2. Types of employment contract
The principles outlined in the previous chapter apply to all types of contract that may govern an employment relationship. However, the nature of that employment relationship can take different forms and it is important to establish what these are because different categories of workers have different employment rights.
Anyone can enforce their rights under a contract (see Chapter 7 for remedies for breach of contract) but employment legislation gives additional statutory rights to individuals according to their employment status.
There is a legal distinction between an employee, a worker and someone who is genuinely self-employed. The nature of the relationship is established by the contract, although a written contract itself may not contain such a definition. Whatever the contract does or does not specify, it will be for the tribunal or court to determine the nature of the relationship from the way that the contract has operated in practice.
Legislation normally states to which category of worker it applies and will usually define that category. Unfortunately, the definitions are not always the same or clearly explained — additionally the nature of the working relationship can render classification difficult. As a result there is a large amount of case law dealing with the status of workers, and this is being constantly modified.
The Employment Rights Act 1996 (Section 230) gives the following definitions:
• an employee is “an individual who works or worked under a contract of service or apprenticeship”;
• a worker is “an individual who works or worked under a contract of service or any other contract 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 client or customer of any profession or business undertaking carried on by the individual.”
An employee will always also meet the definition of a worker and qualify for any rights that apply to workers, but a worker will not always meet the additional requirements needed for the status of employee. The definition of a worker centres on the need for the individual to carry out the work themselves (defined as a “contract for services” as opposed to a “contract of service”) and excludes those who are genuinely in business on their own account.
However, an independent contractor can be a worker depending on the nature of the contract and largely whether they are able to send someone else to do the work (the right to substitute). The case law examples below look at how the definitions have been applied in practice.
A worker has some employment rights, including for example limits on their working time, the right not to have unlawful deductions from their wages and protection from making disclosures in the public interest. However, only an employee has additional rights which include protection against unfair dismissal, the right not to suffer a detriment on specified grounds (such as carrying out duties as a health and safety representative), the right to parental leave and flexible working - although in most cases they will have to have been employed for a certain period of time before they acquire these rights.
The Sex Discrimination, Race Relations and Disability Discrimination Acts apply to anyone who is in “employment” under “a contract of service or apprenticeship or a contract personally to execute any work or labour”. The Employment Equality (Sexual Orientation) and (Religion or Belief) Regulations include similar definitions. These therefore can apply to both employed and self-employed people.
Part-time workers are protected under the Part-time Workers (Prevention of Less Favourable Treatment) Regulations 2000 and fixed-term employees by the Fixed-term Employees (Prevention of Less Favourable Treatment) Regulations 2002. As the titles suggest, the part-time regulations apply to workers and the fixed-term regulations only to employees. In both cases the claimant will need to be able to show that they are working under the same type of contract as their comparator.
Crown employees, Parliamentary staff and officeholders such as police officers and members of the clergy, are regarded as a separate category of worker and some statutory provisions will not apply to them.
Anyone seeking to bring a claim derived from a statute should be aware of the qualifying criteria in their particular case.
Who is classed as an employee?
The courts have over the years established a number of tests to determine whether or not an individual is an employee, as opposed to a worker or an independent contractor. One of the first essentials is that the person must be required to carry out the work personally. This was decided in an early case that is still frequently relied on today:
Mr Latimer was a lorry driver. He was buying the lorry from the company on hire purchase and it had to be painted in the company livery. He had to wear their uniform and he had to drive exclusively for this company. He was found to be an independent contractor and not an employee, one of the key factors being that he was not required to drive the lorry himself but could provide and pay for another driver to do it for him.
Ready-Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 1 All ER 433However, personal service by itself is not conclusive — an independent contractor could carry out the work herself or himself and this would not by itself make her or him an employee. The requirement to do work personally was the main consideration in the following more recent case. The EAT said that a limited right to provide a substitute did not necessarily mean someone could not be an employee, even though that was not the outcome here:
Mr Potter worked as a home delivery agent. The contract said that if he was unable or unwilling to perform the work himself he could send a relief driver, who he would have to pay himself. The EAT held that one of the minimum requirements for a contract of service was the need for personal service. Potter could provide a substitute so the requirement was not there and therefore he was not an employee. The EAT also said that where there was an express term in writing it was not necessary to look at any other facts unless the term had been varied or was a “sham”.
Staffordshire Sentinel Newspapers Ltd v Potter [2004] IRLR 752Also, in the case of Real Time Civil Engineering Ltd v Callaghan EAT/0516/05, the EAT held that a lorry driver was not an employee because he had signed a contract just 18 months previously that said he could send in a substitute — even though he had never exercised that right.
The tests developed by courts and tribunals have been defined as:
• the control test: whether the employer can tell the employee what to do and also how to do it;
• the organisational test: whether the work the person does is an integrated part of the organisation. For example, the hospital authorities cannot tell a resident surgeon how to perform an operation so they do not have control over her or him, but she or he is an employee because they are part of the hospital organisation;
• the economic reality test: to determine whether or not someone was an independent contractor including investment in tools or equipment and skills required; and
• the multiple test: this looks at all the factors and no one particular factor determines whether an individual is an employee.
Courts now tend to take a multiple test approach — they may not consider all of the factors mentioned in earlier tests but are likely instead to consider the elements that are appropriate to the particular circumstances. The element of control was an important factor in a recent decision of the EAT in respect of a temporary worker:
Mr Davidson was assigned to Motorola as a temporary worker through the Melville Craig Group. He had to comply with instructions given by Motorola. He was disciplined by Motorola and his assignment was terminated. He pursued a claim of unfair dismissal, for which he had to show that he was an employee. The EAT said that there was a sufficient degree of control for Davidson to be regarded as an employee of Motorola — it was they who decided what was to be done, the ways and means of doing it and when and where it was to be done.
Motorola Ltd v Davidson and Melville Craig Group Ltd [2001] IRLR 4One principle that has become predominant in deciding whether someone is an employee is that of mutuality of obligation. There will be a mutuality of obligation where the employer is obliged to give work to the employee and the employee is obliged to accept it. Without this, there cannot be a contract of employment:
Mr Gower and others started work for Propertycare under independent sales agency agreements, which amounted to contracts for services. They argued that during the course of their work the relationship changed and they had become employees. Although the tribunal had found that the company was obliged to pay the claimants for work that they carried out, they had not considered whether there was an obligation on them to provide work at all. The EAT held that this was essential for there to be a contract of service.
Propertycare v Gower & others UKEAT/0547/03If the individual is entitled to refuse to work at all, it is unlikely that they will have mutuality, as found by the EAT in the case of Khan v Checkers Cars Ltd EAT/0208/05:
Mr Khan worked for a company that provided a taxi service at Gatwick Airport. He had his own car and paid his own tax and National Insurance, but had to use set routes and charge set fares. He paid the company a commission and could choose whether or not he wanted to work and what hours to work. The EAT held that the obligation on an employee is to provide some minimum work and not necessarily to accept work whenever it is offered. However, Khan could choose whether to work or not and therefore was not under an obligation to provide any work, which meant there was no mutuality of obligation. Khan was therefore not an employee.
Khan v Checkers Cars Ltd EAT/0208/05Without the existence of control on the part of the employer and a mutuality of obligations there will not be a contract of employment. The Court of Appeal has held that these are the minimum legal requirements that have to exist for there to be a contract of employment:
Mrs Montgomery was an agency worker who was assigned to the same client company for two years. She was paid by the agency on timesheets approved by the company. She brought claims against both the client company and the agency — the issue on appeal was whether she was an employee of the agency. The Court of Appeal held that although there was probably sufficient mutuality of obligation, the agency lacked the necessary control over the way she carried out her work and she could not be their employee.
Montgomery v Johnson Underwood Ltd [2001] IRLR 269The court said that in deciding the question of whether a contract of employment exists, tribunals should follow the guidance of the House of Lords in Carmichael v National Power plc [2000] IRLR 43, which gives three conditions that have to be fulfilled:
1. “mutuality of obligations” (wages in return for work);
2. an express or implied agreement that performance of the service would be the subject of the control of the party employing; and
3. that the other provisions of the contract are consistent with it being a contract of service.
Another agency situation was considered by the Court of Appeal in the following case and this time the claimant was found to be an employee of the client company:
Mr Franks was an agency worker who had been providing services for the same employer for six years in a number of different jobs to the extent that he was indistinguishable from employees. The Court of Appeal said that the length of the contract did not necessarily mean that he was an employee, but it was relevant because the longer someone worked in the same place the more opportunity there was to develop the kind of relationship that could determine the test of employment .
Franks v Reuters Ltd [2003] IRLR 423If there is a specific term in the contract that specifies the nature of the employment relationship this will be a strong factor in the decision and could be conclusive.
In Stevedoring and Haulage Services Ltd v Fuller [2001] IRLR 627, the Court of Appeal said that if there is an express term in the contract that specifically excludes mutuality of obligation there cannot be a contract of employment, even if mutuality of obligation could be established in practice. However, another Court of Appeal decision shows that this is not always the case:
Patricia Dacas, a temporary worker with the agency Brook Street, worked as a cleaner for six years at a hostel run by Wandsworth Borough Council. After her assignment ended she brought a claim of unfair dismissal. The contract stated that it “shall not give rise to a contract of employment between Brook Street and the temporary worker, or the temporary worker and the client.” But the Court of Appeal said that contractual labels are not conclusive. They held that Dacas was not an employee of the agency because there was not sufficient control or a mutuality of obligation, but they said it was possible that she was an employee of the council. Unfortunately, Dacas had not appealed on this point so the matter could not be decided.
Dacas v Brook Street Bureau (UK) Ltd [2004] IRLR 358In the subsequent case of James v London Borough of Greenwich [2008] EWCA Civ 35, the Court of Appeal, finding that there were clear contractual terms between the worker and the agency, stated that it will be rare for a contract of employment to be implied between an agency worker and the end user. The Court of Appeal decided that it will only be necessary to imply terms where none exist or where agency arrangements are a sham (which is a hard test to meet).
It may be more straightforward to establish that the written terms are a sham where they have been introduced in an effort to disguise a continuing contractual relationship, or where the parties have attempted (and failed) to change the contractual relationship. This happened to Patrick Muscat, who was dismissed and re-engaged as a contractor in order to reduce staffing levels; the Court of Appeal held that despite the new written terms, Mr Muscat remained an employee (Cable & Wireless v Muscat [2006] EWCA Civ 220 ([2006] IRLR 354)).
The Agency Workers Directive was agreed by the EU Council of Ministers in November 2008. Under the terms of the Directive, which must come into force by 5 December 2011 at the latest, agency workers with 12 weeks’ service will acquire the same basic employment rights as permanent staff.
A tribunal may, having found that someone is not an employee, go on to consider whether they are a worker:
Autoclenz contracted with (supposedly self-employed) individuals to clean cars for British Car Auctions. The individuals were paid on a piecework basis and were responsible for their own tax and National Insurance. The company supplied cleaning materials and group insurance, in respect of which it deducted sums from the weekly pay. The valeters wore overalls, originally with the company’s logo, but latterly with that of BCA. The individuals’ claim that they were employees was rejected by the EAT. Specifically, the EAT found that there was no evidence that the contractual clauses which set out that the individuals could substitute themselves with another and weren’t required to accept offers of work, were a sham. However, the EAT did find that the claimants were workers and they were therefore entitled to the national minimum wage and holiday pay.
Autoclenz v Belcher UKEAT/0160/08/DAWho is classed as a worker?
As with an employee, a worker must be required to carry out the work personally. However, a limited power to provide substitutes to carry out the work does not necessarily take away the obligation to carry out the work personally:
A group of building workers brought claims for holiday pay under the Working Time Regulations. They had signed subcontractors’ agreements which said that they could provide a substitute to do the work, but only if they had approval from the contractor. The EAT held that they were workers.
Byrne Bros (Formwork} Ltd v Baird [2002] IRLR 96Other factors are: whether the right to delegate only applies in circumstances where the contractor is unavailable to work, as opposed to them just preferring not to do the work; whether they were free to choose who to send as a substitute, and whether the right to send a substitute was really intended to be exercised.
Payment of regular wages and deduction of tax and national insurance are not conclusive of someone’s employment status, nor is the way that they define themselves, but they are all factors that will be taken into consideration (see checklist on page 62).
Wright and Roberts were bricklayers working for the Redrow group as subcontractors. They brought claims under the Working Time Regulations, arguing that they were workers. They could decide when to work and how much they were due to be paid. The Court of Appeal held that the fact that Wright and Roberts were paid weekly and were given individual contracts pointed to the conclusion that they were expected to carry out the work personally and that this was the intention of the parties. They were workers and entitled to holiday pay.
Redrow Homes (Yorkshire) v Wright and Redrow Homes (North West) v Roberts [2004] IRLR 720Independent contractors
An independent contractor is someone who is in business on his or her own account. They are employed under a contract for services rather than a contract of service.
An independent contractor is responsible for making his or her own decision about the way they carry out the job and they are economically independent — their contract is an agreement to provide an end product or provide a completed job. They can be described in a number of ways, including “freelance” or “self-employed”.
Someone who is genuinely in business on their own account does not have the statutory rights that apply to employees or workers. In return they are free to get the job done in the way that they wish, including hiring other people to do the work and benefit from a more favourable tax position.
The Privy Council in Lee v Chung and Shun Shing Construction and Engineering Co Ltd [1990] IRLR 236, said that there is no definitive question that will determine who is in business on his or her own account, but consideration would include whether they provide equipment, hire their own helpers and the degree of financial risk and responsibility that they bear.
In London Fitness Consultancy v Hickson EAT/0160/05 a gym worker who asked to be self-employed and paid tax on a self-employed basis was an employee on account of the control exercised by her employer, which included setting her hours and disciplining her.
Also, in Redrow Homes (Yorkshire) v Wright; Redrow Homes (North West) v Roberts [2004] EWCA Civ 469 ([2004] IRLR 720), the Court of Appeal ruled that bricklayers working for the Redrow group were workers, despite the employer’s argument that they did not have to carry out the work personally and therefore were self-employed. They had been issued with standard subcontractors’ contracts that stated that they “must at all times provide sufficient labour”, but the court held that this was not a right to provide a substitute. It pointed out that they were paid weekly and given individual contracts, which suggested that they were expected to carry out the work personally. They were workers and so were entitled to holiday pay .
However, in R J Prentice Brickwork v O’Brien EAT/1086/02, Mr O’Brien was a bricklayer whose contract gave him an absolute right to provide a substitute to do his work. When he was made up to chargehand, he argued that this meant in practice that he could no longer engage a substitute; therefore, he said he was a worker and entitled to holiday pay. But the EAT held this was not the case: it said that the express term in his contract was clear and was not overruled by his becoming a chargehand.
There are now many people working as independent contractors who contract to carry out the work personally. This is common, for example, in the building industry and in the information technology (IT) sector. In some cases these contractors may be “workers” for the purposes of legislation (see cases under “Who is classed as a worker?” above).