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Employment status and sham contracts

Posted on 10th December 2009
Briefing note

The Court of Appeal held that tribunals must focus on the actual legal obligations of the parties and not just take into account express contractual provisions.

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the individuals had to turn up to work unless they had given appropriate notice as an indicator of mutuality of obligation

Autoclenz Ltd v Belcher

Background

Employment tribunals often have to consider the employment status of individuals whose contracts describe them as "self-employed contractors". Are they truly self-employed or are they in fact workers or employees?

There is a series of cases which try to make sense of how to approach the issue of "sham contracts". The case of Autoclenz Ltd v Belcher [2009] is the latest one. Here the Court of Appeal gave further guidance on how employment tribunals should address disputes over the genuineness of a written term of a contract.

The decision

The Court of Appeal confirmed that where the employer was in a position to dictate what terms are to be signed by the individual, it is not necessary to show a common intention to mislead.

The employment tribunal must focus on finding out "the actual legal obligations of the parties". This means looking at all the relevant evidence, including the written terms, evidence of how the parties conducted themselves in practice and what their expectations of each other were.

Evidence of how the parties conducted themselves in practice may be so persuasive that the tribunal can draw an inference that this conduct was reflective of the true obligations of the parties.

The mere fact that a particular contractual provision has never been used, does not automatically mean that it is not genuine. Before reaching that decision, the tribunal must identify other evidence to demonstrate this conclusion. For example, in this case, Autoclenz tried to argue that its team of car valeters were all self-employed contractors and therefore not entitled to be paid the national minimum wage or to receive holiday pay under the Working Time Regulations. In support of this argument, Autoclenz relied on the sub-contractors agreement which described the worker as self-employed and stated that neither party was under any obligation to offer or to accept work from the other. The right to provide a substitute was also expressly stated. The tribunal concluded, however, that from the evidence it heard, in reality the right to provide a substitute was not known and in any event the individuals had to turn up to work unless they had given appropriate notice as an indicator of mutuality of obligation.

The employment tribunal's decision that the car velaters were employees was upheld.

Finally, as an aside, the Court of Appeal said that individuals should not be prevented from contending that they are employees simply because they have been content to accept the tax benefits of self-employment for many years.

Comment

This decision confirms the guidance on sham contracts set out in another Court of Appeal decision of Protectacoat Firthglow Ltd V Szilagyi [2009]. Here it was held that (in assessing whether express contractual provisions should be disregarded when determining employment status issues), "the question is always what the true legal relationship is between the parties. If there is a contractual document that is ordinarily where the answer is to be found. But, if it is asserted by either party, or in some cases by a third party, that the document does not represent or describe the true relationship, the court or tribunal has to decide what the true relationship is."

For Autoclenz this decision may well prove expensive if they cannot overturn the decision on appeal.

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