Employment Status: Mutuality of Obligation [MoO] – Is it really all that complicated?
Everyone knows that Mutuality of Obligation is important so why does HMRC tackle the subject
differently? Have they lost the plot or are they onto something?
Here is a true story from the archives from when I was a Status Inspector.
Jack worked as a high pressure operator for JABC. There was a written agreement and they both
thought he was self-employed. One day the pressure hose burst and Jack was seriously injured and
claimed Industrial Injuries Benefit [IIB]. He also claimed Employment Rights [ER] for Unfair
Dismissal. Then HMRC started to ask if JABC should have been operating PAYE. There were
three questions to be considered by different tribunals;
1. The IIB claim succeeded and the tribunal found that there was MoO:
2. The ER claim fails because the Tribunal decided that there was no MoO:
3. HMRC convinced JABC that they should have operated PAYE implying that there was
MoO.
Is this irrational? How can there be different findings for the same facts?
Industrial Injuries Benefit (IIB).
The point at issue is, ‘Was Jack an employee when he had the accident?’ It did not matter that he
was not continuous employment. The tribunal focused on the relationship between JABC and Jack
on the day of the incident, - the moment of the accident.
The key case is Nethermere (St Neots) Ltd v Gardiner. Here is the source of the oft-used phrase
'the irreducible minimum of obligation.' In asking, “What does MoO boil down to?” the judge
decided that there were just two questions to be asked:
1. Is there a contract?
2. Is it a contract of personal service?
It really is a simple as that! This is what I call the Nethermere principle. There does not need to be
continuity from one assignment to the next.
For Jack, all the tribunal needed to decide was whether or not there was MoO at the time of the
accident. It did not matter to them what he was doing yesterday or tomorrow. They focused on the
working relationship at that point in time and decided that the MoO test was satisfied.
Other recent cases reinforce this point by asking, 'Is it necessary for there to be on-going offers of
work in order to demonstrate that MoO exists?' They conclude that where somebody is working,
the mutuality exists for the duration of the actual working relationship, even if it’s just for one day.
Unfair dismissal claim.
But to qualify for Employment Rights (“ER”) there has to be a single continuing contract of
employment throughout the qualifying period. If the engagements are not linked, then each one
stands on its own as a separate engagement - there is no continuity flowing from one engagement to
the next.
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In Jack's case there was no link. The written terms merely governed the working relationship on
those days after Jack was offered and accepted assignments. Each was a separate contract. There
was no link between assignments.
Think of the beads of a necklace. Each bead is a separate engagement. For ERs, ask if there is a
string linking the beads together. If there is a string, then you've got MoO. If there’s no string, then
MoO is not present for ER purposes.
Critically, this does not address the issue of the nature of each bead. Each one might be a contract
of employment for the day, even if not continuously over a period of days. I'll return to this
analogy later.
Summary to date:
The elements of MoO
Questions to be asked
Indicators. There needs to be:
Is there a contract of any sort in place on each day A
work is offered?
An offer of work
B
Acceptance of that offer
C
Remuneration
D
Intention for a legal arrangement
Does this contract provide sufficient to fulfill the
A – D must be satisfied
irreducible minimum of MoO?
E
Is it a contract of service?
plus
plus
plus
plus
Personal Service
A – E must be satisfied
plus
F
Some right of control by the work provider
plus
G
No other features of the contract inconsistent
with a contract of service (e.g. Worker's large
financial risk, providing of major equipment.)
Is there a single continuing contract of service over
a period of time, needed to claim Employment A – G must be satisfied
Rights?
H
plus
There must be an ongoing obligation between
work provider and worker to offer and accept
work over that period.
No single meaning to the phrase!
Judges are not always quite as precise as this when talking about mutual obligations. In one case the phrase
MoO is used to describe whether conditions A – D apply, but not mentioning E (personal service). In other
cases the phrase is extended and includes E & F! It depends on the context.
What this illustrates is that the phrase does not have a precise meaning to be applied mechanically in all
situations The context of the phrase is important.
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Does PAYE apply?
HMRC always take the line that there does not need to be a single continuing contract of employment in
place for PAYE purposes. The question they ask is, “Is there an employment on each and every occasion
when work is offered and accepted?”
Take Jack. Each time there was a phone call offering work for one day. He could turn it down and there was
no guarantee JABC would offer work again. There was definitely no on-going contract. However, there was
a legal contract once he agreed to work. This is steps A – D above.
He provided personal service (as agreed), so E was satisfied and the irreducible minimum for MoO was met.
All the conditions A – G were satisfied, HMRC said that this was a contract of service for PAYE purposes.
Were HMRC right? MoO tested for PAYE.
For many years there was no case law about MoO for PAYE. That changed with IR35. Employment Status
is at the heart of IR35. The two cases of Usetech Ltd and Synaptek Ltd were brought to the High Court to
test MoO for PAYE purposes.
Usetech Ltd
In Usetech, the company argued that there was no MoO because when the contract ended there was no
obligation on the work provider to offer more work and no obligation on the worker to accept any offer.
This is a popular argument in disputed status cases, but has always been rejected by HMRC who fall back on
the Nethermere principle.
The judge in Usetech also rejected it. He focused on what happened during the contract , not on what might
happen at the end of the contract. MoO existed for the duration of each contract although there was no
continuity from one contract to the next.
Looking back at the table above, he used the Nethermere principle of establishing the irreducible minimum
needed to establish MoO, which is A-D + E.
Synaptek Ltd.
In Synaptek, the judge reckoned that during the 4 week notice period the end-client was obliged to pay for
work done and the worker was obliged to undertake the work? This was sufficient in itself to satisfy MoO!
These two cases bolster HMRC’s view that the Nethermere principle is the correct one to apply for PAYE by
looking at what happens during the period of the contract, however short that period may be.
Thinking back to the analogy of the necklace, the judges in Usetech and Synaptek were less concerned with
the existence of the string than with the quality of each bead. The absence of the string still allows that each
bead, each separate engagement, may be a contract of service..
In Jack's case, HMRC asked if the irreducible minimum existed when work was done, even though there was
no single continuing contract; i.e. tests A-D + E. Based on that they concluded that PAYE should apply.
Whether nor not you agree, this is the way HMRC argue the facts and they now have case law to support
them!
IR35.
Remember that these were IR35 cases. It is important to ask the right questions and not to get
confused. You must look at each contract in turn – and if there is a requirement for personal service, then
HMR&C will be able to argue successfully that there is mutuality of Obligation in each contract. Looking at
the table above, it is A-G that they need to prove their point and Point H is irrelevant because Employment
Rights are not being considered. It really does not matter if there is no on-going obligation between
contracts or even from day to day within the contract. What matters is whether or not MoO exists on the
days when working is being done.Conclusion.

There is no consistent meaning to MoO across all legislation.

For Employment Rights it is necessary to show that there is a single continuing contract of
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employment (a string to link the beads together)

For IIB and PAYE, the single continuing contract is not required (so consider the quality of each
bead)

The Nethermere principle remains the best definition of the irreducible minimum of MoO for PAYE
purposes (the quality of each bead)

Although MoO must be present for there to be a contract of employment, HMRC is not restricted to
ER cases now there are PAYE cases to refer to.
This illustrates the importance of understanding the principles that apply and getting it right when drawing
up contracts.
For advice and help in preparing contracts that address this issue and others to do with Employment Status,
contact Inspired Employer Solutions Ltd.
Phone 07894 394 178 or email s.gretton@inspiredemployer.co.uk
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