United Kingdom Employment Appeal Tribunal

APPEARANCES

 

For the Appellant	MR DECLAN O'DEMPSEY (of Counsel) Instructed by: Messrs Lyons Davidson Solicitors Oriel House 52-54 Coombe Road New Malden Surrey KT3 4QP
For the Respondent:	MS NAOMI ELLENBOGEN (of Counsel) Instructed by: Messrs Cripps Harries Hall Solicitors 12 Mount Ephraim Road Tunbridge Wells Kent TN1 1EG

SUMMARY

Definition of Employee

Mutuality of obligations – contract of service.


 


HIS HONOUR JUDGE PETER CLARK

1. This is an appeal by Mr Younis, (the Claimant) before the London South Employment Tribunal, against that Tribunal's Judgment, promulgated with Reasons on 5 July 2005, dismissing his various claims brought against the Respondents, Trans Global Projects Ltd (the Company) and Mr Charnock, the Managing Director of that company.
2. The issues before the Tribunal related to its jurisdiction to hear the claims, specifically:

(1) Whether the Claimant was an employee of the Company within the meaning of s.230(1) of the Employment Rights Act 1996 (ERA) (for the purposes of bringing his claims of unfair dismissal, failure to provide written reasons for dismissal and breach of contract).

(2) Whether the Claimant was a worker within the meaning of s.230(3)ERA and or/regulation 2(1) Working Time Regulations 1998 (WTR) (for the purpose of bringing claims for unlawful deductions from wages and accrued holiday pay respectively).

(3) Whether the Claimant was an employee within the extended definition contained in s.78(1) of Race Relations Act 1976 (RRA) for the purpose of bringing a complaint of race discrimination against both the Company and Mr Charnock.

The Employment Tribunal answered each of those questions in the negative.

The Facts

3. In late 2001/early 2002 the Claimant carried out some consultancy work for the Company, whose business involved the movement of materials, resources and information for construction and engineering projects around the world. He was paid consultancy fees for that work.
4. In early 2002 Mr Charnock discussed with the Claimant the possibility of his being used as an intermediary to promote the business interests of the Company in the Gulf States and across the Middle East.
5. The Claimant did not advance his cause before the Employment Tribunal by giving evidence, rejected by the Tribunal, that Mr Charnock offered him a package of benefits consistent with his becoming an employee of the Company, nor by producing a document entitled "Contract of Employment" and dated 25 June 2002 which the Tribunal found had been manufactured by him.
6. What the Tribunal did accept was that the Claimant's services were engaged by the Company on a consultancy basis on the terms of a document finally headed "Letter of Appointment" and dated 1 April 2002. Although not signed by the Claimant the Employment Tribunal found that the document reflected the terms on which the Claimant worked for the Company thereafter, until the relationship ended in October 2004.
7. Since those terms are central to this appeal we should set out the content of the letter of appointment in full:

"Dear Mr Younis,

Pleased to confirm this agreement made between Trans Global Projects and Mr Fathi Younis and designates the role and duties of Mr Younis in his provisions of consultancy services to the company.

By use of his contacts Mr Younis will introduce the company to those contacts or into related business areas with the purpose of securing work for the company. The region of his activities will be primarily the Middle east and Gulf states, and not limited to any other proposed opportunities in other areas around the world, are to be addressed as applicable.

As and when necessary, the company will provide marketing leads to Mr Younis to follow through and will provide guidance in respect to any marketing approaches or business activities already entered into with prospective clients in order to avoid conflict of interest or confusion.

Following meetings or discussions with potential clients or business connections, Mr Younis will produce a written report to the company within four days of the meeting/discussion –taking place.

In his role Mr Younis will carry the title of Manager of International Business Development and report on a day to day basis to the Director of International Business Development and to the Managing Director of the Company.

Whilst working for the company, Mr Younis will work in accordance with rules, procedures and policies of the company and will at all times observe and uphold business discussion and dealing as confidential.

At no time will Mr Younis act without authorisation to involve the company in any financial risk or commitment. This also includes the booking or reserving of travel and accommodation.

Business entertainment expenses must be kept to a sensible and reasonable level and submitted for reimbursement using the company standard procedure.

In executing his duties Mr Younis will receive the following remuneration:

1. Whilst on a company duty pursuing projects or business development opportunities designated by the company, a payment of £100.00 per day will be made, this daily rate shall be reviewed and subject to increase from time to time;

2. All reasonable travel, disbursement, accommodation expenses will be met by the company;

3. Petrol used or obtained for travel directly as a result of the company business will be met by the company;

4. If as a result of Mr Younis direct introduction or negotiation the company should secure a contract, then Mr Younis will receive an agreed percentage of the gross contract value secured by Trans Global or a bonus to be negotiated. The level of the bonus will be determined on a project by project basis.

5. The Company shall settle the service fee with Mr Younis once a contract is achieved by issuing a separate letter to be an indivisible part of this letter of agreement (Percentage to be discussed and agreed).

6. This percentage shall apply in increase as well as in decrease in line and commensurate to any increase or decrease introduced to the contract price by the client. The company shall pay the fees in the said percentage within (15) days.

7. From time to time, the company may elect to provide an additional payment to Mr Younis. Any such payment is to be covered by an invoice.

8. This agreement shall remain in force and effect for a period of (3) Years from the date hereof and shall be extended for a successive one (1) year period (s) by mutual written agreement between the parties and could be terminated by either party upon giving sixty (60) days prior written notice of termination. However if a project introduced or initiated by Mr Younis during the validity of this agreement and Secured outside the validity of this agreement Trans Global recognised and accepts the fact that Mr Younis interest will remain in force."

8. The Tribunal further found:

(1) Between April 2002 and October 2004 the Claimant pursued a number of leads supplied by the Company and took certain steps on his own initiative. He also pursued business interests of his own, not being precluded by the Company from doing so.

(2) He was not subjected to any control in the way in which he carried out work pursuant to the letter of appointment.

(3) He was provided with a company e-mail address and mobile phone. From late 2003 the Company allowed the Claimant to use a small self-contained office at their Feltham site.

(4) Occasionally he was described in company correspondence as an employee or by terminology consistent with employee status.

(5) Although the letter of appointment provided for a payment of £100 per day when working on company duty, in fact, from the outset of his appointment in April 2002 he submitted monthly invoices of £3,200, which were paid without question by the Company. The Tribunal accepted Mr Charnock's evidence that such sums were trifling in the overall context of the Company's finances. At a later stage cash flow became a real concern, but by then it would have been out of the question to challenge the Claimant's invoices.

(6) He received no holiday pay nor was he entitled to paid sickness leave under the agreement.

The Tribunal Judgment

9. Based on their findings of fact, reached after forming a favourable view of the Company's evidence and a wholly unfavourable view of the Claimant's evidence, particularly his manifestly false evidence about the contract of employment dated June 2002, the Tribunal turned to consider their conclusions, applying the law to which they directed themselves at paragraphs 6 to 10 of their Reasons. Those conclusions may be summarised as follows:

(1) Mutuality of obligations

Put shortly, the Claimant's assertion that he was an employee and/or worker under any of the statutory definitions, to which we have earlier referred, "foundered on the rock of absence of mutuality"; to borrow an expression from the Employment Tribunal whose decision was under review by the House of Lords in Carmichael v National Power [200] ILR 43, paragraph 9 (per Lord Irvine of Lairg LC). At paragraph 16 of their Reasons the Tribunal found:

"The Claimant never became under a duty to carry out any particular task. Nor were the Respondents ever under any obligation to supply any leads to him."

The absence of the necessary mutuality, the Tribunal found, precluded either employee or worker status.

(2) Control

For the purposes of determining employment status under s.230(1) ERA, the Tribunal found (Reasons paragraph 17) that the relationship did not feature the minimum level of control in the employer necessary for a contract of employment. There was a co-operative relationship but not one which entailed any authority in the Company whatsoever.

(3) In these circumstances the Tribunal had no jurisdiction to entertain any of the Claimant's complaints.

The Statutory Provisions

10. Section 230 ERA provides:

(1) In this Act 'employee' means an individual who has entered into or works under (or, where the employment has ceased, worked under) a contract of employment.

(2) In this Act 'contract of employment' means a contract of service…whether expressed or implied, and (if it is express) whether oral or in writing.

(3) In this Act '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 a customer of any professional business undertaking carried on by the individual;

and any reference to a worker's contract shall be construed accordingly."

11. Regulation 2(1) WTR provides:

"…'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 should be construed accordingly; …"

It will be seen that there is no material distinction between the definition of 'worker' under s.230(3) ERA and that under regulation 2(1) WTR.

12. Section 78(1) RRA provides:

"… 'employment' means employment under a contract of service … or a contract personally to execute any work or labour, and related expressions [we interpose 'including employee'] shall be construed accordingly; …"

Thus a distinction is drawn in the statutory wording between 'employees' in the narrow sense under the ERA, who must be employed under a contract of service, and the extended definition of 'worker' or 'employee' under RRA, which may include those engaged under a contract for personal service.

Mutuality of Obligation

13. There has been much discussion in the cases concerning this concept. So far as contracts of service go, the issue in Carmichael, their Lordships approved the approach of the Court of Appeal in Nethermere v Gardiner [1984] IRLR 240 and Clark v Oxfordshire Health Authority [1998] IRLR 125, that an irreducible minimum of obligation is necessary to create a contract of service, that is, some obligation on the employer to provide work and on the employee to do the work when offered.
14. A similar approach was taken by the EAT (Mr Recorder Underhill QC presiding) in Byrne Brothers v Baird [2002] ICR 667 when considering the extended meaning of 'worker' in regulation 2(1)(b) WTR. Whilst the terms of any written contract are important, the contract must be construed in the light of the circumstances in which the contract was made. Redrow Homes v Wright [2004] IRLR 720, paragraph 23 per Pill LJ, applying the approach of Lord Hoffman in Investors Compensation Scheme Ltd v W Bromwich Building Society [1998] 1 WLR 896. We note that Lord Hoffman sat on the Carmichael case and gave a separate speech dealing with the construction of written contracts of employment (using that expression loosely): see particularly paragraph 33.
15. On this aspect of the case Mr O'Dempsey places particular reliance on a passage in the Judgment of Elias J sitting in the EAT in Stephenson v Delphi Diesel Systems Ltd [2003] ICR 471. He said at paragraphs 10 to 14:

"10. For the purpose of analysing this decision it is not necessary to set out an exegesis of the law in this area. It is perhaps sufficient to start with an observation of Longmore LJ in Montgomery v Johnson Underwood Ltd [2001] ICR, 819, 831, para 46:

'Whatever other developments this branch of the law may have seen over the years, mutuality of obligation and the requirement of control on the part of the potential employer are the irreducible minimum for the existence of a contract of employment: see Nethermere (St Neots) Ltd v Gardener [1984] ICR 612, 623 per Stevenson LJ approved in Carmichael v National Power plc [1999] ICR 1226, 1230 per Lord Irvine of Lairg LC.'

11. The significance of mutuality is that it determines whether there is a contract in existence at all. The significance of control is that it determines whether, if there is a contract in place, it can properly be classified as a contract of service, rather than some other kind of contract.

12. The issue of whether there is a contract at all arises most frequently in situations where a person works for an employer, but only on a casual basis from time to time. It is often necessary then to show that the contract continues to exist in the gaps between the periods of employment. Cases frequently have had to decide whether there is an over-arching contract or what is sometimes called an 'umbrella contract' which remains in existence even when the individual concerned is not working. It is in that context in particular that courts have emphasised the need to demonstrate some mutuality of obligation between the parties but, as I have indicated, all that is being done is to say that there must be something from which a contract can properly be inferred. Without some mutuality, amounting to what is sometimes called the 'irreducible minimum of obligation', no contract exists.

13. The question of mutuality of obligation, however, poses no difficulties during the period when the individual is actually working. For the period of such employment a contract must, in our view, clearly exist. For that duration the individual clearly undertakes to work and the employer in turn undertakes to pay for the work done. This is so, even if the contract is terminable on either side at will. Unless and until the power to terminate is exercised, these mutual obligations (to work on the one hand and to be paid on the other) will continue to exist and will provide the fundamental mutual obligations.

14. The issue whether the employed person is required to accept work if offered, or whether the employer is obliged to offer work as available is irrelevant to the question whether a contract exists at all during the period when the work is actually being performed. The only question then is whether there is sufficient control to give rise to a conclusion that the contractual relationship which does exist is one of a contract of service or not."

16. I considered that passage recently in A D Bly Construction Ltd v Cochrane (UKEAT 0243/05/MAA. 23 November 2005. Unreported). A copy of that Judgment was provided to Counsel. We refer particularly to the observation at paragraph 27 of that Judgment and as Mr O'Dempsey put it in opening his submissions in this appeal, the question is what mutual obligations are necessary?
17. In the ordinary case, we accept as Ms Ellenbogen submitted, the question is whether the employer is under an obligation to provide work and the worker to do it when offered. See the succinct analysis of Maurice Kay LJ in Mingeley v Pennock & Ivory [2004] IRLR 373, paragraph 14. On the particular facts of that case no such obligations arose.
18. However, the present case presents a very different factual matrix. The letter of appointment appointed Mr Younis for a term of 3 years, terminable on 60 days' notice. The obligation on him was to introduce the Company to his contacts in the Middle East and Gulf States. The opportunity to work on those introductions was unlimited so far as the Company was concerned, during the term of the agreement. True it is that the Company agreed to pay him at a daily rate when performing that function but that does not, in our judgment, detract from the open-ended opportunity to work provided by the Company.
19. The position then promptly moved to a retainer basis; the Claimant rendering regular monthly invoices and the Company, for whatever reason, paying those invoices without demur.
20. Looking at the overall factual matrix we have concluded that the necessary mutual obligations, the minimum requirement of a contract for services, existed here. There is no dispute as to whether the Claimant rendered those services personally.
21. In these circumstances we have concluded that the Tribunal fell into error in its approach to the question of mutuality of obligation and reached an impermissible finding on that aspect of the case.

Contract of Service

22. We note that at paragraph 6 of their Reasons the Tribunal specifically referred to the Court of Appeal decision in Hall v Lorimer [1992] ICR 739 and to the need to weigh up and evaluate all of the factors pointing towards and against a contract of service.
23. Mr O'Dempsey submits that the Tribunal in focusing simply on the question of control at paragraph 17 of their Reasons, apart from dealing with the point very shortly, misdirected themselves in arriving at their conclusion there expressed. We do not accept that submission. Leaving aside the question of mutuality of obligation, we are satisfied that the Tribunal took into account all relevant factors contained in their findings of fact in reaching the conclusion that this was not a contract of service. That was a permissible finding on the facts of this case.

Disposal

24. Returning to the three issues before the Tribunal; we uphold the finding on the first issue but on the basis of our finding that the necessary mutuality of obligation existed, set aside their finding of no jurisdiction on the second and third issues.
25. It follows that the Tribunal, in our judgment, has jurisdiction to entertain the Claimant's claims of unlawful deductions from wages, holiday pay under WTR and race discrimination under RRA. Those three claims are returned to the Tribunal where, perhaps, the next question to be addressed will be questions of limitation, but how that is dealt with is a case management matter for the Employment Tribunal. The claims of unfair dismissal, failure to provide reasons for dismissal and breach of contract remain dismissed.
26. An issue arose between Counsel as to whether the matter should return to the same Tribunal as constituted on the last occasion. We accept Mr O'Dempsey's submission that it need not. The Tribunal to hear the next stage of this case will be one appointed by the Regional Chairman.