The Court of Appeal has held, in the case of Protectacoat Firthglow Limited v Szilagyi, that it is not necessary for there to be a common intention to deceive third parties in order for a court or tribunal to find that contractual arrangements amount to a sham.

The tribunal, upheld by the EAT and Court of Appeal, held that both the contract for services between Mr Szilagyi and Protectacoat and the partnership agreement that Mr Szilagyi had been required to enter into with his co-workers were a sham and that Mr Szilagyi was, in fact, an employee.

The Court of Appeal in its judgment clarified that the court will always consider the true nature of the relationship. Usually, the answer will be in any written contractual documents. However, the courts will go behind the documents and look at all the evidence where it is asserted that the documents do not represent or describe the true position. It is not necessary for the documents to be designed to deceive others. In reaching its decision, the Court of Appeal acknowledged that an employee or contractor often has little input into the nature of the contractual arrangements and that the parties' initial expectations and intentions can alter over time.

Impact on employers

Employers should be aware that documents designed to prevent the existence of an employment relationship between the parties will not be effective unless they represent the true factual position. Employers should monitor the position with individuals employed on a self-employed or worker basis and update contracts where necessary to reflect the reality of the relationship.