For many years some employers have manufactured what should otherwise have been be an employer/employee relationship into that of a self-employed relationship in order to have the flexibility of dismissing the worker in question without the risk of an unfair dismissal claim and to pay less national insurance.  Traditionally this has been done by including a substitution clause with in the consultancy agreement (i.e. a clause that allows the worker in question to send a substitute in his place if he is unable to attend work for any reason).  The inclusion of such a clause was seen as evidence that the worker in question was not required to provide a personal service and therefore was a self-employed contractor as opposed to an employee.  However, the recent case of Autoclenz v Belcher & Others [2010] IRLR 70 means that the inclusion of a substitution clause is now unlikely to be decisive.

Facts: the claimants in these proceedings all worked as car valeters for Autoclenz Ltd.  Every one of the valeters retained by Autoclenz Ltd had signed an agreement that clearly defined their status as self-employed sub-contractors.  Each agreement also contained a clause that gave the valeters the right to send a substitute to carry out his/her duties on his/her behalf.  One of the key attributes of a self-employed sub-contractor is that he/she does not have to carry out the work in question personally, whereas an employee does.

Held: these clauses were inconsistent with the reality of the contractual relationship between Autoclenz Ltd and the valeters, which had all the hallmarks of an employment relationship.  It was held that the terms of the written contract between Autoclenz and the valeters did not in fact reflect the reality of the situation.  For example, although the agreements between Autoclenz and the valeters included the right to send a substitute, Autoclenz could not point to one valeter who had exercised this clause, and many of the valeters didn’t even know that this right existed.  The important factor was not the relationship that Autoclenz Ltd had intended to create (one of independent sub-contractor), but the relationship that it had in fact created (that of employer/employee).

What factors will the Tribunal consider?

The types of factors that are important in deciding whether an individual is employed or self-employed are:

• whether there is a mutuality of obligation i.e. whether the worker in question is required to carry out work given to him and whether the “employer” in question is under an obligation to provide such work.  This is the absolute minimum required to establish the relationship of employer/employee. If there is no mutuality of obligation then there will be no employment relationship;
  
  
• the degree of control exercised over the person doing the work;
  
  
• whether the person doing the work must carry out the work personally;
  
  
• whether the person doing the work is paid;
  
  
• whether the person doing the work provides his/her own equipment;
  
  
• whether the person doing the work takes on any financial risk; and
  
  
• the degree of continuity in the relationship between the person doing the work and the person he/she does it for.

Why is employment status important?

The significance of whether someone is an employee or a self-employed contractor is that employees have a number of statutory employment rights (e.g. the right not to be unfairly dismissed) that do no apply to self-employed contractors.  It is also significant that employers can be held accountable for the actions of their employees (e.g. an employee who is discriminated against at work by a fellow employee can bring a claim for discrimination against his/her employer).

Whether someone is employed or self-employed is also significant for tax purposes.  If a worker is self-employed then his “employer” will not be liable to pay Employer’s National Insurance.  However, this article has focussed on the legal tests applied by courts when deciding whether an individual is an employee not.  It is important to note that the status afforded to an individual by the court will not necessarily be the same as the status afforded to him/her by HMRC.  It is true that the tests are similar, and the decision of one body may influence the other, but it will not be decisive.

Conclusion

In light of the decision in Autoclenz it is now harder for employers to manufacture self-employed status.  When drafting consultancy agreements employers and their advisers should therefore take care in order to avoid inadvertently creating an employment relationship.