We are often asked to prepare contracts where an individual is to be taken on as a freelance self-employed consultant, with no worker or employee rights. We always need to explain that even though the parties may agree and are happy with such an arrangement, any agreement reached can be trumped by a court or tribunal finding that the reality of the situation is not what the individual is called in the contract, and that their true or real status is that of a worker or employee.

Earlier in June, the Supreme Court upheld the judgments of the employment tribunal, the Employment Appeals Tribunal and the Court of Appeal, in the case of Pimlico Plumbers Limited and Mullins v Smith [2018] UKSC 29, finding that a plumber engaged by Pimlico Plumbers as an “independent contract”, was in fact a “worker”. Below is a brief summary of the case.

What is a “worker”?

Let us begin by clarifying exactly who falls within the definition of a “worker”. A worker is defined in the Employment Rights Act 1996, and is anyone who works under:

  • a contract of employment; or
  • any other contract whereby the individual agrees to do work personally for another party, the individual is not acting through his own business, and the other party is not a client or a customer of the individual.Therefore, all employees will be workers, whereas not all workers will be employees.

The issue for the Supreme Court to decide was whether a plumber contracting with Pimlico Plumbers Limited was a worker, falling within the above (b) definition of worker, or whether he was a self-employed independent contractor, as set out in his contract.

Facts of the case

Mr Smith was engaged by Pimlico Plumbers (the “Company”) for over 5 years. The contract was terminated after Mr Smith suffered a heart attack, and he subsequently brought tribunal proceedings against the Company for, among other claims, disability discrimination, unlawful deduction from wages and holiday pay.

Mr Smith’s contract with the Company stated that he was engaged as an independent contractor and set out the following terms:

  • Mr Smith was under no obligation to accept work from the Company and the Company was under no obligation to provide work. However, he should complete 40 hours of work per week, as a minimum;
  • Mr Smith took on much of the risk in respect of the work carried out – if Mr Smith did not receive payment from a customer, he would not be paid;
  • Mr Smith had to take out his own insurance policy;
  • Mr Smith was subject to several restrictive covenants;
  • Mr Smith had to provide his own tools;
  • Mr Smith had to wear a Company uniform and carry a Company ID card; and
  • Mr Smith had to drive a Company branded van.

In addition, although Mr Smith did not have a contractual right to substitute himself for another plumber in respect of any job, plumbers engaged by the Company would regularly swap work between themselves. Mr Smith could also engage independent contractors, with the Company’s consent, to carry out jobs for which he did not have the relevant expertise.

At first instance, the employment tribunal held that Mr Smith was not an employee of the Company, but he was deemed to be a worker under second definition in the Employment Rights Act (definition (b) above). Both the Employment Appeals Tribunal and the Court of Appeal dismissed the Company’s appeal, and the Company obtained leave to appeal to the Supreme Court.

Supreme Court decision

The Supreme Court came to its unanimous decision, dismissing the Company’s appeal, on the following two points:

  • that personal service was required; and
  • the Company was not a client or customer of Mr Smith.

Requirement for personal performance

The requirement for a service to be performed personally will assist a tribunal or court in determining whether a person is a worker. Where personal performance of a service is the dominant purpose of the contract, an individual will be deemed a worker.

Although Mr Smith could, in practice (not in writing), substitute another Company plumber, the Court found that there was a sufficient requirement for the work to be carried out personally based on the terms of the contract. The contract also referred to Mr Smith personally at various points. In addition, the fact that Mr Smith was only entitled to substitute another Company plumber, who would also be subject to the same Company terms and held to the same standard, was a telling factor in deciding that personal performance was the dominant purpose of the contract.

The Company was not a client or customer

The Court also held that the Company was not a client or customer of Mr Smith. The Court noted that Mr Smith bore much of the financial risk, had to take out his own insurance policy and use his own tools. The Court also considered the contractual provisions which stated that Mr Smith was under no obligation to accept work from the Company.

However, the other terms in the contract meant that the Company had significant control over Mr Smith, particularly regarding the fact that he was obliged to work 40 hours per week, wear a uniform, carry ID and drive a branded van. Therefore, the Court held that he cannot be an independent contractor given the level of control exercised by the Company.

Why is the distinction between independent contractors and workers important?

The law provides workers with more rights compared with independent contractors, who are deemed to be self-employed. Although workers do not benefit from the full rights that employees have (such as the right not to be unfairly dismissed), workers do benefit from rights such as entitlement to holiday pay. As Mr Smith was deemed to be a worker, his claims for disability discrimination, unlawful deduction from wages and holiday pay were allowed to proceed.

This case provides guidance to businesses on whether a contractor is truly independent when considering the level of control exercised by its principal. The decision made by the Supreme Court does not set any new law, but re-confirms that the written contract setting out that an individual is an independent contractor does not necessarily mean that this is will actually be the case.