UK: Sham Contracts

Last Updated: 27 November 2011
Article by Andrew Yule

On 19 November 2007, twenty car valeters issued employment tribunal proceedings against Autoclenz, which provides car-cleaning services to motor retailers and auctioneers. Despite express language in their contracts that each was a 'self-employed independent contractor', they claimed they were entitled to be paid in accordance with the National Minimum Wage Regulations (NMWR) and to receive statutory paid leave under the Working Time Regulations (WTR).

The Supreme Court has now found in the valeters' favour, finding that they were not just workers, but employees, meaning that they have right not only under the NMWR and WTR but also the full range of rights under the Employment Rights Act. In doing so, the Supreme Court judges produced a clear ruling from the highest court in the land, that employment status is ultimately determined by the reality of the working relationship – not by what is written in the contract, removing ambiguity about this issue in previous cases.

Does intention matter?

It was agreed that the claimants all knew that they were being offered a role described as and intended to be one of self-employment. But this did not change the outcome.
The Supreme Court reviewed the case-law and identified some useful principles when assessing the parties' intentions, in a dispute over employment status:

  • The Court will consider whether the words in the written contract represent the true intentions or expectations of the parties; and not just at inception but also if and when the agreement is varied. So, the reality of how the relationship develops will often override the parties' intentions at the time of entering into the contract; and
  • The Courts recognise that frequently, organisations offering work to individuals will be in a position to dictate the terms of the offer and that this can create an inequality of bargaining position. So, the Court will be more willing to investigate allegations that the written contract does not represent the actual terms of the relationship. In that respect employment contracts are in special category and will not be applied as strictly as commercial contracts between individuals who have equal strength in negotiation.

What are the key indicators?

In reaching their conclusions, the Employment Tribunal made four factual findings in respect of the individuals' relationships with Autoclenz. These were enough to persuade the Tribunal (and subsequently the Supreme Court) that they could disregard the terms of the written agreement.

The key findings were that the valeters:

  1. would perform the services defined in the contract within a reasonable time and in a good and workmanlike manner;
  2. would be paid for that work;
  3. were obliged to carry out the work offered to them and Autoclenz undertook to offer work; and
  4. must personally do the work and could not provide a substitute to do so.

These findings enabled the Supreme Court to conclude that the arrangements did not just confer 'worker' status on the valeters, but full employment status – meaning that they had the right not to be unfairly dismissed and other rights exclusive to employees.

The case confirms that a tribunal is entitled to look behind the words and phrases used in an agreement and if it finds that the reality is different from what the written terms suggest, it can set the written terms aside in deciding what rights an individual has. This means that all the actual facts of an arrangement are potentially significant. In the Autoclenz case for example the tribunal judge noted that if the valeters were unable to attend work on a particular day, they were obliged to notify the manager in advance. This was inconsistent with a written term suggesting that there were no obligations on either side.

Practical tips

Before engaging an individual as a self-employed contractor, businesses should consider how the working relationship will play out in practice and whether the reality is truly consistent with self-employment.

A one-size fits all 'contractor agreement' can be unhelpful and a blanket statement that the individual is not and is not intended to become an employee, will not work if the actual reality is different.

Businesses should also review contractor arrangements from time to time. This is particularly important if you have engaged a contractor for longer, more intensively or in a way that makes them less dispensable to and more integrated into the business than had originally been anticipated.

Using the wrong documentation is a gamble. Getting it wrong not only leaves the business exposed to individuals accruing valuable pay, annual leave and other statutory rights, but can also have significant tax and national insurance implications, if HMRC decides that the relationship has been wrongly categorised from the start.

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.

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