Questions of employment status regularly arise where individuals are described in a contract as self-employed, but subsequently try to argue they are in fact employees, generally to obtain benefits such as holiday pay or protection against unfair dismissal.  This has resulted in many tribunal cases considering how to approach such contracts, and the Supreme Court has now provided guidance on the circumstances in which tribunals can disregard written terms where they do not reflect the genuine agreement of the parties.

In the long-running case of Autoclenz v Belcher and others, contracts appointing car valeters described the valeters as self-employed and contained a right of substitution.  The terms suggested a lack of mutuality of obligation, and the valeters were responsible for their own tax and NICs.  Even HMRC were satisfied they were self-employed.  Nevertheless, the valeters subsequently claimed to be employees.  The Supreme Court has now upheld the decision of the Court of Appeal that the valeters were in fact employees.  The reason for this was that the terms permitting the valeters to provide substitutes, and the lack of mutual obligation, did not reflect the reality of the situation. The true nature of the agreement was that the valeters were required to turn up for work every day and to notify Autoclenz in advance if they were unable to work.

The key issue considered in this case was the circumstances in which tribunals can disregard express written terms where they do not reflect the intentions of the parties.  The Supreme Court clarified that it is not necessary to show a common intention to mislead in order for the contract to be a sham, and for the terms to be set aside.  Instead, tribunals should focus on the reality of the situation to discover "the actual legal obligations of the parties".  This will involve considering the written terms, how the parties conducted themselves in practice, and what their expectations were. However, whilst the conduct of the parties is important, the fact that a contractual provision, such as a right of substitution, is never used, does not necessarily mean that it is not genuine.  The tribunal must ascertain what has in fact been agreed by examining all of the relevant evidence.  If the written terms do not reflect the reality, they can be set aside, whether there has been an intention to mislead, or otherwise.

Impact for employers

  • This decision provides confirmation from the highest UK court that even if a contract looks like an agreement with a self-employed contractor, HMRC are satisfied the individual is self-employed, and there is no intention to create a sham contract, an individual may nevertheless be an employee for employment law purposes, if the practical reality more closely resembles an employment relationship.  Whilst this provides welcome clarity on the legal principles, employment status remains an incredibly difficult area of employment law, in respect of which advice is always best sought on a case-by-case basis.