In Redrow Homes (Yorkshire) Limited v Buckborough and Sewell, the Employemtn Appeal Tribunal (EAT) has held that the claimants were workers for the purposes for Working Time Regulations and therefore entitled to holiday pay. In doing so, it upheld the tribunal's finding that a substitution clause in the contract was a sham.

In a 2004 Court of Appeal case, Redrow had sought to claim that tradesmen working on their building sites were self-employed and not "workers". Redrow lost that case and, as a result, amended its standard contracts in an attempt to ensure that its contractors could not in future claim to be workers. The main change to the contract was the introduction of a clause providing that the obligation to perform work was not personal to the contractor and could be performed by other persons. The clause also obliged the contractor to provide other persons if necessary to carry out the works or maintain the stipulated rate of progress.

The EAT held that the clause failed on two grounds.

Firstly, it was a sham because the parties had a common intention that it was not actually intended to create the rights and obligations it set out. The evidence of the parties was that neither of them expected that contractors would provide substitute personnel or refuse work offered to them. The EAT said that a contractual term could be a sham even if there was no intention to deceive third parties or the court.

Secondly, the nature of the contract was that the tradesmen contracted to do the work personally (even if that involved bringing in other personnel) and were therefore workers for the purposes of the Working Time Regulations 1998.

Impact on employers

This decision makes it very difficult to engage an individual as a consultant or a contractor with any certainty that the underlying legal relationship will reflect what has been set out on paper. The likelihood is that their true status will be as a worker or even an employee. Engaging through a personal service company will not make any difference because of HMRC's IR35 regime.

The right to provide a substitute to carry out the work has been held in other cases to be the key factor that distinguishes a contractor from an employee. Consultancy and contractor agreements often include a substitution clause for this reason, even though in reality neither party intends to rely on it because the engagement is essentially a personal one. According to this decision, a common intention not to rely on the right to provide a substitute will render the clause a sham, making it easy for a court or tribunal to find that the true underlying status of the contractor was either an employee or worker (each case will depend on what the other aspects of the relationship were).

This decision has implications for individuals currently treated as self-employed contractors or consultants and their position should be reviewed particularly in relation to rights under the Working Time Regulations.