United Kingdom Employment Appeal Tribunal

APPEARANCES

 

For the Appellant	MR SIMON GORTON (of Counsel) Instructed by: Messrs Laytons Solicitors Tempus Court Onslow Street Guildford Surrey GU1 4SS
For the Respondent	MR KENDERICK HORNE (of Counsel) Instructed by: Messrs O H Parsons & Partners Solicitors 3rd Floor Sovereign House 212-224 Shaftesbury Avenue London WC2H 8PR


 


SUMMARY

JURISDICTIONAL POINTS: Worker, employee or neither

WORKING TIME REGULATIONS: Holiday pay

Whether 'workers'- whether contracts for personal services – contractual right to use substitute labour – Protectacoat; Buckborough; Kalwak and earlier cases considered. Appeal allowed. The Claimants not engaged under contracts to work/provide services personally.


 


HIS HONOUR JUDGE PETER CLARK

1. This appeal raises once more the well worn question of whether the Claimants, Mr Alan England (Junior) and Mr Alan England (Senior), were workers within the definition contained in reg 2(1) of the Working Time Regulations 1998 (WTR) for the purposes of determining their entitlement to holiday pay in respect of their work for the Respondent, MPG Contracts Ltd. An Employment Tribunal sitting at Manchester chaired by Employment Judge Cook determined, by a reserved Judgment with reasons dated 4 September 2008, that both were workers. Against that finding the Respondent appeals.

The Facts

2. The Respondent is a contractor providing services to the commercial and residential markets in the area of drylining, suspended ceilings, joinery and glazed partitioning and associated trades.
3. The Claimants worked as self-employed partitioning and ceiling erectors on a contract at Shuttleworth between October 2007 and 14 February 2008. Both signed written contracts with the Respondent headed 'Contract for Services'. The material terms of the contracts, in identical form, were these:

"1) The Contractor may from time to time offer the Subcontractor engagements on a contract for services basis under the terms of this Contract.

2) This contract shall cover all engagements performed by the Subcontractor on behalf of the Contractor, as may be offered on an ad-hoc basis from time to time, subject to negotiation in respect of the schedule of rates. However, there is no obligation on the Contractor to provide the Subcontractor with any work and the Contractor or the Subcontractor shall be entitled to terminate this contract forthwith and without notice.

3) The Subcontractor accepts that the Contractor will incur no liability should it fail to offer an engagement to the Subcontractor. The Subcontractor has the right to refuse to accept an engagement and shall incur no liability to the Contractor.

4) The Subcontractor may accept and perform engagements from other persons at any time.

5) The Subcontractor is free to subcontract the work or to engage or employ at the Subcontractor's own cost whatever suitably trained Representatives that may be necessary to fulfil an engagement, provided that the Contractor is provided with sufficient information to satisfy itself that the Representatives have suitable skills and experience to do the work. The Subcontractor shall remain liable to the Contractor for any work performed by any of the Representatives.

…

14) Nothing in this Contract shall be construed or have effect as constituting any relationship of employer and employee, agency or partnership between any of the Representatives or the Subcontractor and the Contractor. The Subcontractor warrants and represents to the Contractor that the Subcontractor is an independent contractor. Accordingly, neither the Subcontractor nor any of the Representatives are entitled to holiday pay, sick pay or pension rights."

4. The contract provided for a retention of 3 per cent of the total cost of the sub-contractor's payment to be held 'until the works performed have been passed as satisfactory by the client'. Both men held CIS4 cards. Each submitted invoices on which they were paid at the prevailing rate, less 3 per cent retention and 20 per cent tax.
5. Payment for the work undertaken was made in accordance with a schedule of prices determined by the Respondent. The rates were not open to negotiation. The Respondent switched the rate of pay between 'price work', time work and hourly pay.
6. Their work was checked on site, where the Respondent was subcontracted to Bovis Homes, by the Respondent's senior supervisor, Michael Gavin. He allocated work to the Claimants and inspected it on a daily basis. A surveyor from Bovis then checked the work on a weekly basis.
7. Mr Aldridge, the Respondent's Finance Manager, who gave evidence before the Employment Tribunal, believed that he was contracting with the individual Claimants, not a limited company.
8. During the relevant period October 2007-mid-February 2008 the Claimants did not provide their services to anyone other than the Respondent.

Legal Principles

9. Regulation 2(1) WTR provides the following definition:

"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 expressed or implied and (if it is expressed) 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."

10. It is not suggested on behalf of the Claimants in the present case that they fall within the limb (a) - employee - definition. Thus the question is whether, as the Employment Tribunal found, the Claimants fall within limb (b).
11. That question in turn raises three issues:

(1) Is this a contract to perform work or services?

(2) If so, is it a contract to perform personally that work or those services?

(3) If so, are the Claimants providing services in the course of running a business undertaking to the Respondent as a customer?

12. As to the first issue, the Respondent accepts that there was a contract for services. The second and third issues required determination by the Employment Tribunal.

Personal service

13. The element of personal service is essential to both a limb (a) contract of service and a limb (b) contract for personal services: see James v Redcats (Brands) Ltd [2007] ICR 1006, per Elias P, para 32.
14. In determining the personal service question significance is attached to whether, under the contract, there is an unfettered right to provide a substitute to carry out the work. In Express & Echo Publications Ltd v Tanton [1999] ICR 693 the Court of Appeal held that where the relevant written term of the contract between a driver and his putative employer provided:

"3.3 In the event that the contractor is unable or unwilling to perform the services personally he shall arrange at his own expense entirely for another suitable person to perform the services."

in the absence of a finding by the Employment Tribunal that such provision was a 'sham' the parties were bound by that term which was inconsistent with a contract of personal service. It was an error of law for the Employment Tribunal to concentrate on what actually occurred during the course of the relationship rather than looking at the obligation by which the parties were bound; per Peter Gibson LJ, 697G.

15. The meaning of 'sham' in the employment field has been the subject of discussion in subsequent cases. It was considered by Elias P in Consistent Group Ltd v Kalwak [2007] IRLR 560 and the Court of Appeal in that case, in which the leading judgment was given by Rimer LJ [2008] IRLR 505. HHJ Burke QC considered the C.A. reasoning in Kalwak in Redrow Homes (Yorkshire) Ltd v Buckborough [2009] IRLR 34 (EAT) and both Kalwak and Tanton have been further considered by the Court of Appeal in Protectacoat Firthglow Ltd v Miklos Szilagyi [2009] EWCA Civ 98.
16. We do not propose to subject the reasoning in those cases to yet further detailed analysis. We respectfully adopt the approach of Smith LJ in Protectacoat, the most recent decision of the Court of Appeal by which we regard ourselves as bound. At paragraph 50 she said:

"The kernel of all these dicta is that the court or tribunal has to consider whether or not the words of the written contract represent the true intentions or expectations of the parties, not only at the inception of the contract but, if appropriate, as time goes by."

17. That clear approach seems to us to meet the objection taken by Mr Gorton to the point made by way of amendment to the Claimants' Answer to the appeal. That amendment reads:

"Further or alternatively, in the light of Buckborough the Employment Tribunal would in any event have been entitled to conclude that the [Claimants] were workers on the following grounds:

(i) that the purported contractual entitlement to appoint substitutes was a sham (in the sense that the parties did not intend the provision to be effective) and/or

(ii) that the [Claimants] by agreeing to ensure that the work was carried out were personally providing a service to the [Respondents] and were therefore workers regardless of whether they undertook to perform the actual work themselves."

18. It seems to us that the use of the word 'sham' is unhelpful, in the sense of Lord Diplock's definition in Snook v London & West Riding Investments Ltd [1967] 23 QB 786, 802, set out at paragraph 37 of Smith LJ's judgment in Protectacoat. The question before this Employment Tribunal was, what were the true intentions and expectations of the parties. Did the words of the written agreement reflect their true intentions or expectations?
19. We emphasize that the right to provide a substitute will not necessarily negative an obligation of personal service. Tanton was distinguished on its facts by Lindsay P, giving the judgment of the Employment Appeal Tribunal in McFarlane v Glasgow City Council [2001] IRLR 7 and in Redcats, having considered both Tanton and McFarlane (paras. 29-33), Elias P drew a distinction (para 34) between a 'substitution' clause which provided the right to send a substitute when the contractor was unable to provide work and where, as in Tanton, the contractor was unable or unwilling to provide work.
20. The second limb of the amendment to the Claimants' Answer is based on Judge Burke's reasoning at paragraph 56 of Buckborough, where it was suggested that a distinction must be drawn between the words 'work' and 'services' in the expression 'work or services' in reg 2(1) WTR. We would not wish to base our approach in this case on that reasoning. We do not accept that merely to provide a substitute to do the work amounts to an obligation personally to perform a service for the Respondent.
21. Employment Tribunals must beware of applying policy considerations as to the nature of employment and self-employment to the question whether a person is a worker. As Pill LJ made clear in Redrow Homes (Yorkshire) Ltd v Wright [2004] ICR 1126, para 21:

'The 1998 Regulations leave parties free to enter contracts and, whether or not the contract includes an obligation to do the work personally is a matter of construction … it does not necessarily follow from the fact that the work was done personally that there was a contractual obligation to do it personally'.

22. It is not enough that the Claimant ought to be a worker if, on its proper construction, the contract is not one of personal service.

Business undertaking

23. In Byne Bros (Formwork) Ltd v Baird [2002] ICR 667, para 17(2), Mr Recorder Underhill QC spoke of an intermediate class of protected worker who is on the one hand not an employee but on the other hand cannot in some narrower sense be regarded as carrying on a business.
24. That guidance did not fall for consideration by the Court of Appeal in Redrow v Wright (see para 22, per Pill LJ), but was the central issue in Redcats (see para 39, Per Elias P), a case decided on the identical wording in s.54 (3) of the National Minimum Wage Act 1998. The President, whilst accepting that assistance may be derived from the approach of Langstaff J in Cotswold Developments v Williams [2006] IRLR 181; is the purported worker marketing his services as an independent person to the world in general or has he been recruited by the principal to work for that principal as an integral part of the principal's operation (paras 49-50), then embarked on an analysis of the cases on the extended definition of employee in the discrimination statutes, concluding that the 'dominant purpose' test, first propounded by the Court of Appeal in Mirror Group Newspapers v Gunning [1986] ICR 145 and later applied by the Court in Mingeley v Pennock (t/a Amber Cars) [2004] ICR 727, also applies in relation to the definition of worker there and now under consideration. Whilst all factors must be considered, the question is whether the obligation for personal service is the dominant feature of the contractual arrangement; if so, it is a 'worker' contract.

Discussion

25. It seems to us, having considered the rival submissions of counsel, that the critical question is whether, in the present case, these were contracts for personal services made between the Respondent and the Claimants. The Employment Tribunal dealt with that issue at paragraphs 23-24 of their Reasons in this way:

"Substitution

23. We have already set out in full the terms of paragraph 5 which identify the right to "subcontract the work". Mr Aldridge said that that right was "unfettered". We do not agree. It is clear that even on the construction of the contract, the respondent has the final word and may veto any chosen appointment. There is an absolute right for them to be "satisfied" that the representative selected has "suitable skills and experience to do the work".

24. The evidence shows that when the Englands attempted to introduce Mr England Junior's brother, Stuart England, onto the site, consent was refused by Mr Gavin. His reason for doing this was that there was "not enough work". This effectively undermines the right of the claimants to appoint substitutes or to appoint subcontracting workers. In addition, it appears to us to undermine the respondent's argument that there was no obligation on them to provide work. The fact is that they did provide work throughout the relevant period, and their reasons for refusing to allow Mr Stuart England on site were that were he to come there would be insufficient work. This flies in the face of the argument that there was no obligation to provide work."

26. Based on the authorities we agree with Mr Gorton that the starting point in answering that question are the words of the written contract. It is worth observing that this Respondent went to some lengths to bring to the attention of the Claimants the full effect of the contracts which they were asked to and did sign. The Terms and Conditions which, so far as are material, we have earlier set out, are referred to on the front of the contractual document signed by the parties. In addition, the men were supplied with a separate document headed 'Understanding your Contract with MPG Contracts Ltd'. Under the sub-heading 'Using other subcontractors' appear these words:

"You are free to subcontract any work offered to you or engage additional labour at your own cost to complete it. However, we need to ensure for Health and Safety reasons that all individuals working on site have suitable skills, experience and insurance to do the work. Therefore if you intend to use subcontractors please ensure that you give us details of each subcontractor you are using."

27. We accept Mr Gorton's submission that on a 'black letter' construction of Clause 5 of the Standard Terms and Conditions this was not a contract for personal services. The fact that the 'subcontractor' (the Claimants) was free to engage labour other than themselves to fulfil the contract with the Respondent is wholly inconsistent with a contract for personal services. That any such labour should have suitable skills and experience to do the work is precisely analogous to the contractual term in Tanton, where the driver had to satisfy the company that any relief driver was trained and was suitable to undertake the driving services. Plainly Express & Echo could not be expected to accept a disqualified driver as a substitute any more than MPG could be expected to accept an individual wholly inexperienced in drylining or ceiling fixing. In our judgment this was an unfettered right of substitution on the face of the written contract and the Employment Tribunal's approach at paragraph 23 of their reasons demonstrates a material misunderstanding of the case law in relation to the right of substitution.
28. However that is not, as Mr Gorton primarily submits, the end of the matter. It is still necessary to view the entire factual matrix, not so as to fall into the trap of looking at the way in which the contract worked in practice as an alternative to determining the contractual obligation, but to see what were the true intentions of the parties, if not initially then as time went by; in other words is it the case that the agreement as written did not reflect the true intention (or expectations) of the parties?
29. On this aspect the focus falls on paragraph 24 of the Employment Tribunal's Reasons. Does the evidence of Mr Gavin that his refusal to have Stuart England on site because there was "not enough work" effectively undermine the right of the Claimants to appoint sub-contractors or substitutes? The Employment Tribunal thought that it did. For our part we are wholly unable to see why that should be so. There is no finding by the Employment Tribunal that Stuart England was put forward as a substitute for either of the Claimants; rather as additional labour for whom there was insufficient work. Thus, it seems to us, the Employment Tribunal took into account an irrelevant factor in determining that these were in truth contracts for personal services notwithstanding the plain meaning of Clause 5.
30. In these circumstances we are satisfied that the Employment Tribunal fell into error in concluding that the Claimants were engaged under contacts for personal services. On this ground alone the claim for holiday pay under the WTR failed and ought to have been dismissed.
31. Mr Horne argues that if we are not persuaded that the Employment Tribunal gave permissible reasons for concluding that these were contracts for personal service on the basis of their findings as to the right to provide substitutes we should remit the case, preferably to the same Employment Tribunal, for further findings and determination. We disagree. It seems to us that there is no suggestion that Stuart England was rejected as a substitute for either of the Claimants. In these circumstances remission would be pointless. Based on the Employment Tribunal's findings there was no evidence to undermine the clear words of Clause 5.

Conclusion

32. For these reasons we shall allow this appeal and dismiss these claims.

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