The question of employment status is a vexed area of the law; it is often far from easy to accurately determine the employment status of an individual. We will all be familiar with the following definitions:

"Employee" | "Self Employed" | "Worker"

The aim of this article is to explore what these different definitions actually mean to businesses and individuals offering services on the Isle of Man.

Statutory Definitions

Section 173(1) of the Isle of Man Employment Act 2006 sets out the definition of employee and worker as follows:

"Employee" means an individual who has entered into or works under (or where the employment has ceased, worked under) a contract of employment.

"Worker" (except in the phrase "Shop Worker") means an individual who has entered into or works under (or, where the employment has ceased, worked under) –

a) a contract of employment, or

b) any other contract, whether expressed or implied and (if it is expressed) 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,
And any reference to a Worker's contract shall be construed accordingly.

A "contract of employment" is defined within the legislation as being "a contract of service or apprenticeship, whether expressed or implied, and (if it is expressed) whether oral or in writing." This should be distinguished from a contract for services which, while not defined in statute, is taken from the case law to govern the provision of services from one party to another, e.g. a self employed contractor.

Contract v Reality: "Sham" Arrangements

When determining the nature of the relationship enjoyed between the parties, the Courts will look to establish "what the true legal relationship is between the parties" (Protectacoat Firthglow Ltd v Szilagyi [2009] EWCA CIV 98; [2009] IRLR 36).

In the English Court of Appeal case of Autoclenz Limited v Belcher and Others ([2009] EWCA CIV 1046), Lady Justice Smith provided guidance on how Employment Tribunals should address disputes over the genuineness of a written term of a contract. This case arose after a number of individuals, who were contracted to valet cars for Autoclenz, brought an Employment Tribunal action seeking a declaration that they were employees (not self employed contractors as per their contracts), and an order for Autoclenz to pay them the national minimum wage and unpaid holiday pay due and owing. This case revolved around the question of whether the contractual documentation entered into by the parties was a "sham", in place to obscure the true nature of the relationship enjoyed.

The leading decision of Lady Justice Smith offered the following guidance for identifying "sham" employment arrangements:

  • The focus of the Tribunal's enquiry must be to discover "the actual legal obligations of the parties". This involves examining 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.
  • In this case, the fact that the day to day practice was one whereby the valetors were expected to turn up for work unless they had given appropriate notice, was evidence of there being a mutuality of obligation. While there was a right of substitution clause within the contract, in reality this was not genuine.
  • Lady Justice Smith interestingly noted that individuals should not be estopped from contending that they are employees simply because they have been content to accept the tax benefits of self employed status for many years.

This case is of significance as it highlights that the Tribunal will not be blindly persuaded by the contract between the parties, where the day to day reality suggests a different relationship is in fact enjoyed. The same arguably applies to any third body commissioned with determining the "real" relationship enjoyed between two parties to an agreement, be that for the purposes of establishing employment rights, or for matters involving income tax or VAT arrangements.

So who is an "Employee" anyway?

A satisfactory definition of "employee" has proved elusive (Harvey on Industrial Relations & Employment Law/Division AI Categories of Worker/1. Categories of Workers/B. Employees/1 Definition). However, over the years, the Courts have attempted to clarify the salient information required to determine an individual's employment status. A well cited authority in this area is the decision of Ready-Mixed Concrete (South East) Limited v the Minister of Pensions and National Insurance ([1968] 2 QB 497). This case determined that the question of whether there is a contract for services in existence should be decided upon the consideration of a number of factors. This "multiple test" established the key tests as being:

1. Whether there is an agreement to provide the servant's own work or skill in the performance of service for the master ("Personal Service") in return for a wage or remuneration ("Mutuality of Obligation").

2. Whether there is control of the service by the master ("Control").

3. Whether the other provisions in operation are consistent with a contract of service ("Other Factors").

Further case law development has held that in the area of professional services, mutuality of obligation and control are "the irreducible minimum". While a Tribunal will make its final decision on employment status based on all of the facts in a particular case, it is suggested that some factors will be more important than others.

Recent Case Law

1. Is a lap-dancer an employee?

No, said the English Court of Appeal in Stringfellow Restaurants Limited v Quashie ([2012] EWCA CIV 1735).

Miss Quashie was a lap-dancer at Stringfellows. She claimed that she had been unfairly dismissed. The preliminary issue in the case was whether Miss Quashie was an employee of Stringfellows or self employed. The Court of Appeal held that whilst Miss Quashie worked under a contract, and there were mutual obligations of a kind in place when she was actually working, there was no obligation on Stringfellows to pay her anything at all. Miss Quashie negotiated her own fees with the clients. This lead Elias LJ to conclude that "it would, I think, be an unusual case where a contract of service is found to exist where the worker takes the economic risk and is paid exclusively by third parties."

2. Was a minicab driver an employee where, under his contract, he could work as and when he liked?

No, said the UK Employment Appeals Tribunal ("EAT") in Knight v Fairway and Kenwood Car Service (UKEAT/0075/12).

The Claimant worked as a minicab driver. His written terms provided that, as long as he made weekly rental payments and sent appropriate notifications to the company, he was allowed to work as and when he pleased. He paid his own tax and national insurance. He left after a disagreement and claimed damages for wrongful dismissal. The EAT said that it was "likely" that the Claimant was employed either throughout a particular shift or from the beginning to end of an individual job, and that there was an overarching umbrella contract. This umbrella contract was not however considered an employment contract given the absence of mutual obligations.

3. Does an employer have to exercise actual day to day control over an employee for there to be an employment relationship?

No, said the UK EAT in White and Todd v Troutbeck SA ([2013]AU ER (D) 266 (JAN)), as the contractual right to control is sufficient. The Claimants in the case were caretakers/managers of a small estate in Surrey on behalf of "absentee owners", who visited once or twice a year. They were engaged under an agreement which set out various duties and responsibilities; however there were no fixed hours.

The EAT considered that the test from Ready-Mixed Concrete remains the "classic description of a contract of employment", and that it is a multi-factorial test, rather than a control test. The fact that the owners had abdicated themselves of day to day control was not conclusive, and instead the key question was whether there was a contractual right of control.

Employment Status: The Implications for Employees and Employers

  • Employers and employees have implied obligations inferred into their contract (e.g. the mutual duty of trust and confidence).
  • The right not to be unfairly dismissed and the right to receive a statutory redundancy payment are legal protections only afforded to employees.
  • The disciplinary and grievance practice and procedures set out in the Code of Practice on Disciplinary and Grievance Procedures 2007 only apply to employees.
  • Employers can be vicariously liable for the acts of employees; this means that the employer is liable for the wrongs committed by an employee where there is a sufficient connection with the employment. It arises even if the employer has committed no wrong.
  • Employers owe employees statutory duties relating to health and safety. Self employed contractors may not be covered under these duties although they will be covered under the employer's common law duty of care in respect of occupier's liability.
  • An employer is required to take out employer's liability insurance to cover the risk of employees injuring themselves at work.

There exists a considerable volume of case law on this topic and consequently there are no simple rules which determine the employment status of an individual.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.