United Kingdom Employment Appeal Tribunal

APPEARANCES

 

For the Appellant	MR J WYNNE (of Counsel) Instructed by: Messrs Ashton Bond Gigg Solicitors Pearl Assurance House Friar Lane Nottingham NG1 6BX
For the Respondents	MISS B AHMED (of Counsel) Instructed by: Messrs O H Parsons & Partners Solicitors 3rd Floor Sovereign House 212-224 Shaftesbury Avenue London WC2H 8PR


 


SUMMARY

Working Time Regulations: Worker / Holiday Pay

Contractual obligation to perform personal services and whether the Claimant bricklayers were a business undertaking by reason of their contractual relationship with the Respondents. Failure of the Employment Tribunal to give proper consideration to the contractual terms. Remission to fresh tribunal for ascertainment of worker status and whether there could be set off of rolled up holiday pay.


 


THE HONOURABLE MR JUSTICE NELSON

1. This is an appeal by David Wilson Homes Ltd, the Respondents, against the decision of the Employment Tribunal sitting at Nottingham on 8 May 2007 and 12 June 2007, determining that Mr Glass and Mr Horner, the Claimants, were workers for the purposes of the Working Time Regulations 1996, and that they were entitled to be paid for holidays taken between June and the end of September 2006 when their contracts ended without any set off for any rolled up holiday pay. The decision, with reasons, was promulgated on 3 September 2007.
2. The Respondents contend that the Employment Tribunal failed to direct itself properly as to the law, failed, in particular, to consider the terms of the contract between the parties and its impact, and reached a perverse decision on central factual issues. The Employment Tribunal should in any event have ordered a set off of rolled up holiday pay as such sums had been paid here transparently and comprehensively in respect of minimum annual leave by way of staggered payments. The Employment Appeal Tribunal should substitute its own finding that the Claimants were not workers under the Working Time Regulations or alternatively should remit the matter to a fresh tribunal. The Claimants, whilst recognising that the decision is in parts somewhat opaque, seek to uphold it upon the grounds that its reasoning is essentially sound, and can be ascertained if the decision is given detailed consideration.
3. Before the hearing of the appeal commenced the parties requested that we resolve an issue relating to disputed evidence both on the Working Time Regulations issue and the rolled up holiday pay issue. The Respondents set out six propositions which, they said, accurately stated the evidence given on key issues. The Claimants had not been prepared to agree these propositions and no order had been made for the provision of the Chairman's notes. At the hearing before us concessions, for the purposes of the appeal, were made in relation to the first two propositions which related to the Working Time Regulations but no concessions were made to the remaining four propositions which related to the rolled up holiday pay. We concluded that it would be both possible and appropriate to hear the appeal in relation to the Working Time Regulations but that the disputed evidence in relation to the rolled up holiday pay issue meant that that had to be dealt with separately.

The Facts

4. The Claimants were both bricklayers who worked on various sites operated by the Respondents between March 2004 and September 2006. They had been working together as a team for some forty years and at the relevant time called themselves Jimel Brickwork, a name which took part of each of their Christian names. They used the same accountant, they provided their own tools, their own public liability insurance and used the Inland Revenue's CIRS(4) card system which confirmed their self-employed status.
5. When they were to perform work for the Respondents each of the Claimants individually was sent a labour only order which was stated to be subject to the conditions of contract set out on the back of the order. Each of them invoiced the Respondents separately and was paid separately. The Respondents completed an assessment form for labour-only subcontractors in respect of each of the Claimants for the particular item of work to be carried out. This covered questions such as whether the method of payment was piece work, i.e. a rate to complete a particular job rather than an hourly rate, whether the financial risk was borne by the Claimants, whether they provided plant, were registered for VAT and other such matters. The Respondents would then conclude on the basis of the answers given whether the individual was to be classified as a subcontractor or directly employed. The Claimants were classified as subcontractors.
6. When the contractual relationship terminated at the end of September 2006 the Claimants asserted that they were entitled to holiday pay as they were properly described as 'workers', within that definition under Regulation 2(1) of the Working Time Regulations 1998. The Respondents resisted the claim on the basis that the Claimants were not workers and that in any event they had received rolled up holiday pay which should be set off against any holiday entitlement they might have. The Respondents relied upon the nature of the relationship and the terms of the contract. They submitted before the Employment Tribunal and the Employment Appeal Tribunal that clause 3.1, clause 7.4 and clause 15.1 showed that the Claimants could work as and when they pleased and could substitute other labour for their own. They were required to achieve a result rather than provide a personal service. Clauses 3.1, 3.3 which placed the risk of the task on the Claimants, clause 4.2 requiring the cost of keeping the site clean and safe being placed upon the Claimants, clause 6.2, 6.6, 6.7 and 7.4 which placed the risk and responsibility upon the Claimants for completing the task within the times as set by the Respondents and 13.11 which placed the risk upon the Claimants of standing time or time lost. Clause 8.2 made the Claimants responsible for transporting, storing and insuring all equipment they used on the site and 8.3 permitted the Respondents to deduct sums for lighting, power, storage and accommodation. Clause 16.1 entitled the Respondents to carry out remedial work without notice and charge the Claimants therefore and clause 18 provided an indemnity.

The decision

7. The Employment Tribunal set out the facts and the law, and concluded that the Claimants were contracted to provide personal service. It was the clear expectation of the parties that the Claimants would do the work personally, and if it proved to be defective they would personally put it right. There was no financial risk to them save the obligation to pay to put any defects right. Control was exercised by the Respondents, directions and instructions given by the Respondents and there was no negotiation on prices. The contract in the case of Redrow Homes (Yorkshire) Limited v Wright [2004] 3AR 98 had no material differences to the contract in the present case. As in Redrow the contract in the present case was 'one size fits all'. The Employment Tribunal said that labour only contracts for bricklayers were common in the industry and there were clearly clauses within the contract that were not enforced or did not apply to these individuals. The items of work were directly within the capacity and skills of the two Claimants, the payments were not to Jimel Brickworks, but to each of the two Claimants separately and the fact that the Respondent had chosen to make individual contracts with the two men, and not a contract with Jimel Brickworks as a partnership, unequivocally pointed towards an expectation that the work would be performed personally. The dominant purpose of the contract was the provision of work by the individual skilled bricklayers.
8. The Employment Tribunal also found that the Respondents were not a client nor a customer as they set the terms and conditions, they set the prices and there were not two independent companies negotiating with one another on a level playing field in order to reach an agreement. It was the Respondents who had control and the Claimants who had to take it or leave it. The Claimants were therefore not arms lengths businesses or independent, but two individuals. There was, the Employment Tribunal found, mutuality of obligation between the Claimants and the Respondent.
9. The Employment Tribunal also rejected the Respondents' arguments on the rolled up holiday pay issue though that does not fall to be dealt with in the appeal because of the absence of any agreement or the chairman's notes in relation to the disputed evidence.

The Grounds and Submissions

10. The principal grounds relate to the Employment Tribunal's approach to the law and in particular the terms of the contract. The Respondents allege that the Tribunal failed to direct itself to the proper legal tests as to worker status, failed to direct itself to the relevant legal principles, and failed to consider the terms of the contract which establish a comprehensive framework of rights and obligations with significant risk on the Claimants, indistinguishable from the sort of contract expected between businesses. The finding that there was virtually no financial risk to the Claimants was perverse. The Tribunal not only failed to take into account whether the Claimants worked in effect as a partnership but more particularly failed to consider the permission under the contract to substitute or supplement their own labour to perform the bricklaying tasks. The reasons they have provided for explaining why the Respondents failed were inadequate.
11. Mr Wynne on behalf of the Respondents submitted that the Regulations require a twofold test, firstly whether the Claimants were obliged by the contract to 'do or perform personally any work or services' for the Respondents, and secondly that the Claimants were not carrying out such a service as part of a business undertaking of which the Respondents were a customer. He relied on Byrne Brothers (Formwork) Limited v Baird [2002] IRLR 96. The personal service had to be the dominant purpose of the contract (James v Redcats (Brands) Limited [2007] IRLR 296). The contract between the parties in this case was intended to cover the whole of the relationship between them. The primary task under that contract was to carry out the brickwork, it did not matter who performed that task. The power to substitute other labour in place of their own under clause 7.4 was of particular importance in this context but was misconstrued by the Employment Tribunal who appeared to contemplate in paragraph 9.3 of their decision that clause 20.1 diminished its effect. Clause 20.1 however related to the assignment or sub-letting or subcontracting of the contract being impermissible without prior written consent of the Respondents. Such a clause was not relevant to the substitution of labour within the original contract.
12. Nor had the Employment Tribunal understood that the contract in Redrow, which they thought to be comparable to the present case, was specifically found by the Court of Appeal not to include condition 6 which permitted others to perform the contractual tasks and hence was inconsistent with an obligation to do the work personally. The Employment Tribunal failed to appreciate that much of the written contract was wholly consistent with the Claimants working as a business undertaking with the Respondents as their customers. Clauses 7.4, 8.2, 8.3 and 6.7 and 13.11, especially those which placed the risk of delay or failure upon the Claimants, were only consistent with a business arrangement. Clause 15.1 specifically stated that the contract was not a contract of employment and the Claimants were not to be treated as either employees or having any rights of an employee. 'Employee should be construed as including 'worker''.
13. Furthermore the Employment Tribunal by its emphasis on the word 'customer' appears to have misunderstood and misapplied the test of business undertaking. Nor was it an error, as the Employment Tribunal said in paragraph 8.1 for the Respondents to describe the Claimants as self-employed operating a business on their own account. The fact of self-employment was one of the factors which it was necessary to consider in determining whether a business undertaking existed, even though it was not in itself determinative.
14. The Employment Tribunal, Mr Wynne submitted, did not specify which clauses in the contract did not apply to the Claimants and the reason why they did not apply. It was impossible in the circumstances to know how they had treated the contract and applied it to the facts. It appeared that they had simply given it insufficient weight. By looking only at the situation of the Respondents as customers, they failed to look properly at the Claimants to see if they were a business undertaking. The citation of substantial passages of that part of the Redrow decision which did no more than determine why condition 6 in that contract did not apply, shows that the Employment Tribunal had not fully understood either the case or the task that they were supposed to be undertaking.
15. The finding that the Claimants had virtually no financial risk was perverse. They were responsible for the speed of work, the speed of materials and for any defects. There was clearly substantial risk upon them.
16. Miss Ahmed submitted on behalf of the Claimants that whilst the decision may not be well set out and could be described as weak in its reasoning, it was possible to tease out why the Tribunal reached the decision they reached. They did consider the question of business undertaking correctly as paragraph 10.1 of the decision demonstrated. If the Respondents were 'customers' it could only be because the Claimants were a business undertaking so there was nothing wrong with their reasoning in this respect. The Tribunal sets out the terms of the contract from 6.13 of their decision onwards which demonstrates that they did look at both the contract and indeed the way it was performed. They were entitled to do this. The contractual terms as to risk were never enforced against the Claimants. The terms upon which the Respondents rely were therefore effectively waived. There was no perversity in the finding that there was no financial risk as the Claimants had put no money in, and suffered no loss. It was however accepted that they could move on to a different site if that one was not profitable.
17. The separate labour only order forms sent to each Claimant for each project showed that this was for personal services. Again the substitution clause under 7.4 never occurred it was never enforced. There was no retention payment.
18. Paragraph 10.2 of the decision shows why the Employment Tribunal concluded that the Claimants were not a business undertaking. It was the Respondents who set the terms, it was the Respondents who set the prices, there were no negotiations, they were not equal parties. It was the Respondents who had control and the Claimants who had to take it or leave it. Those facts justified the findings made.
19. Paragraphs 9.3 and 9.4 set out the findings which justified the conclusion that these were individual contracts with the expectation that the work would be performed personally by each Claimant. The dominant feature was personal work by the Claimants. On the evidence, as set out in 9.2, it was the Claimants who would personally have to put the work right if it was not up to standard. That's how the contract was performed. The performance shows that the contract was varied.
20. Mr Wynne replied that it is the contract of employment which determined the nature of the relationship not the manner in which the contract had been performed unless, as HHJ Peter Clark said in the case of Real Time Civil Engineering Limited and Mr Callahan EAT/0516/05/ZT, the contract has been either varied or it is a sham. As was said in Express and Echo Publications Limited v Tanton [1999] IRLR 367 the contract must contain an obligation on the part of the employee to provide his services personally. The fact that the contract is performed personally will not be decisive.

The Law

21. The Working Time Regulations 1998, Regulation 2(1) states:-

"Worker means an individual who has entered into or works 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."

22. There are three elements to this definition, firstly there must be a contract to perform work or services, secondly there must be an obligation to perform that work personally, and thirdly the individual will not be a worker if the provision of services is performed in the course of running a profession or business undertaking and the other party is a client or customer. As Elias P said in James v Redcats Brands Limited [2007] IRLR 296 the last two elements are interrelated concepts.
23. In considering these elements the first task is to ascertain whether there is a contract under which there is an obligation to perform personal services. This necessitates a careful consideration of the contract itself, if the parties intended all the terms of their contract, apart from any to be implied, to be in that document. If not, oral exchanges or evolution by conduct may also be relevant in order to ascertain the parties' intentions. Carmichael v National Power plc [2000] IRLR paras 19 and 33.
24. A limited power to appoint substitutes is not inconsistent with an obligation for personal service. Byrne (paragraph 13). It is to be noted that in Redrow both Lord Justice Pill and Mr Justice Holman considered that condition 6 in that contract, which they found not to have been incorporated, was inconsistent with an obligation to do the work personally as it, amongst other things, permitted others to do the work.
25. Once the terms of the agreement have been established between the parties it must be considered whether those terms were varied or, where the terms do not in truth regulate the real relationship between the parties but seek to defeat legislation, whether the agreement is in fact a sham.
26. In deciding whether there is an obligation to do the work personally the contract must be construed. The fact that the individual chooses personally to supply the services is irrelevant; the issue is whether he is contractually obliged to do so. James (paragraph 28), Redrow (paragraph 21). If it is found that there is a contractual obligation to do the work personally it may still be necessary to consider whether that service was being supplied in the course of a business to a customer. This issue did not arise in Redrow.
27. As Elias P said in James:-

"The fact that the individual may be in a subordinate position, both economically and substantively, is of itself of little assistance in defining the relevant boundary because a small business operation may be as economically dependent on the other contracting party, as is the self-employed worker, particularly if it is a key or only customer.

What the courts must essentially try to do here, it seems to me, is to determine whether the essence of the relationship is that of a worker, or somebody who is employed, albeit in a small way, in a business undertaking." Paragraphs 48, 49.

28. He added that in some cases the business is effectively created by the contract (paragraph 50).
29. Each case will depend upon a careful analysis of all the elements of the relationship. As was said in Byrne it may be relevant to assess the degree of control exercised by the putative employer, the exclusivity of the engagement, its typical duration, the method of payment, what equipment the putative worker supplies, the level of risk undertaken and other matters. The first consideration however is the contract itself.
30. As Elias P suggested in James one way of approaching the analysis is to seek to discover whether the obligation for personal service is the dominant feature of the contractual arrangement or not. This test may be of help but it is not one which has to be carried out. If personal service is the dominant feature then the contract will normally lie in the employment or worker field; if it is not, for example, if the dominant feature of the contract is a particular outcome or objective and the obligation to provide personal service is an incidental or a secondary consideration, it will lie in the business field. James paragraph 67.
31. I agree with Elias P that what has to be determined is whether the essence of the relationship is that of a worker, or somebody who is employed, albeit in a small way, in a business undertaking.

Discussion

32. The Employment Tribunal decision is substantial and the reasoning detailed so it is with reluctance that we have felt obliged to conclude that Mr Wynne's submissions have merit. The starting point in determining whether the Claimants were workers within the meaning of the Working Time Regulations was the contract. Although the Employment Tribunal recited many of its terms within their decision they do not analyse any of its contents save in a superficial manner. The reason for this may be that in paragraph 9.3 they conclude that 'there were clearly clauses within the contract that were not in force or applied to these individuals'. They do not however say which clauses were not in force and which did not apply to the individuals. It is therefore impossible to know what weight has been given to the Respondents' arguments on the purpose of the contract, the financial risk to which the Claimants were subject and the power of substitution of labour.
33. The Tribunal do appear to deal specifically with clause 7.4 by implying that it is subject to clause 20.1. This is not the case however as the inability to assign sub-let or subcontract without the prior written consent of the company does not affect the contractors power to substitute labour under the contract he is performing without any subcontracting, assigning or sub-letting. If clause 7.4 was and remained part of the contract and permitted the Claimants to engage someone to carry out the work in their place whilst, for example, they went off to carry out some other work at another site, it would, on its face, be inconsistent with a contract for personal services.
34. Nor is it easy to see the basis for the finding that there was virtually no financial risk to the Claimants if clause 6.2, 6.6 and 13.11 formed part of the contract. The Tribunal's findings in paragraph 9.3 do not, as stated earlier, make it clear which of the clauses did not apply. It is not clear whether clauses 6.2, 6.6, 7.4 and 13.11 were found not to be terms of the contract and if so for what reason. The mere fact that they were not enforced would not prevent them from remaining part of the contract. We were told in the course of submissions that the contract terms were not enforced against the Claimants and should be regarded as waived. This is not however a finding which the Employment Tribunal made. We were told that substitution never occurred and was never enforced and that if defects occurred they had to be personally put right by the Claimants, rather than being put right by the Respondents and the Claimants then having to pay for their work. The manner in which the contract was actually performed is inconsistent with its terms, it was submitted, and shows that the contract was varied. Again however there is nothing in the Employment Tribunal judgment which says which terms have been waived, which terms have been varied and for what reasons.
35. Decisions in cases of this kind are often finely balanced and difficult to make. For our part we are not satisfied that there has been a properly detailed analysis of the contractual conditions and facts to enable a properly reasoned decision to be made.
36. It also appears that the Tribunal failed to appreciate that the Court of Appeal found that condition 6 in Redrow was not intended to be included in that contract so as to permit others to do the work, and would have found, had it been incorporated, that it was inconsistent with a contract for personal services. Part of Condition 6 however appears to be similar in its effect to clause 7.4 in the present case. We are also unclear as to whether by its emphasis on the word 'customer' the Employment Tribunal had not lost sight of the question as to whether the contract itself created the business as Elias P said in paragraph 50 of James. There does not appear to have been a clear consideration of the concept of business undertaking.
37. Furthermore we do not feel able to ascertain the reasoning for the decision with sufficient clarity.
38. Regulation 2(1) of the Working Time Regulations 1998 is clumsily drafted and the task of applying it to any contractual and factual situation is difficult. Nevertheless the errors in doing so in this case are such that in our judgment the decision of the Employment Tribunal cannot stand. The failure to consider the contractual terms properly and to make findings as to which of them they considered were varied or waived or not in force or applied and for what reasons, together with what appeared to be misunderstandings of the business undertaking test, make it inevitable that their decision must be set aside.

Disposal

39. We cannot accept Mr Wynne's submission that the Employment Appeal Tribunal can properly substitute their own conclusion and find that the contract, the ability to substitute and the degree of risk are inconsistent with worker status. Decisions on issues such as this are often finely balanced and can be particularly fact sensitive. Without hearing from the Claimants we do not believe that we could come to decision which would provide a just result. How the contracts were entered into, what negotiations took place, whether and if so which of the terms were varied or waived, are all matters that need to be explored in the evidence. We cannot safely undertake that task on the information before us, particularly with the reservations which both parties have even on the facts found at the Tribunal hearing relating to worker status.
40. We are therefore satisfied that the matter must be remitted for further hearing before the Employment Tribunal. This must in our view be a fresh tribunal rather than the same Employment Tribunal. The failure to consider the contract properly is in our judgment a substantial failure and as the findings made are strongly adverse to the Respondents we consider that the matter would be better considered by a new tribunal.

Conclusion

41. The appeal is therefore allowed and the case remitted to a fresh tribunal for rehearing.