Clarification of Employment Status and Contractors
The Court of Appeal has recently handed down a judgment with potentially massive implications for agency workers and those that engage ‘staff’ via agencies. Over the years, the Courts have been inundated with cases concerning the employment status of workers engaged via an agency. Decisions over time have varied considerably with the trend of thought moving from one camp to the other. It is fair to say that the classic tripartite arrangement has baffled the Courts with regards to the correct course of action.
In a landmark case, the Court of appeal has upheld the decision of the Employment Appeal Tribunal (EAT) in Tilson v Alstom. There was concern that the original decision in March 2009 could be used as case law to circumvent the contractual relationship between a freelancer, an agency and the end client by focusing on the practical aspects of the individual’s role rather than the contractual agreements. The EAT decision last November overturned the March verdict and was subsequently appealed.. The Court of Appeal has now decided the matter and it is good news for freelancers although the caveat is that this is an employment decision not a tax case.
This is largely due to the split in ‘obligations’. The agency engages and pays the individual which provides for the offer, acceptance and consideration necessary to come close to forming a contractual relationship. However, the end-user will exercise the control necessary to make the individual an employee but have no contractual relationship with the individual.
Given this, many arguments have been put forward in the past. For example, it has been argued that the agency is the employer and has simply delegated control to the end-user. This argument failed but was hotly followed by the argument that the agency is merely paying on behalf of the end-user and therefore the reality is that the contract is with the end-user. A derivative of this argument and the current issue is whether a contract should be implied between the individual and the end-user effectively removing the agency from the equation.
The ‘implied contract’ argument received a warm welcome in the case of Brook Street Bureau v Dacas in 2004. However, the general feeling was that the contract was too readily implied in this situation and the courts began to row back from this decision culminating in James v London Borough of Greenwich in 2008. Here it was re-stated that a contract should only be implied where it is necessary to give the arrangements business efficacy. Essentially, this meant that if the arrangements concerning the agency adequately dealt with the relationships between the parties then it was not necessary to imply a contract. This was the issue that was again put before the Court of Appeal in Tilson.
What makes the Tilson judgment even more important is that it went beyond the standard tripartite agency structure and was in fact a quadripartite relationship. These are becoming ever more popular. They essentially involve an end-user who engages an agency to find labour. The agency then engages a contractor to provide the services and the contractor engages ‘staff’ to provide those services. Mr Tilson was engaged in this form of structure.
On a day to day basis Mr Tilson provided services to the end-user, Alstom but had no contractual relationship with them. He initially acted as a technical engineer but was moved into a Management role. Mr Tilson was fully integrated into Alstom’s business, working 9-5, Monday-Friday. He answered to a Line Manager had authorisation to recruit, discipline and dismiss Alstom staff and would represent Alstom in negotiating contracts with clients. He was also obliged to request holidays through his Line Manager. At the end of the ‘engagement’ Mr Tilson claimed he had been unlawfully dismissed.
At the first instance Tribunal it was found that the contractual arrangements amounted to nothing more than payroll, that one of the contracts was ‘bogus’ and that it was necessary to imply a contract. The Tribunal found that when implying a contract between Alstom and Mr Tilson it could only be one of employment. Alstom appealed the decision and the Employment Appeal Tribunal (EAT) found in their favour. Mr Tilson appealed this judgment and the matter found itself in the Court of Appeal.
Given the facts, the Court of Appeal had two differing arguments to balance. The first is that clearly on a day to day basis Mr Tilson was acting like an employee and being treated like an employee. Based on what actually happened the only decision is one of employment. However, the second argument is that there are solid contractual relationships, entered into in good faith that adequately explain the scenario and under these contracts Mr Tilson has no contractual relationship with Alstom and therefore cannot be their employee.
The Court of Appeal found that Mr Tilson was not an Employee of Alstom and upheld the judgment of the EAT. The Court made the following important points:
- The onus is firmly on the Claimant to establish that a contract needs to be implied.
- A contract will only be implied where it is necessary to do so in order to give the arrangement business efficacy.
- Public policy is not a sufficient reason to imply a contract. On the face of it, this would be an argument to say that this totally undermines the IR35 Intermediaries Legislation. However, the counter-argument is that IR35 specifically requires the creation of a hypothetical or “implied” contract, but this contract is purely for tax purposes and has no bearing on employment or indeed other matters.
- Courts cannot imply a contract simply because they object to employers using agencies or other structures to avoid direct employment.
- Simply because one clause in a contract proves to be inaccurate it does not necessarily invalidate the whole contract. Tilson v Alstom would therefore be a good case to argue in the event that a contract did contain such a clause.
- The fact that the contract between two parties contained a ‘sham’ term it did not affect Alstom because they were not party to that contract.
- The mere fact that an individual is fully integrated is not sufficient to trump valid contractual relations. In fact where satisfactory contracts exist, integration is of little weight in making a decision. Despite this point, one would still wish to establish the differences between the relationship an engaging organisation has with its employees and its contractors.
- Provided the contracts between all parties fully explain the arrangements then it will not be necessary to imply a contract. Unfortunately, this will have no bearing on the creation of a hypothetical contract for tax purposes.
- Despite Mr Tilson’s full integration and the ‘sham’ term there was no legitimate basis for implying a contract between Mr Tilson and Alstom Transport.
The importance of this decision cannot be underestimated. Firstly, it is the Court of Appeal and therefore binds all EATs and first instance Tribunals. Secondly, it is a re-assertion of basic contractual principles in the employment jurisdiction. This is important because in recent judgments it has been suggested that contractual principles do not necessarily need to be followed as readily in the employment jurisdiction. Thirdly, the judgment is clear that parties are free to regulate their activities as they see fit and provided that the contracts explain these adequately it will not be necessary to imply a contract. Fourthly, the case involves a quadripartite arrangement involving a commercial contractor as well as an employment agency. This is the first time the four party arrangement has been seriously considered by the Court of Appeal and has effectively been ratified.
There is no doubt this case is a landmark judgment and a ratification of the principles of contract law. IPSE members should be aware of this case as it does provide further ammunition in fighting an IR35 case, but its main impact is upon employment law.
Written for IPSE by Mark Taylor at Accountax Consulting
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