace them, a provision which had not previously been included within their written agreement. The agreement also purported to exclude mutual obligations on the Claimants to accept work and on the Respondent to offer the Claimants work. The lead Claimant, Mr Huntington, gave evidence that although he signed the agreement in May 2007 he did not read it.

The Employment Tribunal originally held the Claimants were both employees and workers. The Employment Tribunal found that the Respondent had imposed the terms and the Respondent controlled how the Claimants did their work. The Employment Judge’s approach was to look at the “true nature of the relationship” between the Claimants and the Respondent on the basis of the evidence.  The Employment Tribunal found that the substitution clause did not reflect what was agreed as the Respondent gave evidence the agreement could not have worked without mutual obligations and that there was an obligation on the Claimants to attend work ‘unless a prior obligation had been made’.

Initially on appeal to the EAT, HHJ Peter Clarke overturned the Employment Tribunal’s decision in part.  Judge Clarke determined that the Claimants were not employees but were workers as the Claimants provided their work personally and as the substitution clause was ‘qualified’.  Judge Clarke noted that the ET had relied upon Elias J’s dicta in Kalwak (EAT), an approach which Judge Clarke referred to as ‘the reality test’ and which he held differed from Rimer LJ’s approach in Kalwak (CA) which was consistent with Snook.  Judge Clark considered that the ‘guiding principle’ from Kalwak (CA) was that it was ‘not the function of an ET to recast the parties’ bargain’.

Once Autoclenz was appealed to the Court of Appeal, perhaps surprisingly, Smith LJ held that there was ‘no difference of substance between’ between the approaches of Elias P and Rimer LJ in Kalwak. Smith LJ held that where there is a dispute as to the genuineness of a written term the focus would involve examining all the relevant evidence.

Smith LJ upheld the original Employment Tribunal’s decision that the Claimants were employees and sought to focus on the reality of the arrangements between the parties.  Smith LJ made it clear that the label a party gives to an arrangement would not be conclusive. Smith LJ concluded that the Employment Tribunal were entitled to rely upon the Respondent’s evidence that they expected the Claimants to turn up for work unless they had given appropriate amount of notice as evidence that the parties had a joint intention that the Claimants would turn up for work each day. Smith LJ also held that the fact that the Respondent did not know of any examples of true substitution among all the Claimants was evidence “from which it would be permissible to draw an inference that no one ever intended that it should be done”.

Although Aikens LJ agreed with Smith LJ to uphold the decision of the Employment Tribunal and therefore found that the Claimants were employees, it is difficult to discern a consistent rule or test from the Judgments when read together.

Aiken LJ’s Judgment does not readily embrace Smith LJ’s endorsement of Elias J’s ‘reality test’. Whilst Smith LJ held that the consideration must be whether the agreement represented the ‘true intentions or expectations of the parties’ Aikens LJ stated that it was ‘not helpful’ to consider the true intentions or expectations of the parties as it is what was actually agreed which is relevant. This disparity between the Lord Justices makes it somewhat difficult to distil the Court’s overarching reasoning in Autoclenz.

Conclusion

Despite the great body of caselaw which has built up over the past 40 or more years, Freedland has suggested that the Courts’ task in discerning employment status has ‘become more arduous rather than less so as time as gone on’ and that ‘the accumulation of case has added weight rather than wisdom’.[1]

There remains a great uncertainty as to when orthodox contractual rules should be relaxed and the reality of a potential employment relationship should be analysed.

Although employment reform was recently in the consultation stage no reforms are proposed in this the area of employment status.  It therefore appears likely that it will be for the common law to provide further guidance. It is therefore hoped that the Supreme Court, in determining Autoclenz can provide some much needed clarity in this difficult area.


[1] Mark Freedland, The Personal Employment Contract (First Published 2003, OUP 2009) 21

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