United Kingdom Employment Appeal Tribunal

APPEARANCES

 

For the Appellant

MISS MELANIE TETHER Instructed by: Messrs Thompsons Solicitors St Nicholas Building St Nicholas Street Newcastle upon Tyne NE1 1TH

For the Respondent

MR PAUL WILSON Instructed by: Andrew Holland Law Suite 2 The Bakery Steeton Keighley BD20 6RB

SUMMARY

Unlawful Deduction from Wages

Tribunal correct in defining business undertaking in line with the test set out in Byrne Brothers.

Tribunal in error in not considering the precise effect of the agency agreement and its subsequent variation in considering the dependence and control between the parties.


 


HIS HONOUR JUDGE ANSELL

1. This is an appeal from a judgment of an Employment Tribunal held at Leeds on 1 December 2004, who in written reasons promulgated to the parties on 30 December 2004, unanimously decided that the Appellant was not a worker within the definition set out in s.230(3) of the Employment Rights Act 1996, and accordingly the Tribunal did not have jurisdiction to hear his complaint in relation to unlawful deduction from his wages under s.13 of the ERA 1996. The issue in the case is whether the Appellant who acted as a self-employed commercial agent on behalf of the Respondent and a number of other companies was a worker within the definition set out in s.230.
2. The background facts are that the Appellant was originally employed by the Respondent from February 1988 and in the summer of 1997 he decided to leave that employment and become a commercial agent for the Respondent and other principals. This was designed to help him increase his income and to allow him to sell other products on behalf of other principals to his existing customers without compromising his position with the Respondent. The Appellant entered into a sales agency agreement with the Respondent on 1 August 1997. Although the Tribunal in their decision made reference to this document and to their understanding of some of its terms and conditions it made no precise reference to any particular clauses.
3. The Appellant received commissions based upon sales achieved by him in his designated area of Scotland and Northern Ireland and such commission was paid without deduction of income tax or national insurance contributions. He was allowed to undertake work as a commercial agent for other principals in non-competing products. His accounts were prepared by his own accountant and those accounts included income from all the principals for whom he worked as agents and as normal he was able to deduct business costs and expenses. He converted his garage at home as a storage facility for the various samples and was responsible for the cost of insuring those samples at home. The Tribunal found that though he was expected to attend sales meetings and regional sales conferences there were no contractual obligations for him to do so. However, the agent's duties in the agreement did include a provision that he should "at his own expense attend meetings of representatives of the principal and such customers or prospective customers in the territory as may be necessary for the performance of his duties under this agreement". He would receive leads from the Respondent but the Tribunal found that it was a matter for the Appellant to decide which customers he called upon and when they were visited.
4. In September 1999 the Appellant agreed to stop working for one of his other principals – Claremont – which meant that he would suffer a loss of commission. The Respondent agreed to pay him a retainer of £8,500 per annum for an initial period of 6 months to be reviewed thereafter. The retainer was meant as a cushion until such time as his commissions increased through selling the Respondent's products. The Respondent wrote to the Appellant on 29 September 1999 to confirm the revised arrangements. Although the letter was in the documents before the Tribunal they made no precise reference to it. It is clear from that letter that there was a possibility that the Appellant would re-join the Respondent as an employee. The penultimate paragraph of that letter contained the following "You have agreed not to take on any more agencies nor expand your existing ones." In fact the Respondent continued to pay the retainer until 2004 when on 19 May they wrote to him telling him that the retainer was being terminated with effect from 1 June. This led to the complaint being lodged alleging unlawful deduction from his wages.
5. The Tribunal then posed itself five questions which it answered.

(1) They found that there was little if any control exercised by the Respondent over the Appellant in terms of when and where his work was carried out and how it was performed.

(2) They found that there was no obligation on the Respondent to provide any work nor any corresponding obligation on the Appellant to accept and perform it.

(3) They found that there was no obligation for the work to be carried out personally although he would always do it personally. Before us both Counsel agree that upon close scrutiny of the agency agreement it is clear that the agreement was personal to the agent – see clauses 12.3 and 12.4.

(4) The Tribunal found that the Respondent like the Appellant's other principals was more of a client or customer than employer

(5) The Tribunal found that the Appellant carried any financial risk in respect of the agency in that his level of commission was entirely dependent upon his own efforts.

6. The Tribunal's final conclusions are set out in paragraph 8 as follows:-

"8 From the findings of fact set out above the Tribunal was satisfied that the Claimant did not fall within the definition of a "worker". To a great extent the Claimant was left to his own devices in terms of how, when and where he performed his Agency duties in accordance with the Agency Agreement. His work was not supervised or measured in any way by the Respondent other than for the purposes of calculating his commission. The manner in which the Claimant prepared his accounts was no different from that of any other person in business on his own account. His financial risk in the Agency arrangement was such that if he did not achieve any sales then he would not receive any remuneration from the Respondent. He did not expect, nor did he ever ask for holiday pay, believing that he was not entitled to holiday pay because he was a "Commercial Agent." No Income Tax or National Insurance was deducted from his commission payment."

7. On behalf of the Appellant Miss Tether took us firstly to s.230 of the ERA. Section 230(3) provides that:-

"230(3) In this Act "worker" (except in the phrases "shop worker" and "betting worker") means 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."

8. Miss Tether submitted, and it was not disputed by Mr Wilson on behalf of the Respondents, that where a person alleges that he works under a contract within the meaning of subparagraph (b) the Tribunal is required to answer two questions, namely (1) does the individual work under a contract whereby he undertakes to do or perform personally any work or services for the other party to the contract (the personal service point); (2) if so, is the Respondent's status by virtue of that contract that of a client or customer of a profession or business undertaking carried on by the Appellant (business undertaking point). As we have indicated above both parties agree that the Tribunal were in error in dealing with the personal service point by reason of their failure to give proper consideration to the terms of the agency agreement between the parties that we have set out above.
9. However, the core of this appeal is Miss Tether's submissions relating to the Tribunal's failure to deal properly with the issue of whether or not the Appellant acted in the capacity of a business undertaking of which the Respondent was the customer. She took us to Byrne Brothers (Formwork) Ltd v Baird [2002] IRLR 96 where at paragraph 17 of the EAT decision Mr Recorder Underhill QC sought to give guidance on the issue of the business undertaking point in the following terms:

"17 We were referred to no authority giving guidance on that question; and we accordingly spell out our approach to it in a little detail, as follows:

(1) We focus on the terms '[carrying on a] business undertaking' and 'customer' rather than '[carrying on a] profession' or 'client'. Plainly the applicants do not carry on a 'profession' in the ordinary sense of the word; nor are Byrne Brothers their 'clients'.

(2) '[Carrying on a] business undertaking' is plainly capable of having a very wide meaning. In one sense every 'self-employed' person carries on a business. But the term cannot be intended to have so wide a meaning here, because if it did the exception would wholly swallow up the substantive provision and limb (b) would be no wider than limb (a). The intention behind the regulation is plainly to create an intermediate class of protected worker, who is on the one hand not an employee but on the other hand cannot in some narrower sense be regarded as carrying on a business. (Possibly this explains the use of the rather odd formulation 'business undertaking' rather than 'business' tout court; but if so, the hint from the draftsman is distinctly subtle.) It is sometimes said that the effect of the exception is that the Regulations do not extend to 'the genuinely self-employed'; but that is not a particularly helpful formulation since it is unclear how 'genuine' self-employment is to be defined.

(3) The remaining wording of limb (b) gives no real help on what are the criteria for carrying on a business undertaking in the sense intended by the Regulations - given that they cannot be the same as the criteria for distinguishing employment from self-employment. Possibly the term 'customer' gives some slight indication of an arm's length commercial relationship - see below - but it is not clear whether it was deliberately chosen as a key word in the definition or simply as a neutral term to denote the other party to a contract with a business undertaking.

(4) It seems to us that the best guidance is to be found by considering the policy behind the inclusion of limb (b). That can only have been to extend the benefits of protection to workers who are in the same need of that type of protection as employees stricto sensu - workers, that is, who are viewed as liable, whatever their formal employment status, to be required to work excessive hours (or, in the cases of Part II of the Employment Rights Act 1996 or the National Minimum Wage Act 1998, to suffer unlawful deductions from their earnings or to be paid too little). The reason why employees are thought to need such protection is that they are in a subordinate and dependent position vis-à-vis their employers: the purpose of the Regulations is to extend protection to workers who are, substantively and economically, in the same position. Thus the essence of the intended distinction must be between, on the one hand, workers whose degree of dependence is essentially the same as that of employees and, on the other, contractors who have a sufficiently arm's-length and independent position to be treated as being able to look after themselves in the relevant respects.

(5) Drawing that distinction in any particular case will involve all or most of the same considerations as arise in drawing the distinction between a contract of service and a contract for services - but with the boundary pushed further in the putative worker's favour. It may, for example, be relevant to assess the degree of control exercised by the putative employer, the exclusivity of the engagement and its typical duration, the method of payment, what equipment the putative worker supplies, the level of risk undertaken etc. The basic effect of limb (b) is, so to speak, to lower the pass-mark, so that cases which failed to reach the mark necessary to qualify for protection as employees might nevertheless do so as workers.

(6) What we are concerned with is the rights and obligations of the parties under the contract -not, as such, with what happened in practice. But what happened in practice may shed light on the contractual position: see Carmichael (above), esp. per Lord Hoffmann at pp.1234-1235. 

(7) We should add for completeness that, although the Regulations are of course based on the Working Time Directive, we were referred to no provision of the Directive nor any case law of the ECJ. which sheds any light on the present issue. The Directive does not contain any definition of the term 'worker'."

10. Miss Tether was critical of this approach particularly as set out in subparagraph 5. Although earlier in the decision at subparagraph 3 the Recorder had suggested that the criteria for carrying on a business undertaking cannot be the same as the criteria for distinguishing employment from self-employment, he appeared to use those self-same criteria in sub-paragraph 5, albeit with the "boundary pushed further in the putative worker's favour" for determining whether a person operated as a worker or as a business undertaking. Miss Tether further argued that the Recorder then goes on to suggest that limb (b) can be defined by lowering the pass mark in respect of the criteria used to determine employment or self-employment without suggesting the threshold that has to be crossed. She submitted that the focus should more properly be on whether or not the alleged worker was operating a business undertaking with customers and, in particular it was necessary to look at the degree of economic dependence between the parties. She submitted that the Byrne Brothers test caused the Tribunal in this case to fall into error in defining their task where in paragraph 7 they set it out as determining "whether the Claimant was carrying on business on his own account or could properly be described as a worker within the definition as set out in section 230."
11. In support of her argument she referred us to a recent article in the Industrial Law Journal Volume 34 No.1 March 2005 by Guy Davidov entitled "Who is a worker?" She referred us to three passages in that article, firstly at page 57 under the heading 'Introduction' the following:

"Briefly put, it is argued that a distinction should be maintained between two related, but separate, characteristics of employment relationships: dependency and democratic deficits (often referred to, in this context, as subordination). While 'employees' should be identified by the accumulation of both characteristics, the group of 'workers' should consist of people who are dependent (mostly economically) on the relationship with a particular employer, even when no democratic deficits exist. Otherwise put, it is argued that 'workers' should not be identified as being 'semi-dependent', as has been suggested. Rather, this intermediate category should catch work relationships that are characterised by significant dependency on a single employer, even when no subordination exists."

Later under the heading 'Making sense of the 'worker' category' the author continued as follows:

"5.

This distinction fits perfectly with the definition of 'worker' under UK legislation. As mentioned above, the three pillars of the definition are the contractual relationship, the personal nature of the engagement and the lack of an independent business undertaking. The last requirement can and should be understood as dependency on a particular client-employer. It is not the formalities of having a 'business' for tax or other purposes that matter, but the extent to which this 'business' is truly independent. If you only work vis-à-vis one specific client and depend on it, there is no reason why this client-employer should not be obliged to pay minimum wage or observe working time regulations. And the 'worker' definition appears to recognise that. Hence, the main question when examining whether one is a 'worker' or not should be to what degree is this person independent - not in the sense of controlling her own time and making her own decisions (which is relevant for inclusion within the group of the better-protected 'employees') - but in the sense of being able to spread her risks among a number of different relationships.16 Dependency on a specific relationship - especially economic dependency, but also dependency for the fulfilment of social and psychological needs-justifies various kinds of regulatory protections. Suffering in addition from democratic deficits (subordination) justifies the application of a broader range of regulatory protections. This, in my view, is the most useful way to differentiate between 'workers' and 'employees'."

And finally under paragraph 7 'Identifying Dependency'

"…It has already been mentioned that the number of employers/clients-or, otherwise put, the exclusivity of the engagement-is determinative. For this purpose, it is also useful to examine the proportion of income derived from a specific employer. Obviously opinions on where to put the line will vary. In Canada, most labour boards require that at least 80% of the worker's income will be derived from the putative employer to be considered a 'dependent contractor'.28 In Germany, on the other hand, 51% are sufficient.29 The important point is that the more you rely on a single employer for your livelihood - the more the relationship is characterised by dependency, and this vulnerability, in turn, justifies some protection. The crucial aspect appears to be the ability of the worker to spread risks."

12. Mr Wilson submitted that the Tribunal in this case should not be criticised for following the guidance in Byrne a case which has often been cited both in the EAT and before tribunals, apparently without any disapproval. He submitted that the Tribunal set out their general approach in paragraph 9, adopting the general guidance given in Byrne namely the task was to determine whether the Appellant was or was not in a "subordinate and dependent position vis-à-vis the Respondent" or in a "sufficiently arms length and independent position, and able to look after himself in the relevant aspects". Moreover he submitted that having set out s.230 and the relevant authorities the tribunal made a specific finding in paragraph 6.(4) that "the Respondent, like the Claimant's other principals, was more of a client or customer than an employer". He contended that whilst economic dependence might be one factor it was important to consider the overall control involved in the relationship to determine the degree of subordination or dependence between the parties. He also reminded us that in paragraph 7 the Tribunal were making it clear that they were not undertaking a mechanical exercise of running through a check list but specifically considered "all aspects of relationship between the Claimant and the Respondent" with no single factor being in itself decisive.
13. We agree with Mr Wilson's submissions. The essential test for the Tribunal must be to determine the level of control and dependence including economic dependence between the parties to be judged by numerous factors including those set out by Mr Recorder Underhill in paragraph 17(5) of Byrne. In this case an additional important factor was the fact that the Appellant acted for more than one principal although even in that case it would be necessary to examine the relationship between the agent and each principal particularly as in this case if there were a predominant principal.
14. Miss Tether then went on to make particular criticism of the Tribunal's approach in relation to their fact finding which she contended led to the Tribunal coming to a perverse conclusion in relation to the business undertaking test. Her particular criticism was in relation to the Tribunal's failure to consider carefully the precise terms of the agency agreement, thereby failing to follow the guidance set out in the Byrne case where Mr Recorder Underhill made it clear that the important considerations were the rights and obligations of the parties under the contract. We have already pointed out two errors in the Tribunal's approach in relation to the Tribunal's conclusion, that the work did not have to be carried out by the Appellant personally and that he was not expected to attend sales meetings and regional sales conferences. In addition, she points to the further contractual obligations on the Appellant as further examples of the control and dependency between the parties. For example, the Appellant was required to maintain a record of customers and potential customers for the Respondent's products; to notify the Respondent of any other agency position held by him; and not to act for any competing principal in the agreed territory; and the obligation to agree target volumes at the beginning of each year in relation to the products to be sold. In addition, there was an obligation for the Appellant to be responsible for obtaining all licences, permits, and approvals which were necessary to assist in the sale of the products. Crucially, she contended that the Tribunal failed to consider properly the effect of the arrangements in September 1999, namely the continuing payment of a retainer, and more importantly the obligation imposed by the Respondent on the Appellant not to take on any more agencies, nor expand his existing ones.
15. Moreover, in relation to the Tribunal's finding that there was no obligation on the Respondent to provide work, and no corresponding obligation on the Appellant to accept and perform work, she contended that the Tribunal failed to take into account the terms of the agency agreement which provided that the Respondents had to provide the Appellant with all necessary samples, catalogues, pricing information, other information reasonably required by him to act as agent, and in return the Appellant had an obligation to use his best endeavours to perform his work for the Respondent which obligations were further particularized in some twenty or so specific duties set out in the agreement. Further she argued that the Tribunal failed to take adequate notice of the fact that 70% of the Appellant's work was on behalf of the Respondent, and although the Tribunal found that the Respondent, like other principals, was more of a client or customer than an employer, there was no specific information before the Tribunal as regards the relationship between the Appellant and his other principals.
16. Mr Wilson contended that although the Tribunal may not have specifically referred to particular clauses in the agreement they had the benefit of hearing from the Appellant as to how the contract worked. He submitted that at the end of the day there was no substantial challenge to the fact that the manner in which the Appellant ran his day to day business was left up to him. The Appellant had no daily or weekly sales targets or numbers of customers to visit in any particular week and he was free to act as he thought appropriate on behalf of the Respondent and indeed the other principals. Mr Wilson submitted that the obligations in the contract were no more than one would normally see in any commercial arrangement between principal and agent where the parties were in an independent and arms length relationship. He argued that the Tribunal were correct particularly to stress the element of financial risk in that the Respondent gave the Appellant absolutely no guarantee of any work whatsoever. Mr Wilson contrasted the position where in the Byrne case self-employed contractors in the building trade turn up for work which is available and guaranteed.
17. We are concerned that the Tribunal did not give closer attention to the precise terms of the agency agreement which was in front of them. As we have observed it led them to make two important errors in their fact finding, one of which may have had some bearing on their conclusions in relation to business undertaking. It seems to us that it was incumbent upon the Tribunal to carry out some analysis of the written agreement in order to determine what degree of dependency and control that contract imposed. Far more important however, is the Tribunal's failure to consider the effect of the change of arrangements in 1999 in relation to the payment of retainer and most importantly the imposition of the condition that the Appellant would not take on any more agencies nor expand his existing ones. It seems to us that that was a significant alteration in the nature of the relationship between the parties that may have had some bearing on the Tribunal's conclusions in relation to control and dependency.
18. Their failure to do so leads us to the inevitable conclusion that this Appeal must be allowed and the case remitted to a fresh tribunal for a re-hearing.