United Kingdom Employment Appeal Tribunal

APPEARANCES

 

For H M PRISON SERVICE	MR MATTHEW PURCHASE (of Counsel) Instructed by: The Treasury Solicitor Employment Team One Kemble Street LONDON WC2B 4TS
For M & P STEELCRAFT LTD	MR NICHOLAS PRICE (of Counsel) Instructed by: Royal Bank of Scotland Mentor Services 134 West Regent Street GLASGOW G2 2RQ
For Mr R J ELLIS	MR SEAN JONES And MS RACHEL KAMM (of Counsel) Instructed by: Messrs Farnfield & Nicholls Solicitors The Square GILLINGHAM Dorset SP8 4AX

SUMMARY

Jurisdictional Points – Worker, employee or neither

Tripartite agreement between a prisoner, the prison and the employer under which the prisoner was given a job placement by the employer pursuant to the resettlement scheme, which was designed to facilitate the rehabilitation of prisoners. The Tripartite agreement included a provision purporting to prevent the arrangement from giving rise to any legal consequences. The claimant alleged unfair dismissal. This depended upon whether he was an employee when working for the employer pursuant to the scheme, and whether the clause was valid. The Tribunal held that there was a contract of service in place and the clause was ineffective to remove the jurisdiction of the courts.

The EAT upheld the appeal and held that given the nature and purpose of these arrangements they were not to be located in the employment field. There was no contract of employment in place at the material time. However, had there been, the EAT would have concluded that the clause was not effective to exclude jurisdiction because it fell foul of section 203 of the Employment Rights Act. Since the claimant could not have exercised those rights anyway, section 203 was inapplicable and the clause was valid.


 


THE HONOURABLE MR JUSTICE ELIAS (PRESIDENT)

1. This case raises the question whether the respondent (who we shall call the claimant, as he was below) who is a serving prisoner and attended a paid work placement with an employer organised by the Prisons Resettlement Unit, was employed under a contract of employment. The employment judge held that he was and the employer, supported by Her Majesty's Prison Service, appeal against that decision. The Prison Service was added as an interested party in the proceedings before the Employment Tribunal.
2. The burden of the respondents' submissions was borne by Mr Purchase, counsel for the Prison Service, although his submissions were supplemented by Mr Price, counsel for the employer. The claimant was represented before us by Mr Jones of counsel. We are grateful to them all for the helpful submissions, both written and oral.

The background.

3. The background facts can be briefly summarised. The claimant was serving a term of imprisonment at Erlestoke Prison. This has a resettlement unit, the purpose of which is to place prisoners with local businesses in order to prepare them for release and possibly secure them future employment.
4. M & P Steelcraft Ltd ("the employer") operates a small boat building business in Melksham, near the prison. The prison secures a placement for the prisoner to carry out work with businesses which are willing to be partners in the scheme.

The Resettlement unit.

5. There are two stages to the resettlement programme. The first is an unpaid external placement. During this period the prisoner is treated as though it were a community service placement; he earns prison wages from the prison but receives no wages from the employer. The second stage is described in a document entitled "The Aim of the Resettlement Unit" as follows:-

"Full time job placement with a local company as an employee of that company, earning full wages, which will be paid into the candidate's own bank account. Wages paid by companies will follow a period of induction where the prisoner is paid by the establishment until such time as is deemed appropriate."

6. Further information is provided in a document entitled "Guidance on the Resettlement Estate" which describes stage 2 in the following terms:

"The stage 2 regime continues the focus on developing the prisoner's opportunity to exercise personal responsibility and trust. The principal element is the prisoner's participation in full time paid employment outside the establishment.

Prisoners on stage 2 may be allowed to undertake unpaid community work or education/training courses as an alternative to paid employment. However, the main purpose of Stage 2 is to give longer term prisoners, often with little or no history of gainful employment, the opportunity to develop the practical skills and personal discipline which will be required to sustain full time employment."

7. The prison has adopted a document termed a 'Memorandum of Understanding', there being a separate memorandum for each of the two stages. These are based on, but differ marginally from, model memoranda produced by the Prison Service. The principal difference is that the model document relating to the second stage had the following clause which is omitted in the memorandum applicable to Erlestoke itself:

"Nothing in this Memorandum should be taken to prevent the employer entering into a written contract of employment with the prisoner."

Equally, however, nothing in the Erlestoke Memorandum in terms forbids the creation of a written contract of employment.

8. The Memorandum states that "the purpose of this Memorandum of Understanding is to ensure that all those who are party to it, as listed above, are aware of and understand the arrangements under which the placement will take place." The three parties are the prisoner, the employer, and the prison service establishment.
9. With regard to the second stage, it is emphasised in that Memorandum of Understanding that the paid prisoner remains a serving prisoner and is subject to prison rules. When he is at work he is to carry out the placement in accordance with the resettlement day release licence. This specifies the time, the location and the purpose of the release. The purpose is said to be "paid employment." The licence also imposes various restrictions, such as forbidding him to drink, take drugs and gamble, use the employer's telephone or receive social visits at work. Any breach of the terms of that licence means that the placement may be cancelled.
10. All parties have certain obligations under the arrangement. The Memorandum purports to "remind" the parties of these obligations. The Prisoner is reminded that he must comply with the terms of the licence and with all reasonable requirements of the employer. The Prison Service Establishment undertakes to risk assess the Prisoner, to monitor compliance with the terms and objectives of the day release, to inform the employer if the licence is suspended or withdrawn, and to provide information in confidence about the Prisoner's criminal record.
11. The employer has certain obligations to monitor the performance of the prisoner, to participate in regular meetings to review the progress of the placement, and to permit unannounced visits from prison staff to check that the prisoner is complying with the terms and conditions of the release. The employer is also obliged to notify the Prison Service if there is a breach of the terms of the licence or, indeed, of the employer's own rules governing the conduct of employees. As to the terms and conditions under which the prisoner is to operate, the Memorandum says this:

"The employer confirms it will apply to the prisoner the same terms and conditions of employment as apply to other employees, including those in relation to pay, holidays, sickness and other benefits, pensions, deductions for tax and national insurance, grievance and disciplinary rules and procedures, and notice periods.

In particular, the employer confirms the prisoner will be paid at or above the minimum wage."

12. It is specifically provided that if there is a dispute about the terms of the Memorandum then any resolution or variation must involve all parties to the Memorandum.
13. Finally, the Memorandum says this:

"For the avoidance of doubt, nothing in this Memorandum of Understanding shall create or shall be deemed to create a contract of service, a contract for services, or a partnership between any of the parties hereto, nor any rights or obligations that are legally enforceable."

It is to be noted that this clause (hereinafter the "exclusion clause") seeks both to express an opinion that no contract of service or for services is created, and to prevent any legally binding relationship from arising.

The facts.

14. The claimant was first introduced to the employer on 12 September 2005 and worked as a joiner pursuant to stage one of the placement until 12 December 2005 when he moved on to stage two. Thereafter he had regular hours of work and was paid the national minimum wage rates then applicable and tax and national insurance were deducted at source. He would be transported to the place of work by the prison authorities and would return to prison at the end of the day. He could work overtime subject to the approval of the prison and appropriate transport arrangements being made. (We note that section 45 of the National Minimum Wages Act 1998 disapplies the Act to any prisoner who carries out work in pursuance of prison rules. We have heard no argument as to whether that would apply in this case. In any event, it would not of course prevent such payments being made, as occurred in this case.)
15. The claimant was offered a statement of particulars of employment in May 2006. That gave the date of commencement of his continuous employment as 12 December 2005. However, he did not sign that document. The company submitted that it had been given to him by mistake, but the Tribunal made no finding about that.
16. On 7 June 2006 he was released from prison. He continued to work for the employer and was given a fresh statement of particulars to sign. This time he did so. That gave the date of commencement of employment as being 7 June 2006. He was thereafter paid significantly in excess of the national minimum wage. Each of the statements of particulars stated that:

"This Statement together with your offer letter and the Employee Handbook form your written contract of employment."

17. Subsequently he was dismissed on 9 January 2007, the company alleging that he had become unreliable. He brought proceedings for unfair dismissal. Whether he could pursue that claim depended upon whether he could establish that he had one year's continuous service (see section 108(1) of the Employment Rights Act 1996).
18. The employers said that he could not establish the requisite continuity because he was not employed by them under any contract, let alone a contract of employment, until he had been released from prison. The claimant accepted that he was not under a contract in respect of stage one of the placement, but submitted that he was employed under a contract of employment as from the commencement of stage two. On that basis he had the requisite continuous employment. The issue was determined by the Employment Tribunal as a preliminary issue.

The Tribunal's conclusion.

19. There were essentially two arguments which the employer advanced before the Employment Tribunal to defeat the claim, and they are essentially the same as have been advanced before us (save, of course, that we are bound by findings of fact properly made.) First, reliance was placed on the express provision in the Memorandum of Understanding that there was no intention to create legal relations. This, it was submitted, prevented any contractual rights at all arising. Second, the nature and purpose of the relationship was such that even if there were a contract, it did not meet the criteria necessary to amount to a contract of employment.
20. The Tribunal rejected both these arguments and held that the claimant was employed under a contract of service during the relevant period and therefore had the requisite continuity of employment.
    
21. The employment judge was not impressed by the clause in the Memorandum of Understanding purporting to deprive the arrangement of any legal effect. He referred to the House of Lords' decision in Rose & Frank Company v J R Crompton & Brothers Ltd & Others [1925] AC 455, in which their Lordships held that a clear and unambiguous express term stating that the parties did not intend their agreement to create legal relations was indeed binding upon them, but he felt that the circumstances here were distinguishable from that case for the following reasons (para 10):

"Here we are dealing with a question of whether or not there was to be a contract of employment in circumstances in which there was certainly no equality of arms, and against a statutory background which has historically been very jealous of the employment rights of individuals, rights which they are forbidden by Statute to sign away save under rigidly controlled circumstances. It is my view therefore that if I conclude that the reality here is that there was a contract of employment, then it is not open to the respondent or the prison to rely upon this document just because the document says that there is no intention to create legal obligations."

22. As to the second ground, the Tribunal applied the well known test laid down by MacKenna J in the Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497 in which the judge identified three criteria necessary to establish a contract of employment, namely the obligation to provide personal service, control by the employer of a kind to establish such a status, and the lack of any features inconsistent with that status. In this case the Tribunal considered that all three criteria were satisfied. The claimant was providing his skill for remuneration; there was significant control over his activities on such questions as what he was to do and how and when he should to do it; and there was nothing inconsistent with that status. He was subject to the same terms and conditions as everybody else, and there was nothing either in the written statement or the Memorandum inconsistent with the status of being an employee working under a contract of employment.
23. On the question of control, the Tribunal did recognise that there were significant restrictions on the claimant's personal liberty, and in particular the fact that he was wholly dependent upon the prison to release him for work. The Prison could at any time, and for no reason, refuse him the licence to leave the prison. The Tribunal concluded that these restrictions were principally concerned with the relationship between the claimant and the prison. Whilst they impacted upon the claimant's ability to fulfil his obligations to the employer, they did not affect the nature of the relationship when he was actually at work.

The Grounds of Appeal.

24. As we have said, the two grounds of appeal largely mirror the arguments advanced below. The first is that the Tribunal erred in concluding that there was any legally enforceable contract at all. It was said that the employment judge ought to have given proper effect to the Memorandum of Understanding and concluded that these obligations were binding in honour only, since they were expressly stated not to be enforceable in the courts, and that therefore no contractual obligations of any kind were created.
25. Alternatively, even if some contract did exist, it was not a contract of employment. Given the unusual nature of this tripartite relationship, and in particular the purpose of the arrangement, it could not be said that the principal purpose was the classic wage/work bargain. The employment judge failed to give proper weight or significance to these particular features of the relationship. We shall deal with the submissions on each issue in turn.

Intention to create legal relations: was there a contract?

26. The employer submits that it is a pre-requisite of a contract of employment being in place that there is a contract at all. That is not possible where there is no intention to create legal relations. Whether such an intention exists is a matter to be judged objectively and where, as here, there is an express term dealing with the question of intention, it is simply a matter of construing that clause. It is the duty of the court to give proper effect to the terms agreed between the parties, whatever the reason for its introduction: see Rose and Frank v Compton [1925] AC 445,451 per Lord Phillimore.
27. Reliance is placed upon the following observation in the Divisional Court in R v Lord Chancellor's Department ex-parte Nangle [1991] 1 ICR 743 at 751:

"The question of whether there is an intention to create legal relations is to be ascertained objectively, and where the terms of the relationship are, as here, to be derived solely from the documents, depends upon the construction of those documents. It is possible for a party to believe mistakenly that he is contractually bound to another when in fact he is not, and conversely to believe that he is not when he is. His belief is immaterial. …. It must be a construction of the documents as a whole and what effect should be given to such a statement."

28. Here it is submitted that there is no ambiguity in the language used in the Memorandum; the Memorandum creates no rights that are legally enforceable. Moreover, other provisions in the Memorandum are consistent with the intention that there should be no legal relationship. For example, it refers to "the arrangements" under which the placement is to take place; and it "reminds" the parties of their obligations arising out of those arrangements.
29. Mr Jones, counsel for Mr Ellis, submits that the Tribunal were right to reject this contention. He submits that the exclusion clause in the Memorandum is no bar to the claimant for three reasons.
30. First, the relevant contract under which the claimant is suing was not located in the Memorandum at all. Rather it was made directly between the employers and the claimant and arose from his engagement. Whatever the status of the obligations created by the Memorandum itself, the attempt to contract out of legal rights does not touch the separate and distinct agreement made between the employer and the claimant.
31. In this connection he prays in aid the decision in the Rose and Frank case itself. The facts were that an English company appointed an American company as its sole agent to sell goods manufactured by a third company in the United States and Canada. An agreement was made between all three parties which envisaged that the agency would be for a rolling period of three years with six months' notice.
32. The agreement stated in terms that it was not "a formal or legal agreement, and shall not be subject to the legal jurisdiction in the Law Courts either of the United States or England." It was simply an agreement to which each party honourably pledged itself. The English companies summarily terminated the contract. At that date they had received and accepted certain orders for goods but had not delivered them. The American company sued for breach of contract and non-delivery of the goods.
33. The House of Lords held that the claim for damages for breach of the agreement failed because of the clause denying the agreement any legal effect. However, the particular orders made and accepted did constitute legally binding contracts for sale and therefore the action for non-delivery could be maintained. The Court rejected a submission from the defendants that the separate orders made pursuant to the agreement were also bound by the clause denying legal effect to the overall arrangement. Lord Phillimore said this (p455):

"Any actual transaction between the parties…gave rise to ordinary legal rights; for the fact that it was not of obligation to do the transaction did not divest the transaction when done of its ordinary legal significance."

34. Similarly here, submits the claimant, even if the Memorandum itself successfully excluded any contractual effect, that clause did not apply to the agreement made between the employer and the prisoner pursuant to that Memorandum. That was a distinct and separate agreement.
35. In support of the proposition that there are two distinct relationships, Mr Jones relied in particular upon the fact that there are two sets of inconsistent notice provisions. The Memorandum allows any party to terminate the arrangement without notice at any time, but the written particulars of employment state that the parties to the employment relationship shall terminate it on notice. That, submits Mr Jones, strongly suggests that there are two independent relationships in play.
36. Second, and in any event, it is said that the statement that there are no legally binding relations is an attempt to contract out of the statutory rights which (subject to exceptions which are immaterial in this case) is forbidden by section 203 of the Employment Rights Act. This provides:

Restrictions on contracting out

"(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 this Act, or

(b) to preclude a person from bringing any proceedings under this Act before an employment tribunal."

37. Although in formal terms there is no exclusion or limit on the enforcement of rights conferred by the Act because, as Mr Jones accepts, on a strict construction no rights arise, the provision should be given a purposive interpretation. Adopting that approach, it is applicable because its effect is to remove legal force from a provision which, absent that clause, would have been legally enforceable. That, submits the claimant, is sufficient to bring the clause firmly within the scope of section 203. It matters not whether the employee genuinely agreed to the clause, or whether it was a proportionate means of achieving a legitimate objective. The policy reflected in the provision is clear and would be defeated if the clause were to be given legal effect.
38. Mr Jones relies by analogy upon a decision of the House of Lords in Smith v Eric Bush [1990] 1 AC 831 in which their Lordships held that a similar but differently worded provision found in section 13 in the Unfair Contract Terms Act which sought to prevent parties by agreement from excluding liability for claims in negligence (at least unless the clause was reasonable) could not be avoided by seeking to make an agreement that no duty of reasonable care would arise at all. Lord Templeman said this ( p.848):

"In Harris v Wyre Forest District Council [1988] Q.B. 834, the Court of Appeal (Kerr and Nourse L.JJ. and Caulfield J.) accepted an argument that the Act of 1977 did not apply because the council by their express disclaimer refused to obtain a valuation save on terms that the valuer would not be under any obligation to Mr. and Mrs. Harris to take reasonable care or exercise reasonable skill. The council did not exclude liability for negligence but excluded negligence so that the valuer and the council never came under a duty of care to Mr. and Mrs. Harris and could not be guilty of negligence. This construction would not give effect to the manifest intention of the Act but would emasculate the Act. The construction would provide no control over standard form exclusion clauses which individual members of the public are obliged to accept."

Lord Griffiths thought that a "but for" test would provide an answer to the question whether the contractual clause was caught by the section (p.857D):

"I read these provisions as introducing a "but for" test in relation to the notice excluding liability. They indicate that the existence of the common law duty to take reasonable care, referred to in section 1(1)(b), is to be judged by considering whether it would exist "but for" the notice excluding liability. The result of taking the notice into account when assessing the existence of a duty of care would result in removing all liability for negligent misstatements from the protection of the Act."

39. Mr Jones also referred to the decision of the Court of Appeal in Joseph v Joseph [1967] Ch.78 which was concerned with the construction of a similar provision found in section 38 of the Landlord and Tenant Act 1964. The court held that the words "in so far as it purports to exclude the tenant from making an application" were capable of meaning "in so far as it has the effect of excluding" such an application being made.
40. Finally he also drew attention to some observations of the Court of Appeal in Igbo v Johnson Matthey Chemicals Ltd [1986] ICR 505. In that case the parties agreed that the employee could go on extended unpaid leave but that if she did not return on the due date "your contract of employment will automatically terminate on that date." She did not return on that date and the employers refused to take her back. She claimed unfair dismissal but the employers submitted that the claim was bound to fail since she had not been dismissed; there had been no termination by the employer, and that was required to constitute a dismissal. Her employment had terminated by mutual agreement. She alleged that this involved contracting out in breach of the statutory predecessor of section 203 and the Court of Appeal, allowing an appeal from the Employment Appeal Tribunal, agreed.
41. The Employment Appeal Tribunal referred to the Joseph case and held that but for this provision, the refusal of the employers to take her back would have constituted a dismissal and the claim for unfair dismissal could have been pursued. In reaching that decision, Parker LJ, giving the judgment of the Court, recognised that in this case the employee had genuinely understood and accepted the arrangement, which was designed to achieve a legitimate objective. However, the implications of allowing such a clause were severe. His Lordship said this (p.512D):

"If the employers' contention is correct, it must follow that the whole object of the Act can be easily defeated by the inclusion of a term in a contract of employment that if the employee is late for work on the first Monday in any month, or indeed on any day, no matter for what reason, the contract shall automatically terminate. Could it be said that such a provision did not limit the operation of sections 54 and 55? In our judgment it could not. Such a provision would vitally limit the operation of section 54(1), for the right not to be unfairly dismissed would become subject to the condition that the employee was on time for work on the first Monday in each month, or every day, as the case might be."

(Sections 54 and 55 were the statutory predecessors of the current sections 94 and 95 of the Employment Rights Act 1996.)

His Lordship added that the effect was as if the clause had said "in the event of failure to return to work, termination of the employee's employment on that ground shall not be a dismissal". Such a clause, said the judge, would plainly infringe the section.

42. The claimant submits that these observations are equally in point here. The appropriate approach is to apply the "but for" test. If, but for the clause, rights conferred by the Act would be enforceable, the clause infringes section 203. There is no doubt that the clause has that effect here and therefore it is invalid.
43. The third way in which the claimant seeks to escape from the effect of the clause is by construction. It is submitted the Memorandum does not achieve what the employer and Prison Service say it does. The agreement purportedly is made "for the avoidance of doubt". However there is no doubt, absent the clause. Furthermore, even looking at the Memorandum itself, it refers to the employer conferring the same terms and conditions on the claimant as other employees. Those other employees have the benefit of legally enforceable terms. This raises an ambiguity about the effect of the contracting out clause.
44. However, as the Divisional Court recognised in the Nangle case, once a relationship exists which would normally attract the protection of the law, the onus is firmly on the party seeking to establish that there is no intention to create legal relations: see per Stuart Smith LJ, p.752B. Therefore, submits Mr Jones, any ambiguity in this case should tell against the employer. The Tribunal were right to recognise the inequality of bargaining power, and the Memorandum should be construed with that in mind.
45. The employer responds to these arguments as follows. First, there is no basis for saying that the employer ever agreed to enter into a separate contract with the claimant independently of the tripartite arrangement. The provision of services by the claimant is wholly consistent and explained by the tripartite relationship, and it is not necessary to spell out a separate agreement between the employer and the claimant. Equally, the provision of the written particulars is wholly consistent with, and a convenient way of complying with, the obligation to give the claimant the benefit of the same terms and conditions as other employees, as the Memorandum requires. The fact that two separate notice provisions are given under the Memorandum and the written particulars is too limited a basis to infer a distinct contract. It is consistent with identifying what the employer and the claimant would be expected to do, absent some good reason to terminate the arrangement without notice.
46. Second, it is submitted that section 203 has no application at all in the context of this agreement. That section forbids parties to contract out of, or limit the operation of, statutory rights, but here the consequence of the particular exclusion clause is that no rights arise in the first place. There is a logical distinction between reaching an agreement which is not to be subject to any legal rights at all, and making an agreement that certain rights are not capable of enforcement in the way which statute allows. The Igbo case was different because it involved an agreement made between parties who were already subject to the legal rights and obligations arising under a contract of employment. Moreover, it was concerned with the termination of the contract and not its creation.
47. Mr Purchase also relied on two different categories of authorities which he submitted demonstrated the limits of the Igbo decision and are inconsistent with the application of a "but for" test in this area. The first is where there is a voluntary agreement to terminate, without duress. In Logan & Salton v Durham County Council [1989] IRLR 99 following a dispute with his employer, the claimant negotiated through his representative a written agreement under which he accepted that the contract would terminate by mutual agreement and that he would benefit from certain financial arrangements. He subsequently complained to the Tribunal, arguing that the agreement had been reached under duress and that he had been dismissed. The Employment Appeal Tribunal (Wood P presiding), following the earlier EAT decision in Sheffield v Oxford Controls [1979] IRLR 133, held that the Employment Tribunal were entitled to find that here there was a properly agreed mutual termination of the contract and therefore no dismissal as a matter of law. Igbo was distinguished on the grounds that here there was a separate contract entered into willingly and after taking legal advice. A simple application of the "but for" test would have invalidated this clause.
48. The second category concerns cases where a term in the contract deprives an agreement of an essential element necessary to enable statutory rights to arise. An example is Stevedoring and Haulage Services v Fuller [2001] IRLR 627. The Court of Appeal held that a contractual provision negativing any legal obligation to offer or accept work was inconsistent with a contract of employment arising. Similarly, in Realtime Civil Engineering Ltd v Callaghan UKEAT/0516/05 the case turned on whether or not the claimant was an employee. Under his contract he could provide a substitute, and the Employment Tribunal found that this was not a sham provision. The effect was that he did not have to provide personal service and therefore fell outwith the definition of an employee, or indeed a worker, under the employment legislation. (To similar effect is the Court of Appeal decision Express & Echo Publications v Tanton [1999] IRLR 367).
49. Mr Purchase recognises that no argument was advanced in these cases that section 203 was infringed, but he submits that if the claimant is right and a "but for" test is sufficient to attract the operation of the section, then these cases should not have been decided as they were.
50. As to the submission that as a matter of construction the clause did not in fact have the effect of precluding contractual rights arising, the respondents submit that the words could not be plainer. The reference to terms and conditions of the employee was not at all inconsistent with the exclusion clause and created no ambiguity. It was the obvious shorthand way of referring to the benefits which the employer had to confer upon the claimant. The plain intention was that the same benefits should be conferred but without any legal obligation to do so. Similarly, providing written particulars was an easy way of identifying the detail of those terms and conditions. It was not intended to undermine or alter the effect of the Memorandum and it did not do so. The fact that there might be some inequality of arms between the parties is irrelevant when the question is simply the objective construction of a written term.

If there was a contract, was it a contract of service?

51. The respondents' alternative ground is that even if they are wrong and a contract does arise, it is not a contract of employment and therefore time spent working pursuant to that contract cannot count when calculating the period of continuity. This is not merely because the parties had specifically agreed that the relationship was not to constitute a contract of employment. That would plainly not be determinative of the true status, although it would be a factor, and potentially a decisive one, in a borderline case where the conclusion was genuinely unclear: see the observations of Lord Denning MR in Massey v Crown Life Insurance Company Ltd [1978] IRLR 31 para.15. In addition, the nature of the control, and in particular the fact that the prison governor could determine whether the claimant attended work at all, was inconsistent with the Tribunal's conclusion.
52. In addition, there was a broader and more far reaching challenge. It is submitted that the relationship here was not properly located in the employment field. That was not its dominant purpose. If that is right, then not only would the prisoner not be an employee, but he would not either be a worker within the meaning of the legislation: see the discussion in James v Redcat (Brands) Ltd. [2007] IRLR 296, paras. 52-70. The submission here is that the purpose of the placement scheme, and of the arrangement into which these three parties entered, was to provide a period of disciplined employment to assist in enabling the prisoner to find employment in the future and thereby assist his rehabilitation. It was not to provide the personal services of the prisoner to the company. This purpose should have coloured the way in which the Tribunal looked at the nature of the contract. In fact, it was barely considered at all.
53. Two analogous cases were relied upon. In Daley v Allied Suppliers Limited [1983] IRLR 14 the Employment Appeal Tribunal held that a young woman who was sponsored by the respondent company pursuant to the Youth Opportunities Programme was neither an employee nor a worker of the company. The nature of the contract was that the employers provided training under a scheme organised by the Manpower Services Commission. The applicant was merely availing herself of facilities for training which the Scheme provided. Even if a contract existed, it was not a contract falling within the employment field so as to attract the operation of the Race Relations Act.
54. Mr Justice Neill, giving the judgment of the Employment Appeal Tribunal, followed the earlier Court of Appeal decision in Wiltshire Police Authority v Wynne [1980] ICR 649 and held that the crucial question was: what was the primary purpose of the contract? In this case the primary object of the work experience scheme was to enable Ms Daley to obtain work experience; it was not to provide work as such.
55. Similarly in Thorpe v Dul [2003] ICR 1556 the claimant was party to a tripartite agreement between himself, the employer and the training and enterprise council under which the employer would provide training of a certain standard and the council would providing funding and support. The Employment Appeal Tribunal (Wall J presiding) held that although a separate contract of employment could in principle exist between a claimant taking advantage of these arrangements and the employer, it did not arise from the tripartite agreement itself. The purpose was to provide training and job experience, and in that case the employer did not pay the wages; the money came from the Learning and Skills Council.
56. The respondents submit that in this case too the primary purpose of the arrangement was to allow the claimant to avail himself of the benefit of a work placement, pursuant to the resettlement scheme, in order to facilitate rehabilitation. This will frequently involve the provision of services to the employer for which pay is received, but that was an incidental consequence rather than the principal objective of the arrangement. This conclusion is also in line with public policy. The prison authorities have a real fear that there may be a considerable reluctance for employers to be involved in the scheme if they thereby are taking on legal liabilities of this nature.
57. Mr Jones contends - and the respondents accept - that the question whether there was a contract of employment in place was plainly a decision for the Tribunal. This was not a case where the whole relationship was determined by the written contract, in which case the issue would have been a pure point of law. Here the question for the Tribunal was what is sometimes said to be a mixed question of law and fact. The Employment Appeal Tribunal can only interfere in such decisions if there is some error of law or the decision is perverse: see, for a recent judicial recognition of that well established principle, the observations of Lord Hope giving the judgment of the Judicial Committee of the Privy Council in Hanna v Imperial Life of Canada, Privy Council Appeal no.61 of 2005, paras 17-18. There was no such error here. The Tribunal carefully considered each of the principal elements of the relationship and concluded, as they were entitled to do, that this constituted a contract of employment.
58. There can be no doubt, says Mr Jones, that absent the Memorandum, and had there simply been a contract on the same terms as contained in the Written Particulars, the claimant would be an employee. Indeed, that is the status which everyone accepts the claimant had had from the time he left prison; and it was the status of similarly placed workers. The fact that there were certain limitations on his ability to attend work did not preclude there being the minimum obligation which is necessary for a contract to exist, since he was under a duty to attend work if he could do so, and that was sufficient to make a binding agreement.
59. On any view the Tribunal's decision that the criteria in Ready Mixed were met was one which a reasonable Tribunal, weighing the evidence, could properly reach. It could not conceivably be said to have been a perverse conclusion.
60. Neither the Daley nor the Thorpe cases were material here. They merely recognised that where the purpose of an agreement was to provide training rather than to enable the employee to work, no contract of employment would exist. Here, focusing upon the relationship between the claimant and the employer, the governing feature was that he would provide work for pay. The fact that the Prison Service, and even to some extent the other two parties, might see the benefits of work in terms of rehabilitation does not alter the principal purpose of the contract itself. A mother may want her son to go to work to stop him being feckless and idle; and the work may indeed achieve that objective, but it is no basis for saying that the son is not engaged in the field of employment. As to the public policy argument, that was no more than assertion. In any event, it was not a basis for distorting the proper categorisation of the agreement.

Discussion.

61. Logically, the second issue, concerning the nature of the agreement, is the first that should be answered since if the employers succeed on that ground, the effect of the purported exclusion clause is immaterial. Section 203 is only engaged where someone is either an employee or worker who has rights conferred by that Act. Accordingly, there is no reason why that section should bite at all if the claimant does not have the status of either employee or worker. Nonetheless, we have heard detailed argument on both issues and will deal with them both, taking them in the order in which they were argued before us. We turn first to consider the issue whether the exclusion clause was valid and had the effect of preventing this claim.
62. We would accept that if there is a contract between the employer and the prisoner which is separate and distinct from the agreement identified in the Memorandum, the exclusion clause would not be incorporated into that contract. The fact that the Memorandum provided the source of the contract would not be sufficient to incorporate the clause into the contract. The position would be akin to the separate orders made pursuant to the agency relationship in the Rose and Frank case.
63. We do not dispute that there is no inherent barrier in a prisoner and the employer choosing to enter into a contract of employment. An example might be where the employer undertakes to employ the prisoner from the time he leaves prison. However, we do not accept that a separate and distinct agreement arose in the circumstances of this case. In our judgment the mere fact that the claimant entered into an engagement on the same terms as other employees would not be sufficient to infer such a contract because that fact is equally consistent with the parties giving effect to the Memorandum. Any such contract can only be implied where there it is necessary to do so (see, by analogy, James v Greenwich Borough Council [2008] ECWA Civ 35 and we do not think that any such necessity is established here. In particular, in our judgment it cannot properly be implied simply by the engagement of the claimant by the employer.
64. Nor do we accept that the fact that the Written Particulars were issued demonstrates an intention to create a separate contractual relationship. That was a convenient way of disclosing to the claimant the terms and conditions which the employers were obliged to apply to him by virtue of the Memorandum, on the basis that they were obliged to apply to him the same terms as conferred on other employees.
65. As a pure matter of construction, we have no doubt that the clause does effectively establish that there was no intention to create legal relations. The fact that the clause is said to have been adopted "for the avoidance of doubt" does not alter its effect. Nor in our judgment does the obligation to apply the same terms to the claimant as to other employees create any ambiguity about the clause. Given the clear words of the clause, there is no reason to infer that it is not intended to mean what it says merely because those other employees have legally binding relationships.
66. In our judgment, the issue of greater significance is whether the exclusion clause infringes section 203 of the Employment Rights Act 1996. The aim of that provision is to prevent parties by agreement from either cutting back on the statutory rights, or seeking to put barriers in the way of an employee or worker who wishes to pursue his or her claims in a tribunal. Read literally, there is indeed a powerful argument that a clause which denies an agreement any legal effect does not infringe either of those principles. Rights cannot be limited or excluded until they have arisen, and the effect of this clause is to prevent them arising in the first place. Nor is anyone prevented from taking their claims to the tribunal; they can do so without restriction. The problem is that having done so, a claimant will not be able to establish that any rights arise, and that is the condition precedent to any claim succeeding.
67. So whilst the clause does not limit or exclude any rights, it does, to use the language in the Joseph case, have the effect of limiting or excluding the rights. In our view it would seriously weaken the policy objective which section 203 was designed to achieve if employers could, by the simple expedient of including a clause denying the agreement legal effect, thereby avoid the extensive statutory rights conferred upon employees. We think that there is no difficulty in adopting here the approach of the Court of Appeal in Joseph and Igbo and refusing to give effect to this clause on the grounds that it infringes section 203.
68. We do not, however, think that the "but for" test is of itself sufficient to bring a contractual provision within the scope of section 203. In our view Mr Purchase is plainly right when he says that cases such as Fuller and Realtime Engineering could not possibly be treated as infringing the section. Yet they would have had to be differently decided if a simple "but for" test had been adopted.
69. We are conscious that we have by no means exhaustively considered the cases in this area. However, we would suggest that whilst the "but for" test is a necessary condition for the operation of section 203, it is not sufficient. The second condition, it seems to us, which must be met before the clause can be said to infringe section 203 is that the only purpose of the clause must be to alter, or seek to alter, what would, absent the clause, be the legal effect of the contractual arrangements.
70. The significance of this second condition can be demonstrated by comparing the cases of Igbo and Realtime Engineering. In the Igbo case, the clause was designed to impose a particular legal characterisation on the failure of the employee to return at the due date. That failure would normally be a factor which may entitle the employer to take further disciplinary action, including dismissal, but it would not of itself amount to a termination of the contract. The only effect of the clause is to seek to bring about that change in the legal consequence. The clause did not in any way change what the parties could or could not do, but sought by agreement to create a different legal consequence than would otherwise have arisen in the event of a particular situation arising.
71. By contrast, in Realtime, even if the intention of providing for a substitute may have been to avoid the employment legislation, the provision of that clause did not merely alter the potential legal effect of the arrangements which the parties had made. It actually altered the arrangements themselves. It directly affected their rights and potential behaviour; the worker could appoint a substitute without being in breach of contract. (It would of be otherwise if the clause were a sham.).
72. Similarly, the agreement in the Logan & Salton case was not seeking to give a particular and unusual legal characterisation to a set of events that had occurred or might occur. Rather it was agreeing to a course of conduct which, but for the agreement, would not necessarily have occurred in that way at all. The parties may not have agreed that the relationship should be brought to an end, had the terms not been acceptable to each of them.
73. We recognise that this analysis does not necessarily fit all the cases that have found infringements of section 203. For example, in Secretary of State for Employment v Deary [1984] ICR 413 the EAT held the reduction of number of hours worked to a figure below 8 infringed the section because it precluded employees for qualifying for statutory rights. (It was then necessary to work at least 8 hours a week to build up continuity of employment.) This Tribunal (Nolan J as he was, presiding) held, obiter, that even an agreed variation of contract achieving that result would infringe section 140. We would respectfully question that analysis. The provision altered the rights of the parties under the contract; it did not simply change the legal characterisation of past or future events.
74. Applying that analysis, we have no doubt that the only effect of the exclusion clause here was to seek to alter the legal consequences of conduct pursuant to the relationship. The exclusion clause had no other purpose whatsoever. On the assumption that the claimant would otherwise have been able to take advantage of statutory rights, this has the effect of infringing section 203.

Was there a contract of service?

75. We turn to the second ground of appeal, namely that the Tribunal erred in any event in saying that there was a contract of employment. It is common ground that in this context the answer is a mixed question of law and fact, although we would observe that it would be highly unsatisfactory if different results could be reached by different tribunals in different parts of the country on what are essentially common arrangements.
76. There can be no doubt but that if this had been a simple contract entered into between the claimant and the employer, it would have been a contract of service. That is not disputed, and that indeed is how the employer has perceived the relationship since the employee left prison. If the only issue were whether there was sufficient control to justify the Tribunal's conclusion, we would have found that there was, notwithstanding the declaration that no contract of employment existed.
77. The crucial question, it seems to us, is whether the agreement takes on a different character when seen in the context of the tripartite arrangement and the resettlement scheme. We agree with the respondents that it does. We think that the Tribunal has erred in law in its approach to this arrangement. In substance it has treated the case as though the prison were some kind of agency for finding potential employees who might be acceptable to the employer. We appreciate of course that the Tribunal recognised that there were certain provisions in the relationship which were highly unusual, in particular the fact that the claimant could give no guarantee at all that on any particular day that he would be able to turn up for work even if willing to do so, but considered that this did not affect the fundamental nature of the relationship between claimant and employer. If it were legitimate to look at the relationship in that narrow way, essentially extrapolating the bilateral contract out of a trilateral arrangement, then we would not consider that there was any error of law in the Tribunal's conclusion. But it seems to us that this is to look at the arrangements in too narrow a way.
78. In our judgment, it is not legitimate to separate out and focus upon the features that identify the relationship between the claimant and the employer, and to treat those features of the relationship between the claimant and the prison, and the employer and the prison, as essentially incidental. Here was a tripartite relationship in which the prison selected prisoners whom it considered could benefit from job placement, and within the constraints of the prison rules, it permitted them to be allowed out on licence to obtain work experience designed to further their rehabilitation.
79. No doubt the employers who participated in the scheme would in some cases consider that they were obtaining the benefit of competent employee, but they were undertaking various obligations over and above those of a normal employer, in particular monitoring the prisoner and reporting back, and allowing prison staff to visit and regularly check on the arrangement.
80. If one focuses on the tripartite agreement, it seems to us that the dominant purpose has to be seen in terms of the rehabilitation objective. The prisoner could have the privilege of attending work withdrawn at any time and the employer could not insist as against the prison governor that he should be allowed to attend. If at any stage it appeared that the purpose of imprisonment itself was being undermined by breach of the licence conditions or if for any other reason the prison took the view that the arrangement was no longer conducive to rehabilitation, or perhaps even if they considered that some other prisoner ought to be given a similar opportunity and there were limits to the number of prisoners they could allow at any one time, then the arrangement would cease. The job placement had to take second place to those considerations.
81. We think that there is an analogy that can be drawn with the Daley and Thorpe cases, both tripartite cases. They are not, we accept, wholly on a par with this case because even focusing upon the relationship of the claimant and employer in those cases, the principal objective was training rather than the employer benefiting from the personal industry and skills of the worker. However, we do not accept Mr Jones' analogy of a mother who is delighted that her son has accepted employment because it would generally be conducive to a more constructive life. That would be a feature unknown to the employer, or of no relevance to him. That cannot be said to be the position here, where parties undertake a number of specific obligations one to the other and where all parties appreciate that the arrangement is designed to promote rehabilitation and will cease if at any time that objective is no longer considered to be achievable or if the claimant's behaviour is such that the prison considers that he is not taking proper advantage of that opportunity.
82. In our judgment the decision of the Court of Appeal in the case of Wiltshire Police Authority v Wynn, relied upon by the EAT in the Daley decision, also supports our conclusion. In that case a police cadet claimed that he was an employee employed under a contract of service. The industrial tribunal (as they were then called) found that he was, the EAT agreed, but the Court of Appeal upheld the police authority's appeal. Lord Denning MR said that the crucial question was the primary purpose of the relationship (p.656E):

"If the primary purpose was work for the master- and teaching the trade was only a secondary purpose- it was a contract of service. But if teaching the trade was the primary purpose- and work for the master was only secondary- then it was a contract of apprenticeship."

83. Similar observations were made by Waller LJ (p.658H) and Dunn LJ. The latter said this (p.660 H-661B):

"In my judgment, the Employment Appeal Tribunal failed to give sufficient weight to the question, what is the nature or substance of the relation created? Ever since the settlement cases of the 18^th and 19^th centuries, the common law has held that the court must look at the principal object of the contract in deciding whether or not a contract of service exists. Where the primary object of the contract is teaching or learning, then there is no contract of service. In Horan v. Hayhoe [1904] 1 K B 288 it was held that an apprentice jockey was not employed under a contract of service although in the ordinary course of his training and for the purpose of learning his business he performed the duties of a stable-boy during a considerable part of the day, was paid wages and was given free board and lodgings. He was not employed as a servant. The principal object was teaching and learning. The fact that the conditions of engagement are consistent with a contract of service is not decisive if the principal object of the relationship is teaching and learning. In placing emphasis on the terms of engagement of the police cadet rather than on the principal object of the relationship, in my judgment the Employment Appeal Tribunal fell into error."

84. In our judgment, the Employment Tribunal in this case committed essentially the same error. They did not consider the relationship in the round to determine its real objective but focused on the terms of engagement between the employer and the prisoner, which taken in isolation were, we accept, consistent with a contract of service being in place.
85. In our judgment, the only permissible conclusion that can be reached, if one focuses upon the purpose of the arrangement, is that its purpose is to assist the rehabilitation of the prisoner. The provision of the personal service to the employer is essentially a secondary purpose, albeit important no doubt to those two parties. That would not preclude the employer and prisoner necessarily entering into a specific and different contract of employment. An obvious example is where there is agreed prior to release that the employee would be employed as from a date of release, but no such bilateral contract in our view arose out of the nature of this tripartite relationship.
86. We should add that we accept that policy considerations, particularly when resting on unproven assertions, cannot be a basis for construing arrangements of this kind. That is not to say that the concerns of the prison service are misplaced. Indeed, the lay members, who have some experience of arrangements of this kind, believe that they are probably realistic. Moreover, the very fact that policy concerns of this nature arise is of itself a reflection of the atypical nature of the relationship. Whilst policy does not dictate the result, we do draw some comfort from the fact that our conclusions will not exacerbate the risk that the operation of the resettlement scheme will be undermined.
87. It follows that section 203 would not bite to deprive the claimant of any rights as he would be neither a worker nor employee and would not obtain any rights under the 1996 Act. On that basis we see no reason why effect should not be given to the statement that there was no intention to create legal relations.

Disposal.

88. It follows that for these various reasons the appeal is upheld. We find that the claimant was not an employee in the period when he was working for the employer whilst still in prison, and that his period of employment referable to that time cannot count for the purposes of determining whether he has sufficient continuity of employment.