United Kingdom Employment Appeal Tribunal

APPEARANCES

 

For the Appellants	MR A HOGARTH (of Counsel) Instructed By: O H Parsons & Partners Sovereign House 212-224 Shaftesbury Avenue London WC2H 8PR
For the Respondent	MR J HAND QC And MR N SIDDALL (of Counsel) Instructed By: Legal Department P E Jones (Contractors Ltd) Emerson House Heyes Lane Alderley Edge Cheshire SK9 7LF


 


MR RECORDER LANGSTAFF QC:

1. This appeal from a decision of the Employment Tribunal sitting at Liverpool, raises an issue under the Working Time Regulations 1998, which itself reflects the wider and more important question as to how a "worker" is to be identified.
2. The Extended Reasons of the Tribunal, promulgated on 7 June 2000, show the issue as arising in this way. Mr Barlow and Mr Nelson were bricklayers. For a period of 14 weeks they worked on a building site being developed by the Respondent company. Neither received any holiday pay during that period. Each claimed a right, pursuant to Regulation 13 of the Working Time Regulations 1998 to do so. Regulation 13 provides:

"(1) … A worker is entitled in each leave year to a period of leave determined in accordance with paragraph (2).

(2) The period of leave to which a worker is entitled under paragraph (1) is -

…

(c) … (in the circumstances of this case) four weeks."

Regulation 13(7) provides that the entitlement conferred by paragraph (1) does not arise until a worker has been continuously employed for 13 weeks.

3. The right is thus dependent upon an individual being a "worker". Regulation 2 of the 1998 Regulations defines "worker" as:-

" … 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 express or implied and (if it is express) 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."

The Tribunal, in its decision, found it proved that the contractual documentation governing the relationship between Mr Barlow and Mr Nelson respectively, and the Respondent contained certain specific provisions. The provisions it noted from amongst those contained in the documentation were that the bricklayers would not be entitled to holiday pay or to sick pay; that they were entitled to send a substitute or delegate at their absolute discretion to undertake the services to be provided; that they were entitled to hire assistance at their own expense; that the Respondent would not control, nor have any right to control in any detailed manner, how the bricklayers were to fulfil their services, and the bricklayers were to use their own initiative to complete the services to be rendered; that there would be no set hours, and that the bricklayers could choose how and when to complete the services to be rendered so long as performance was satisfactory (it was to be reviewed periodically); that the bricklayers would be able to benefit from their own efforts and sound management and might freely undertake work for other third parties; that the relationship (described as a "business relationship") was acknowledged to be one of self-employment and not one of master and servant and it was specifically acknowledged that the contract for services did not give rise to a contract of employment. It was provided that both parties considered the bricklayers to be in business on their own account; that the bricklayers were to be responsible for their own tax and National Insurance liabilities and would apply for a self-employed Schedule D reference number; that the bricklayers would be responsible for providing their own equipment; and that the bricklayers would be responsible for implementing public liability insurance as required and for making their own pension provision.

4. The Employment Tribunal commented (at paragraph 7(4) of its decision) that those terms "broadly represent the manner in which the work in question was, in fact, carried out". We shall need to return to that phrase and the scope for uncertainty to which it gives rise. On that basis, the Employment Tribunal identified the central issue as being whether the bricklayers fell within the definition of "workers" which we have set out above. They answered that question in these terms:

"That definition is identical to the definition of a worker contained in Section 230(3) of the Employment Rights Act 1996. It includes, but is not restricted to, individuals employed under a contract of employment. Potentially, it also covers a wide range of individuals who provide personal services under a contract, including many casual, freelance and self-employed workers. What it does not do, however, is to extend to self-employed people who are genuinely pursuing a business activity on their own account. That is something which has already caused some difficulties. Even the guidance afforded by the Department of Trade and Industry is not free from difficulty. Faced with these problems the correct approach to adopt would appear to be that which is now generally accepted in relation to determination of the question of who is an employee. Namely, that no one factor should predominate, but that one has to take an overall view of the situation, balancing all the known factors, one against the other. Taking all the known circumstances, in this particular case, the Tribunal concludes that the decision must go against the applicants and that they can properly be regarded as self-employed in the true sense. Mr Scragg, for the applicants, has described the arrangements referred to above as a 'sham' and, indeed, many might have difficulty with the fact that employers are spending much time and expense in devising ways of ensuring that they are not, as they see it, trammelled by the responsibilities which flow from 'employee' or 'worker' status being accorded to anyone. Nevertheless, in this case, the Tribunal finds that the balance is against the applicants. That they are not 'workers' within the meaning of the Working Time Regulations and that accordingly their claim fails and is dismissed."

5. We should add that a corrected decision was subsequently received which rightfully noted that the Chairman had the assistance of lay members, but which also, and confusingly, omitted or altered the original text in a number of respects. We were satisfied however, that although it rendered some of the sentence construction bizarre the sense of the decision did not appear materially to be affected.

Submissions

6. At the hearing, there was much greater agreement between Counsel than might have been anticipated from a reading of their skeleton arguments. In particular, both Counsel accepted and adopted the approach of the Employment Appeal Tribunal (Mr Recorder Underhill QC presiding) towards the identification of a "worker" in Byrne Brothers (Formwork) Ltd v Baird & Others (EAT/542/01, 18 September 2001). Both were at one in agreeing that the analysis of this question attempted by the Employment Tribunal was neither cogent nor coherent, and that there was real difficulty in the way in which the conclusion was expressed. They differed, however, as to whether or not on the material before the Employment Tribunal the contractual documentation could be said to represent a "sham", and they differed as to whether or not the reasoning of the Employment Tribunal might, despite its deficiencies, nonetheless be supportable.
7. For the Appellants, Mr Hogarth argued that the final paragraph of the decision did not make it clear which part of the definition in Regulation 2(1) of the 1998 Regulations the Tribunal were addressing, what problem that definition gave rise to on the facts which the Tribunal attempted to resolve, what facts the Tribunal took into account in resolving that issue, what it considered the strength of the relevant facts to be, and indeed gave no explanation worthy of the name as to why it came to the conclusion it did.
8. The Appellants were entitled to know why they had lost, the Respondents were entitled to know why they had won. Neither could tell. If the decision as to whether an individual was a worker or not was a question of balance, as the case of Byrne Brothers v Baird might suggest, the Tribunal had nowhere set out the evidence favouring the application of such a description to the bricklayer Appellants, nor weighed it against evidence to the contrary.
9. Secondly, he submitted that the contractual documentation was plainly a device designed to avoid the application of the Regulations. Each of the provisions might be traced to the wording of a similar provision considered by the Courts in a decided case, in which that wording had resulted in employment status being denied the would-be employee. Thus the provision in paragraph 4 of the contract for services, conferring entitlement upon the bricklayer to send a substitute or delegate at his absolute discretion to undertake the services to be provided was, he maintained, a reflection of Express and Echo v Tanton [1999] IRLR 367; the provisions of Clause 6 (no control or right to control in any detailed manner how the bricklayer was to fulfil his bricklaying services, and that the bricklayer would use his own initiative to complete the services to be rendered) coupled with Clause 7 (no set hours) was to avoid the effects of those cases which had identified control as the decisive factor in determining employment; and Clause 13 ("K. Barlow is not under an ongoing obligation to provide bricklaying services and P.E. Jones (Contractors) Ltd are not under an ongoing obligation to contract for such services") was a reflection of the denial of mutuality of obligation which was so decisive in a case such as Carmichael v National Power [1999] ICR 1226 H.L. He argued that Regulation 35 of the Working Time Regulations applied to defeat such contractual documentation having the effect of excluding what would otherwise be a right to holiday pay.
10. Regulation 35 of the Working Time Regulations 1998 provides, so far as material:-

(1) Any provision in an agreement (whether a contract of employment or not) is void in so far as it purports -

(a) to exclude or limit the operation of any provision of these regulations, save in so far as these regulations provide for an agreement to have that effect … ."

11. Mr Hogarth argued that "purports" in this context meant "has the intent and effect of". These provisions had the effect, and were intended to exclude the valuable right to holiday pay, and were therefore void. He distinguished a contract which had the effect of excluding the Regulations (that would be one which fell, naturally, outside the Regulations, and would not be rendered void by Regulation 35) from one which was intended and designed to avoid the Regulations, in which case Regulation 35 would strike it down.
12. For the Respondent company, Mr Hand QC reminded us of the words of Diplock LJ in Snook v London and West Riding Investments Ltd [1967] 2 QB 786, at 802 C to F:

"As regards the contention of the plaintiff that the transactions between himself, Auto Finance and the defendants were a 'sham', it is, I think, necessary to consider what, if any, legal concept is involved in the use of this popular and pejorative word. I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the 'sham' which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. The one thing, I think, is clear in legal principle, morality and the authorities (see Yorkshire Railway Wagon Co v Maclure and Stoneleigh Finance Ltd v Phillips), that for acts or documents to be a 'sham', with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating. No unexpressed intentions of a 'shammer' affect the rights of a party whom he deceived."

He pointed out to us that there would have to be evidence that a contract had been designed to avoid the Regulations if Regulation 35 were to apply. This would involve evidence of previous contracts, and substantial evidence as to the practice of engaging bricklayers both by these employers and generally. There might be a difference between a sham (a document designed to deceive others, agreed by both parties) on the one hand, and the question whether the contract appearing on the face of the documents was, or was not genuinely the contract which applied between the parties. In such a case Secretary of State for Trade and Industry v Bottrill [1999] IRLR 326, the Court of Appeal considered the approach to be adopted where the genuineness of an apparent contractual relationship was questioned. In paragraph 28 of the Judgment of the Court, delivered by Lord Woolf MR, it was said that in cases in which the issue was whether or not a shareholder was also an employee of the company: -

"The first question which the tribunal is likely to wish to consider is whether there is or has been a genuine contract between the company and the shareholder. In this context, how and for what reasons the contract came into existence (for example, whether the contract was made at a time when insolvency loomed) and what each party actually did pursuant to the contract are likely to be relevant considerations.

If the tribunal concludes that the contract is not a sham, it is likely to wish to consider next whether the contract, which may well have been labelled a contract of employment, actually gave rise to an employer/employee relationship … ."

Mr Hand observed that it was difficult to know which, if either, of those approaches Mr Scragg in his submissions had intended to encapsulate by the word "sham", but in either event the finding at paragraph 7(4) to the effect that the terms of the contract broadly represented the manner in which the work in question was in fact carried out precluded the arrangement being other than genuine. Nor, he submitted, could it be argued that a contract shown as being one intended to circumvent the Working Time Regulations would necessarily fall foul of Regulation 35. What was rendered void was the purported exclusion of rights under the Working Time Regulations. The provision itself had to be one which apparently excluded the rights under the Working Time Regulations, rather than simply being a contract drafted in such a way that the Regulations never applied. If, therefore, a contract was to the effect that there was no obligation personally to perform services, it would be outside the terms of the 1998 Regulations.

13. Turning to the decision, he accepted that the Employment Tribunal should clearly have asked whether each of the Appellants undertook to perform the work personally. Given the finding in paragraph 7(4), however, and what he described as the clear terms of the contract, this could not be said to be a contract in which there was such an undertaking. The ratio of Express and Echo v Tanton [1999] IRLR 367, and McFarlane v Glasgow City Council [2001] IRLR 8 excluded the Appellants here from being workers. In the first of those cases, a clause which entitled Mr Tanton not to perform any services personally was held to be a "provision wholly inconsistent with the contract of service which the Chairman found the contract to be". In the latter case, this Tribunal presided over by the President, Lindsay J., considered that a provision allowing for a limited ability to delegate did not inescapably lead to the conclusion that the contract was one for services and not a contract of service. Mr Hand pointed out that the contractual provision in the present case was, if anything, even more extreme than that considered by the Court of Appeal in Tanton.

The law

14. The question whether or not an individual doing work for another is a "worker" within the meaning of the Working Time Regulations can only be answered by reference to the statutory definition. That definition is satisfied if the individual is an employee. If not an employee, it may be satisfied under (b). That contains three requirements. First, the work must be done under contract. Secondly, the individual must by that contract "undertake to do or perform personally any work or services". Thirdly, under the contract, he must do so 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".
15. As to "contract", the decision of the Employment Tribunal makes no analysis of the effect of the contractual documentation it identified. Had it done so, it would have had to have grappled with the effect of Clause 13 (which denied any ongoing obligation to provide services on behalf of the bricklayers, and denied any co-relative obligation on behalf of the Respondents to contract for such services), and to consider the effect of that Clause set against the apparently inconsistent provision at Clause 2, that the bricklayer was indeed under an obligation to provide bricklaying services. If that was intended to be an obligation, Clause 13 would, by denying any obligation, on the face of it potentially be inconsistent. Mr Hand, for the Respondents, argued that the effect of the documentation was to create an umbrella contract, as Clause 8 showed. That envisaged individual hirings within the umbrella scope of the documentation. If this submission is correct (we do not need to determine it) then it begs the question as to the terms which apply to each contract for services undertaken in respect of each form SC60 or 715 voucher as referred to in Clause 8: though Mr Hand would argue that each such contract would import terms from the umbrella arrangement. In the alternative, he submitted that it might be argued that there was no contract at all, and work would be remunerated on a quantum meruit basis.
16. As to the requirement to provide work "personally" this Tribunal in Baird & Others v Byrne Brothers concluded that the approach to be adopted in considering the requirement of personal service explicitly required under limb (b) of the definition in Regulation 2 should be consistent with the approach which would be adopted implicitly in determining whether there was a contract of employment under limb (a). We agree and endorse that approach. We agree also with the conclusion which the Tribunal reached that a limited power to appoint substitutes is not inconsistent with an obligation of personal service, and that there is a line to be drawn between the ratio of Express and Echo v Tanton on the one hand and McFarlane v Glasgow City Council on the other.
17. The third question is whether or not the proviso to limb (b) (that part which begins with the words "whose status is not …") is such that the contract, albeit one to provide work personally for another, is not one to which the Regulations apply. The definition is, interestingly, more expansive than that found in the Trade Union and Labour Relations (Consolidation) Act 1992, Section 296 (where the "other party" to the contract is not to be "a professional client"). Consideration of this earlier section of statute makes the language of (b) easier to understand as envisaging a professional client on the one hand, or a "customer" of a "business undertaking" on the other. The scope to be given to the phrase "business undertaking" is critical. If it is synonymous with "business" it would exclude the self-employed worker from the definition "worker" within the meaning of the Regulations. Yet limb (b) is plainly intended to give the word "worker" a wider scope than "employee". Adopting a wide scope to what is contemplated by "business undertaking" would limit the expansion beyond the case of an employee to those cases where work is done not under a contract of employment, but under, for instance, a contract of carriage as in Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497, or a contract of license (such as that of the caddie on the Hong Kong Golf Course (Cheng Yuen v Royal Hong Kong Golf Club [1998] ICR 131). If the word "undertaking" suggests a narrower scope, then the self-employed person in business on his own account as a sole principal would be covered by the protection of the section, and only those offering services as part of a more structured economic entity would be excluded from it. This approach is consistent with that spelled out in greater detail in Baird & Others v Byrne Brothers. We gratefully adopt the reasoning set out at paragraphs 17 and 18 of that judgment. We are fortified in doing so by noting that neither Counsel, each of whom is experienced in the field, seeks to suggest that the approach is incorrect.
18. In the last full paragraph of its decision, the Employment Tribunal attempted to apply the definition in Regulation 2 of the Working Time Regulations to the facts of the case before us. It did not focus upon whether there was a contract under which work was performed. Rather, it assumed it. By doing so, the Tribunal deprived itself of any ability to assess the relevant facts in the light of the view of the contractual arrangements (or lack of them) that seemed most appropriate, given the different questions that various analyses of the contractual terms might give rise to. A lack of mutuality of obligation might, for instance, deprive an umbrella contract of any effect – but it might have no applicability to work done in one consistent period for 14 weeks under not only the umbrella of that contract, but under the terms, whatever they might be, of the individual hiring for that period.
19. The Employment Tribunal nowhere focussed upon the central test – whether the individual undertook to perform work personally. Instead, it applied the approach used to determine whether or not an individual was an employee. Whereas that might have assisted the Tribunal to answer the question posed by limb (a) of the definition, it could not address that proposed by limb (b). If determining whether or not someone was an employee determined also the issue arising under limb (b), then limb (b) would add nothing to limb (a). It may be that the Tribunal intended to express the view that it was assessing the question whether the Respondents were properly to be regarded as the customers of a business undertaking conducted by the bricklayers. Unfortunately, the Tribunal did not say that that was what it was doing, nor can it be implied. There is a potential inconsistency between the third and fourth sentences of the paragraph we have quoted at paragraph 4 of this judgment: having recognised that the definition of worker is potentially wide enough to cover many casual, free-lance and self-employed workers, it immediately says that the definition does not "… extend to self-employed people who are genuinely pursuing a business activity on their own account". Since the question "is he in business on his own account?" has been regarded as determinative of whether someone is self-employed, rather than employed (by the Privy Council in Lee Ting Sang v Chung Chi-Keung [1990] ICR 409) the latter sentence might be thought to exclude anyone who was self-employed (whether casual, free-lance or otherwise).
20. In short, the question which the Employment Tribunal sought to address is nowhere clearly identified. The decision does not demonstrate the nature of the approach it took to determining whether limb (b) was satisfied or not. Moreover, to refer to an approach which required the balancing of some factors against others requires identification of the purpose for which the balance is being conducted. None is clearly identified. Next, it is unsatisfactory and insufficient for a Tribunal to indicate that a balancing exercise is being conducted, and to report the conclusion of the balance using the words: "taking all the known circumstances" (presumably into account) without identifying what particular circumstances are indeed taken into account. It is necessary for a decision to be written with sufficient detail so that if it contains an error of law it may be corrected by a Superior Court, and so that both parties are clear why they have won or lost. They could not know from the approach of this Tribunal.
21. Next, the Tribunal concluded that the bricklayers could "properly be regarded as self-employed in the true sense". This is presumably a reflection of the Tribunal's view that the definition does not "extend to self-employed people who are genuinely pursuing a business activity on their own account". Without identifying what the scope of the "true sense" or of "genuineness" is, it is impossible to understand what is being decided. There is no such guidance in the decision. Moreover, the words "business activity" appear to be adopted, whereas the statutory definition, perhaps importantly, uses the words "business undertaking". An "undertaking" may suggest an element of structure, organisation, identity and purpose which is missing from a mere activity (an analogy would be the distinction drawn between a mere business activity, and a business undertaking in the European Court of decisions in respect of EC Directive 77/187 (the Acquired Rights Directive), which has given rise to the application of that same distinction in domestic case law in respect of the Transfer of Undertakings (Protection of Employment) Regulations 1981).
22. The problems caused by this approach cannot simply be resolved by an appeal to paragraph 7(4), as Mr Hand makes. That is because to state that the terms identified in paragraph 7, which derive from the contract and which we have quoted above at paragraph 4, "broadly" represent the manner in which the work in question was carried out is to indicate that there may be aspects in which those terms were not honoured, or respects in which the terms were more obviously given effect to. Without knowing, it is impossible to see what weight the Tribunal may have given to which factor, if any. An example might be the finding of fact that for a period of 14 weeks the bricklayers worked for the Respondents. It is implicit in that that they actually did so personally. How that represents the operation of a term that the Applicants would be entitled to send a substitute or delegate to undertake the services to be provided is unclear.
23. Secondly, there appears to have been an unresolved argument addressed to the Tribunal by Mr Scragg who appeared on behalf of the Applicants, the Appellants below. The Employment Tribunal note his argument that the arrangements were a "sham". In the words that follow, it might be thought that the Tribunal was crediting that view of the arrangements to some extent. But they neither accepted, nor rejected, the argument in terms.
24. If the Employment Tribunal had accepted the argument they would then have been faced with a situation in which the real contract, as operated between the parties, was different from that which the contractual documentation suggested. In such a case, it would have been open to them to conclude that the bricklayers were indeed workers.

Conclusions

25. We are entitled to interfere with the decision of a Tribunal only if an error of law is demonstrated to us. There is such an error of law here. The Employment Tribunal has failed to address clearly the appropriate issues. It has failed adequately to express the reasons why it came to the conclusion it did. Further, it has failed to explain, clearly and definitively what it made of the argument addressed to it which might well have been to the effect that the contractual arrangements indicated by documentation were in material respects not those operated by the parties. We have nonetheless to determine whether the answer given by the Employment Tribunal is nonetheless clearly and obviously right, such that it may be upheld even if not for the reasons given by it. Sadly, we do not think that we can do so without further factual inquiry which we are not in a position to make, and which has not been resolved for us by the Tribunal in the course of its reasoning.
26. The consequence is that it will be necessary for there to be a further hearing at which the issues posed by the contractual arrangements on paper and the contractual arrangements in practice can be fully and carefully explored and the definition in Regulation 2 of the Working Time Regulations 1998 addressed. We consider that the matter should be re-heard by a fresh Tribunal. To that extent, this appeal will be allowed.