Independent Contractors and the Challenge of Vertical Disintegration to Employment
Protection Laws
Author(s): Hugh Collins
Source: Oxford Journal of Legal Studies, Vol. 10, No. 3 (Autumn, 1990), pp. 353-380
Published by: Oxford University Press
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Contractors
and theChallengeof
Independent
Vertical
toEmployment
Disintegration
Protection
Laws
HUGH
COLLINS*
During most of this centuryindustrialorganizationhas tendedtowardvertical
ofproduction.'Althoughsectorsoftheeconomydiffer
in
integration
considerably
theirdegreeof concentration
the generalpatternunfurling
into largefirms,2
has
been the replacementof small businesses linked by commercialcontractsby
organizationswhich directproductionthroughbureaucraticcontrols.Since the
recessionat thebeginningofthe 1980s,however,thistrendhas been reversed.As
wellas thedecomposition
ofcapitalintoseparatecorporateentitiesin an endeavour
to replicateefficient
capital markets,3managersof large firmshave exhibiteda
greaterinterestin disintegration,
by arrangingaspects of productionthrough
Similardevelopments
subcontracting,
concessions,and outsourcing.4
franchising,
have occurredin thepublicsectoras one aspectof thepolicyofprivatization.5
has hitherto
maturedalongside
Legal regulationoftheemployment
relationship
thegrowthin verticalintegration
of production.This coincidenceexplainsin part
thelimitedscope oflegalprotection
foremployees.Employment
protection
rights
such as therightto claimunfairdismissalor a redundancypaymenttypically
vest
only in employeeswhose jobs fit into the complementary
paradigmformof
in verticallyintegratedproduction:employment
whichis full-time,
employment
and
for
an indefinite
duration.The recenttrendtowardsverticaldisintestable,
grationof productionplaces manyworkersoutsidethisparadigmand therefore
laws.
beyondtherangeofemployment
protection
* BrasenoseCollege,Oxford.I am grateful
to theAmericanCouncilof LearnedSocietiesforfinancialassistancefor
thisresearch,and to Mark Freedlandforhis commentson an earlierdraft.
J1. Purcelland K. Sisson, 'Strategiesand Practicein theManagementofIndustrialRelations',in GeorgeS. Bain
RelationsIn Britain(Oxford,1983)95, 96-8.
(ed), Industrial
2 M.
'Small is Bountiful:Labour Marketsand Establishment
Granovetter,
Size', (1984) 49 American
Sociological
Review323.
3 J. Purcell and B. Ahlstrand,'CorporateStrategyand the Managementof EmployeeRelationsin the MultidivisionalCompany'(1989) 27 BJIR 396.
4 NationalEconomicDevelopmentOffice,ChangingWorking
Patterns,
(London, 1986),para 1.36; D. Wood and P.
Labour Use Strategies,
ResearchPaperNo 63 (1989) 35-7.
Smith,Employers'
Dept ofEmployment
K.
M.
and
and
Hartley
Huby, 'Contracting-out
Evidence',in JohnKay, Colin Mayerand David
Policy:Theory
5
& Regulation
Industrial
Thompson(eds), Privatisation
(Oxford,1986)Chap 15; Eric Batstone,TheReform
ofWorkplace
Relations(Oxford,1988) 186-8.
Press 1990
OxfordJournalof Legal StudiesVol. 10, No. 3
? OxfordUniversity
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All use subject to JSTOR Terms and Conditions
354
Oxford
JournalofLegal Studies
VOL.10
As thesize ofthegroupofworkersexcludedfromlegalprotection
has increased,
labourlawyers
both in absolutenumbersand as a proportionof the workforce,6
have become concernedforthe plightof these 'marginalworkers',who include
and homeworkers.7
The
temporaries,casuals, the self-employed,
part-timers,
most of these workersis, however,no more than a
predicamentconfronting
legislativeartefact.Because employment
protectionlaws limitrightsaccordingto
hoursofwork,lengthofservice,and place ofwork,manyemployeesfailto acquire
could be
rightssimplyby virtueof the choice of the legislature.This difficulty
overcomeby a changeofmindin Parliament,perhapspromptedby theEC law of
sex discrimination.8
The new patternof verticaldisintegration,
however,presentslabour lawyers
witha moreformidabletask. By turningan employeeinto a subcontractor,
the
managementof a large firmsubstitutescommercialcontractsfor employment
relations.This contractualarrangement
not onlyappliesto the rapidlyincreasing
numbersof self-employed
workers,9but also to many of the othergroupsof
is oftenregardedas self-employmarginalworkerslistedabove, forhomeworking
ment,10and temporaryor casual work can oftenbe describedas consulting,
or subcontracting.
In addition,the provisionof servicesby indepenfreelancing,
dentcontracting
is a prevalentformof acquiringlabourin manyindustrialsectors
such as construction."Despite the formof the contractualrelationin all these
instances,however,in substancethe workersfrequentlyappear to be in an
equivalentpositionof social subordinationand economicdependenceto thatof
ordinaryemployees,and so in need of thoseemployment
protectionrightsfrom
whichtheyare oftenexcludedby virtueof havingceased to qualifyas employees.
A satisfaction
of thisneed requiresmuch morecarefulconsideration
thanthe
taskof remedyingthe positionof othermarginalworkers.It is unlikelythatthe
should
legislaturewill alterits fundamental
positionthatindependentcontractors
view
be deniedemployment
protectionrights.This fitsin withthecommon-sense
thatbusinessmendealingwitheach otherat arm'slengthshouldnotbe responsible
foreachother'seconomicand physicalsecurityto anygreaterextentthanprovided
forby theircontractualagreementand the ordinaryduties of care owed by all
citizens to each other. For example, it seems absurd to propose that, on
of contractualrelationsbetweenthem,one entrepreneur
termination
dealingat
arm'slengthshouldbe able to claimcompensation
fordismissalfromtheother.
6 C. Hakim, 'Trendsin theFlexibleWorkforce',
Gazette549; R. Disneyand E. Szyszczak,
(1987) 95 Employment
in Britain',(1984) 22 BJIR 78; C. Hakim, 'Employment
'ProtectiveLegislationand Part-TimeEmployment
Rights:
A Comparisonof Part-timeand Full-timeEmployees',(1989) 18 ILJ 69; R. Disney and E. Szyszczak,'Part-time
Work: Replyto CatherineHakim', (1989) 18 ILJ 223.
7 P. Leighton,'MarginalWorkers',in Roy Lewis (ed), LabourLaw inBritain(Oxford,1986)503.
v FIV/ Spezial-Gebdudereinigung
GmbH & Co KG [1989] IRLR 493 (ECJ).
SRinnter-Kiihn
in Britain: Results fromthe Labour Force Surveys 1981-84', (1986)
9 S. Creigh, et al, 'Self-Employment
Gazette183.
Emiploymentt
inSelectedIndustries,
ResearchPaperNo 39 (1983).
1o P. Leighton,Contractual
Arrangements
Dept of Employment
" Reportof the Committeeof InquiryunderProfessorPhelps BrownintocertainmattersconcerningLabour in
Board v LabourForceLtd [197013
Buildingand Civil Engineering
(Cmnd 3714, 1968); Construction
Training
Industry
All ER 220 (DC); cfFerguson
vJohnDawsonLtd [1976] IRIR 1213(CA).
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AUTUMN1990
EmploymentProtectionLaws
355
But this absurdity,it should be stressed,does not extend to all types of
legislation.In manyinstancesthelegislaturehas judgedit
protection
employment
In thecase oflow
unnecessaryto tie workers'rightsto the statusof employment.
the
social
remainthe
from
for
and
deductions
instance,
problems
pay,
penal
wages
same regardlessofwhethertheworkeris an employee,an independentcontractor,
or theemployeeofa notionalindependentcontractor.12Similarly,theobjectionto
race or sex discrimination
applies whatevertypeof servicecontractthe parties
envisage.13Much the same reasoningnormallyextendsprotectionforhealthand
safetyat work to all workerson the premisesor using another'sequipment,
regardlessof the questionof whethertheyare directlyemployedby theownerof
thepremisesor oftheequipment.14
But leavingtheseissuesaside, thereremainsa
noticeperiods,'5maternity
core of employment
rights,16
rightssuch as statutory
sickpay,19and rightsin the
unfairdismissal,'7redundancypayments,'8statutory
limitation
of
and sale of the business,21wherethe statutory
eventof insolvency20
coverageto employeesmakes sense, because it correspondsto prevalentunderfortheeconomicneeds ofothers.22
standingsof theproperscope ofresponsibility
but in
This leavesmanyworkers,who in formcompriseindependentcontractors,
thatthecourts
substancefunctionas employees,in theunsatisfactory
predicament
laws.
maydenythemthebenefitofemployment
protection
Because thecourtshave been unableto developa clearand consistently
applied
in orderto deal
testfordistinguishing
employeesfromindependentcontractors
with all the variegatedpatternsof servicearrangements
engenderedby vertical
we have reached what Clark and Wedderburncall 'a crisis in
disintegration,
fundamental
concepts'.23 What should be the relevantcriteriafordistinguishing
forthe purposeof determining
betweenemployeesand independentcontractors
the applicationof employmentprotectionlaws? This articleseeks to make a
towardsa solutionto thisproblem.
contribution
The firstsectionexaminesthecauses of verticaldisintegration,
concludingthat
in anyaccount.
labour
must
to
reduce
costs
efforts
figureprominently
employers'
This raisesthequestionwhethertheexclusionfromemployment
protection
rights
is in factan important
ratherthanan unfortunate
reasonforverticaldisintegration
of othereconomicforces.The second sectionthenposes the puzzling
side-effect
12 Wages Act 1986,ss 8(2), 22, 26.
13 Unfortunately
workerswho manageothersratherthanperform
services
thelegislationexcludesfromprotection
directlyforanother:Sex DiscriminationAct 1975, s 82(1); Race RelationsAct 1976, s 78(1): 'employment';see:
Ltd v Gunning[1986] IRLR 27 (CA); Tanna v PostOffice[1981] ICR 374 (EAT).
Minror
GroupNewspapers
14 Healthand Safetyat WorkAct 1974, ss 3-4; R v Mara [1987] ICR 165 (CA); Mailerv AustinRoverGroupPlc
[1989] 2 All ER 1087 (HL). For thelimitsofordinaryoccupier'sliability,see Fergusonv Welsh[1987J3 All ER 777
(HL).
Protection(Consolidation)Act 1978PartIV.
15 Employment
16 Employment
Protection(Consolidation)Act 1978PartIII.
17 Employment
Protection(Consolidation)Act 1978PartV.
18
Protection(Consolidation)Act 1978PartVI.
Employment
19 Social Securityand HousingBenefitsAct 1982,s 26.
20 Employment
Protection(Consolidation)Act 1978 PartVII.
21 Transferof Undertakings
(ProtectionofEmployment)Regulations,1981SI No 1974.
22 I explore this question of the
elsewhere:H. Collins, 'Ascriptionof Legal
proper scope of responsibility
to Groupsin ComplexPatternsof EconomicIntegration',
MLR (forthcoming).
Responsibility
23 Lord Wedderburn,R. Lewis and J. Clark(eds), LabourLaw and Industrial
Relations(Oxford,1983) 144.
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356
Oxford
JournalofLegal Studies
VOL. 10
can organizeproductionefficiently
withoutentering
questionofhowentrepreneurs
into contractsof employment.The answerinvolvesan analysisof the available
techniquesforefficient
acquisitionof labourpower.Buildingon thisanalysis,the
thirdsectionargues that one of the major sources of confusionin the courts'
fromotherservicecontractsspringsfroma
attemptsto distinguishemployment
failureto appreciatehowfarthesedifferent
techniquesare functionally
equivalent.
But the thirdsectionalso identifies
the ideal of freedomof contractas the root
cause of thecourts'failureto establishintelligible
and coherentcriteriaforsetting
the limitsto the coverageof employment
protectionrights.In thefinalsectionI
proposea betterapproachforthecourtsto adopt.
TowardsVertical
1. Pressures
Disintegration
It is possiblethatthistendencytowardsverticaldisintegration
is no morethana
temporary
responseto the uncertainties
generatedby recession.It has been clear
since the earliestdays of mechanizedproductionthatsmallfirmsand individual
contractors
providingcommoditiesand servicescan functionas a bufferto a core
firmin the eventof marketfluctuations.24
offers
Because verticaldisintegration
than regularemploymentcontractsin raisingor loweringthe
greaterflexibility
effectivesize of the workforce,it certainlyproves attractivein conditionsof
Yet oftenverticaldisintegration
uncertainty.25
inaugurateslong-term
advantages
a networkof smallfirmswhichofferflexibleand specializedskills,
byestablishing
and achievingconsidercreatingeconomiesofscalewithinthesenarrowmarkets,26
able innovationin productionmethods and products.27Some theoristsand
frommass productionto networksof
futurologists
predicta permanenttransition
smallerbusinessesgearedto rapidresponseto changesin consumertaste.28
The empiricalevidencein Britainpartiallyconfirmsthispredictionof a more
with about one-thirdof firms
permanentshifttowardsverticaldisintegration,
which have adopted an explicitmanpowerstrategyoptingfor verticaldisintenot as a
and self-employment,
gration,and a steadygrowthin subcontracting
to
of
and
but
a
relative
recession,
response
rapid expansion
during period
24 E. J. Hobsbawm,
LabouringMen (London, 1964) 298; D. S. Landes, 'What Do Bosses ReallyDo?', (1986)
XLVI J ofEconomicHistoty585.
25 J. Atkinson,'Flexibilityor Fragmentation?
The United KingdomLabour Marketin the Eighties',(1987) 12
LabourandSociety87; AndrewL. Friedman,Industry
and Labour(London, 1977) 114-29.
26 For theimportance
in theConstruction
ofeconomiesofscale,see: R. G. Eccles, 'The Quasifirm
Industry',(1981)
2 J ofEconomicBehaviorand Organization
335, 340.
27 S. Brusco, 'The EmilianModel: ProductiveDecentralisation
and Social Integration',(1982) 6 Cambridge
J of
Economics93; M. Storper,'The transition
to flexiblespecialisationin the US filmindustry:externaleconomies,the
divisionof labour,and the crossingof industrialdivides',(1989) 13 Cambridge
J ofEconomics273. But see: M. H.
Lazerson,'An Outcomeof Marketsand Hierarchies?',(1988) 53 American
SociologicalReview330. For comparable
in JonElsterand
in Hungarianenterprises',
underglasnost,
see: G. Sziraczki,'Internalsubcontracting
developments
toCapitalism(Cambridge,1989) 39.
Karl O. Moene (eds), Alternatives
28 Michael J. Piore and CharlesSabel, The SecondIndustrial
Divide (New York, 1987); RobertoM. Unger,False
of production-thedecline of the massNecessity(Cambridge,1987) 180-95; F. Murray,'The decentralisation
collectiveworker?',(1983) 19 Capital & Class 74; ThierryJ. Noyelle,BeyondIndustrialDualism: Marketand Job
Frontier
in theNew Economy(Boulder, 1987) 100-1; RobertB. Reich, The NextAmerican
(New York,
Segmentation
1983) Part4.
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AUTUMN1990
EmploymentProtectionLaws
357
in the economyin themiddleof the 1980s.29The questiontherefore
uncertainty
now appears more attractiveor feasiblethan
arises why verticaldisintegration
before.
ofthesize ofa firmmust
From an economicperspective,themajordeterminant
be therelativecostsof internaland externalproduction.An entrepreneur
decides
whetherhe can produce goods and services more cheaply inside his own
organizationby directcontrolsover labour or whetherit would be cheaperto
purchasecommoditiesand servicesin the open market.Each decisionof each
ofcosts
mustbe analysedin isolation,however,fortheconfiguration
entrepreneur
may differfromone componentor serviceto the next.Whereasthecleaningof a
thecateringmay
hospitalmaybe achievedmorecheaplyby externalcontracting,
in generalwhether
be lessexpensiveifkeptin-house.Thereis no wayofestimating
theprofits
contractor
whichincreasethecostsofexternal
soughtbyan independent
will exceed the possible savingsavailable to the externalcontractor
contracting
arising,forexample,fromhavingloweroverheads,bettereconomiesof scale,and
fromoperatingin a differentlabour market. Is it possible to overcomethe
and contingency
of cost,and to indicatesome
of theseconsiderations
particularity
generaleconomicconsiderationswhich in the past have favouredverticalintegrationbut now explainthetendencytowarddisintegration?
Coase approachedthisproblembyinaugurating
theprocedureofexcludingfrom
the enquirycertaintypesof contingent
costs.30On the assumptionthatthe firm
and theindependentcontractor
havethesameproductioncosts(thatis labourcosts
plus thecostofrawmaterials)fora particularitem,thenit becomespossibleto ask
whatotherkindsof costswill determinethechoicebetweeninternaland external
contracting.Even withthisunrealisticassumption,however,the problemof the
of considerations
of costs reappears.The remainingcosts,including
contingency
transactionscosts, fluctuateaccordingto the particularcircumstancesof the
costs
employer.AdoptingCoase's example,ifwe examinetherelativetransaction
of ascertaining
marketprices,we cannotpredictin advancewhetherit mayprove
cheaperto ascertainthecurrentpriceoflabourin thelabourmarketthantheprice
of finishedgoods and services.The use of elaboratejob evaluationschemesfor
employers-in part as a proxyto a competitivelabour market-revealsthatthe
priceoflabourmaybe as expensiveto ascertainas thepriceoffinishedgoodsin the
accessibleworldmarkets.
as againstdisintegration
Moreover,thecostsand benefitsofverticalintegration
mustbe evaluatedin theirtotality,
in orderto incorporate
in themodel.
trade-offs
OliverWilliamsondevisedan influential
listofsuch efficiency
but
considerations,
thismerelyrevealshow oftenthechoicebetweenverticalintegration
and distancingmaybe finelybalanced.He acknowledgesforinstancethatexternalcontracting
ofworkeffort
and its conduciveness
maybe superiorwithrespectto theintensity
29 D. Wood and P. Smith,above n
of these trends,see J. Rubery,
4, 35-7. For doubts about the significance
in Britain(Oxford,1988) 251, 264-8; Eric
'Employersand the Labour Market',in Duncan Gallie (ed), Employment
Batstone,above n 5, 200-7.
30 R. Coase, 'The NatureoftheFirm',(1937) 4 Economica386.
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358
Oxford
JournalofLegal Studies
VOL.10
to innovation,twofactorswhichmightdecisivelyargueagainstverticalintegration
in thelongterm.3"The problemof thecontingency
and particularity
ofcoststhus
becomesaccentuatedwhenall relevantbenefits
are includedin thecalculus.
In orderto explainthe recenttendencytowardverticaldisintegration
froman
economicperspective,therefore,
we must be able to pointto a contingentcost,
whichhas substantially
alteredin the economyas a whole, and whichaltersthe
of externalcontractsoverinternalorganization.Beforeexplainrelativeefficiency
ing why labour costs representpreciselysuch a contingentcost, however,we
shouldnotleaveout of thepicturecertainothersocialand economicdeterminants
of verticalintegration
whichmay also play a lesserrole in the tendencytoward
verticaldisintegration.
Verticalintegrationprovidesa degree of insuranceagainstthe risk that the
marketwill not provide sufficient
numbersor adequate qualityof servicesor
willtake
and
the
productsrequired,
consequentriskthatindependentcontractors
of
their
and
increases.32
advantage
price
imposeopportunistic
bargainingposition
backwardstowardsthe provisionof raw materialsand forwards
By integrating
towardsdirectretailing
ofa finishedproductto consumers,a firmavoidstheriskof
halts in productionand a reductionof profitsby the presenceof sellers or
sourcesor outlets.33
purchaserswithstrongbargainingpoweror withalternative
But it is importantnot to overstatethis consideration,for of course vertical
incurssimilarrisksas well. Unionizedemployeeswithfirm-specific
integration
skills can equally push up wage costs above competitivemarketratesthrough
collectivebargaining,therebypresentinga similarsortof riskto thatstemming
frommarketfailure.34In addition,multiplesources of supplies and carefully
draftedcontractualrelationswithexternalcontractors
can guardagainstthe risk
associated with marketfailure.For example, suppliersof componentsto US
automobilemanufacturers
findthemselvesbound by a requirementscontract,
whichfixespricesin advancebut does not committhemanufacturer
to anyfixed
numberof purchases.35
It seemsunlikely,therefore,
thatmarketfailureconsiderations,or ratherthe absence of them,will constitutean importantcause of the
tendencytowardsverticaldisintegration.
More difficultto estimatein connectionwith verticaldisintegration
is the
of the growthof the servicesectorand the increasingimportanceof
significance
technologicaland scientificknowledgeto competitiveproduction.By keeping
productionin-house,thefirmmayacquireknowledgeabout productionmethods,
in
skills,and sales techniques,whichin turnmaypointtheway to improvements
ofWork',(1980) 1J ofEconomicBehaviorand Organization
31 O. E. Williamson,'The Organization
5, 25; see also,
Oliver E. Williamson,The EconomicInstitutions
of
(New York,
Markets,RelationalContracting
Capitalism--Firmns,
1985).
32 B. Klein, R. G. Crawfordand A. A. Alchian,'VerticalIntegration,
and
the
Rents,
Appropriable
Competitive
Process',(1978) 21 J ofLaw andEconomics297.
Contracting
13 J. M. MacDonald, 'Market Exchangeor VerticalIntegration:An EmpiricalAnalysis',(1985) 67 Review of
andStatistics
327.
Economtics
34 S. J. Grossmanand O. D. Hart, 'The Costs and Benefitsof Ownership:A Theoryof Verticaland Lateral
Integration',
(1986) 94J ofPoliticalEconomy691.
International
35 S. Macaulay, 'The StandardizedContractsof United States AutomobileManufacturers',
EncyclopediaofComparative
Law, Vol 7, Chap 3, 18 (1973) 23.
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AUTUMN1990
Protection
Laws
Employment
359
forsubstituting
machinesforlabour
includingopportunities
productiveefficiency
and slicker operatingprocedures.36These considerationsmay have proved
forexample,in thecase ofcomputersoftware
workersin theUSA,
determinative,
of production.37
On the other
whose companiesusuallyseek verticalintegration
and theproliferation
ofsmallfirmsmay
hand,thegrowthofverticaldisintegration
are not alwaysfullyexploitedand thata network
indicatethattheseopportunities
of smallerbusinessesworkingco-operatively
can achieve greaterproductinnovationand in the long run establisha superiorcompetitiveedge in international
markets.
verticalintegration
over
In additionto theseeconomicconsiderations
favouring
external contracting,we should not overlook importantsocial dimensions,
describedas agencycostsin neo-classicaleconomicsand as aspectsofclass control
within Marxism.38The attractionsof status and power accruing to senior
mustsurelyinfluencetheir
managementof a largevertically
enterprise
integrated
decision.The verysize oftheorganization
can insulateitagainstvagariesofcapital
and productmarkets,leavingmanagement
securelyin chargeofa growingempire,
and therefore
freeto indulgea jet-setlifestyle
and to influencepoliticalevents.39
The independentsocial interestsof labourmaysharethesame aim as managementofincreasingthesize oftheorganization.In thelatenineteenth
centurytrade
unionsfoughthardagainsttheinternalcontracting
thedocks,
systemin factories,
and elsewhere,throughwhich entrepreneurs
subcontractedwork to a 'piecemaster','sweater',or 'buttee',who thenhiredemployees.Althoughthe union's
motiveconsistedin part in securingunion ratesforall workers,even whenpay
paritywas achieved in moderntimes trade unions still soughtto destroythe
internalcontracting
subcontractsystem,as in thestrikeactionagainstlabour-only
Co Ltd v Lowthian.40Here themotiveforthe strike
ing in EmeraldConstruction
seems to have been a combinationof a desire that the employershould have
sufficient
resourcesto meetlegitimate
claimsofworkersforpaymentand compensationand also a profounddislikeofwhatHobsbawmcalls 'co-exploitation',41
that
is thewayone worker,by beinglabelledthesubcontractor,
becomestheemployer
and boss oftherest.
Two changesin thesesocial interestshave takenplace in recentyears,which
have probablytiltedbusinessorganizationtowardverticaldisintegration.
On the
side of managementthe attractions
of largeconglomerates
have
diminished.
may
The adventof junk-bondsand otherformsof debt to financetake-oversrenders
even the managementof the largestfirmsinsecure;and theimprovements
to the
Powerand theDivisionofLabour(Cambridge,1986) 17.
36 DietrichRueschemeyer,
and Controlin ComputerSoftwareWork', (1986) 25
37 P. Kraftand S. Dubnoff,'Job Content,Fragmentation,
Industrial
Relations184.
38 S. Bowles, 'The ProductionProcess in a CompetitiveEconomy: Walrasian,Neo-Hobbesian,and Marxian
EconomicReview16.
Models', (1985) 75 American
39 M. C. Jensenand W. H. Meckling,'Theoryof the Firm: ManagerialBehavior,AgencyCosts, and Ownership
Structure',(1976) 3 J of FinancialEconomics305; R. J. Monsen and A. Downs, 'A Theoryof Large Managerial
Firms',(1965) 73 J ofPoliticalEconomy221.
40
[1966] 1 WLR 691 (CA).
*4 E. J. Hobsbawm,above n 24, 298.
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360
Oxford
JournalofLegal Studies
VOL.10
rateof returnon capitalinvestment
achievedby limitinga firm'sactivitiesto areas
of special skill may determanagementfromestablishingan overreachingconglomerate.On the side of labour, weakeningbargainingpower because of high
levels of unemploymentand more restrictiverules governingthe legalityof
industrialactionhave reducedthepowerofworkersto resistexternalcontracting.
But thesesocial factorsare probablymuch less significant
thanchangesin the
labourcostsresultingfromverticaldisintegration.
Four generalsavingsin labour
costsmay springfromexternalcontracting.
First,the ownerof the businessmay
avoid or reducethe quasi-fixedcostsassociatedwithemployment,
such as hiring
and training.42
It is noticeable,forexample,howmanyhomeworkers
providefirms
withskilledlabour,in manycases withoutthe firmhavingin'curredthe cost of
training.Second, the externalcontractor
maybe able to take advantageof lower
wage ratesoutsidethefirm.Insteadof beingcompelledto pay the relatively
high
ratesofthefirm'sinternallabourmarket,throughverticaldisintegration
thework
may be performedat lower cost in the externalmarket,takingadvantageof
non-unionrates,regionaldifferences,
and labour marketsegmentation.43
These
affordedby distancingto findcheaperlabourmayalso reverberate
opportunities
back intothefirm'sinternallabourmarketand, throughthethreatofcompetition
fromsubcontracting,
Third,the
suppressthewage ratesofordinaryemployees.44
firmmay be able to reduce or avoid the costs involved in compliancewith
employment
protectionrights.Evidence fromItaly45and France46supportsthe
view thatthe cost of compliancewithstatutory
dutiesleads to a preferencefor
formsof marginalwork. Finally, by the avoidance of long-termcontractual
relationswithmembersoftheorganization,
theownerofthebusinessmaybe able
to use his bargainingpowerto imposestrictercontractualcontrolsoverperformance and avoidtheneedfortheexpenseofco-operative
giveand taketypicalofthe
relationalcontractsof employment
whichpredominateinsideorganizlong-term
ations.
In the conditionsof the presentlabour marketin Britain,thereare strong
incentivesforthe ownerof the businessto opt forexternalcontracting
wherever
has facilitatedthe manoeuvreof exploitingcheaper
possible.47The Government
labour costs in the secondarylabour marketby seekingto removewage floors
establishedby collectivebargainingand statute.In thisveinit abolishedSchedule
11 oftheEmployment
Act 1975whichextendedtheresultsofcollective
Protection
to
it terminatedthe Fair Wages Resolution
agreements unorganizedworkers;48
42 W. Y. Oi, 'Labour as a Quasi-FixedFactor',(1962) 70J ofPoliticalEconomy538; ArthurM. Okun, Pricesand
(Oxford,1981) Chap II.
Quantities
and Low Pay (Cambridge,1982).
Industrial
Organisation,
43 C. Craig,et al, LabourMarketStructure,
in J. Ruberyand F. Wilkinson,'Outworkand Segmented
44 See, forexample,thediscussionofthecutlery
industry
Labour Markets',in FrankWilkinson(ed), TheDynamicsofLabourMarketSegmentation
(London, 1981) 115, 124.
45 M. H. Lazerson, above n 27, 336-7; M. J. Piore, 'Perspectiveson Labour Market Flexibility',(1986) 25
Industrial
Relations146, 153.
46 F. Michon, 'Dualism and the French Labour Market: Business Strategy,Non-standardJob-forms
and
SecondaryJobs',in FrankWilkinson(ed), above n 44.
Flexibility:A U.K. Perspective',(1988) 39 Labor
47 See: J. Atkinson,above n 25; P. B. Beaumont,'Employment
Law J 547.
Act 1980.
18 Employment
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AUTUMN1990
Protection
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361
1946 which required collectivelyagreed or fair wages to be paid by central
imposed a duty on public bodies (includinglocal
governmentcontractors,49
to
'non-commercial'
considerations
whenmakingcontracts,50
authorities) ignore
and exemptedyoungworkersfromminimumwage laws.51The Government
in its
as
an
also
led
the
field
in
floors
employer
byabandoningpay
avoidingwage
capacity
comparabilityas the basis for civil service remunerationand by encouraging
privatizationor subcontractingof governmentwork in order to exploit the
cheapnessoflabourin thesecondarylabourmarketand to avoidspecialregulations
The Governmentclaimsannual savingsof
governingpublic sectoremployees.52
more than ?20m in both the National Health Service and Local Authority
and one studyestimatesthatcontracting-out
services,53
publicservicesachievesan
averagesavingof twenty-six
per cent,almostentirelydue to a reductionin labour
in generaloftenhas the advantagesto the employerof
costs.54 Subcontracting
force of
movingwork out of a unionized location,escaping the gravitational
and can restoremanagerial
customaryworkpracticessuch as job demarcations,55
prerogativein a new form-the economicclout to dictatetermsto the subcontractor.
The Government's
therefore
quest forlabourmarketflexibility
appearsto have
shiftedthebalanceoflabourcostsin favourofexternalcontracting
in recentyears.
This is the principalreasonforthe proliferation
of verticaldisintegration
as the
efficient
mode of acquisitionof labourpower. The suspicionmustarisethatthe
declining coverage of employmentprotectionlegislation,far from being an
unforeseenside-effectof changingpatternsof productiveorganizationin a
post-industrial
society,representsin some respectsa goal of the Government's
are sufficiently
familiar
policyoflabourmarketflexibility.
Althoughfewemployers
withthe detailsof the law to arrangetheircontractsinvolvingservicesin such a
the Government
way as to minimizethe costsof compliancewiththoserights,56
mayhave anticipatedthattheincentivestowardsexternalcontracting
arisingfrom
othersavingsin labour costs such as lowerwages would be compoundedby the
exclusionoflegalrights.
The proliferation
ofverticaldisintegration
raisesthefurther
questionofhowcan
entrepreneurssucceed in runningan efficientbusiness whilst eschewingthe
disciplinary
powersgrantedto an employer?To understandbothhow thismaybe
achieved, and the consequentimplicationsfor the applicationof employment
49 Paul Davies and MarkFreedland,LabourLaw: TextandMaterials,2nd edn (London, 1984) 154-63.
so Local GovernmentAct 1988, s 17; see: S. Evans and R. Lewis, 'Labour Clauses: From Voluntarismto
Regulation',(1988) 17 ILJ 209.
forsecondary
51 Wages Act 1986,s 12(3). Similarpolicieshave guidedthegradualeliminationof tortimmunities
industrialaction.
52 C. Becker,'With Whose Hands: Privatisation,
Public Employment,and Democracy',(1988) 6 Yale Law and
PolicyReview88.
53 K. Matthewsand P. Minford,'Mrs. Thatcher'sEconomicPolicies 1979-87', (1987) 2 EconomicPolicy57, 69.
54 K. Hartleyand M. Huby, aboven 5, 292; forsimilarcostreductionsin theUSA, see: R. D. Weismanand R. W.
in thePublic Sector:Its Purposeand Limitations',(1988) 39 Labor Law J 493.
Perez, 'Subcontracting
55 S. Deakin, 'Labour Law and the DevelopingEmployment
Relationshipin the UK', (1986) 10 Cambridge
J of
Economics225.
56 W. W. Daniel and E. Stilgoe,TheImnpact
Protection
Laws, PolicyStudiesInstituteReportNo 577
ofEmnployment
(London, 1978); P. Leighton,above n 10; D. Wood and P. Smith,above n 4.
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362
Oxford
JournalofLegal Studies
VOL.10
protectionrightsto workers,we mustnow considerin greaterdetailthemechanisms which the entrepreneur
provisionof
may establishto secure an efficient
serviceseitherfrominsideor outsidethefirm.
2. Techniques
ofLabourPower
forEfficient
Acquisition
Because men are not machines,but will onlyworkforincentivessuch as money,
ofensuringa
theownerofa businessfacesthedifficulty
status,and job satisfaction,
fair returnof labour power for his money. Since the industrialrevolution
employershave used a combinationof two techniquesforachievingan efficient
acquisitionof labourpower.The firstinvolvesthe contractualallocationof risks
betweenthe firmand the worker,the simple idea being to place the risk of
inefficiency
upontheworkerin orderto givethelatteran incentivetoprovidea fair
controlssuchas worksrules,
return.The secondtechniquecomprisesbureaucratic
managerialsupervision,
penaltiesforpoorwork,and incentivessuchas promotion.
servethe
framework
These familiartoolsof management
withinan organizational
samepurposeofensuringan efficient
acquisitionoflabourpower.
These twotechniquescomprisetheprincipalfactorswhichshapethesocialand
economicarrangements
underwhichpeople work.It is thechoiceof theownerof
the business betweenthese two techniques,or more commonlyof a particular
ofthetwo,whichdetermines
theworkingpracticeswhicha courtmay
combination
eventuallyconsiderwith an eye to the question of whetherthe workeris an
By exploringthedynamicsof thechoices
employeeor an independentcontractor.
betweenthesetwo techniques,and combinationsthereof,we can betteridentify
the social and economicfactorswhich the law should take into accountwhen
rights.
protection
settingtheboundaryto thesphereofemployment
Contracts
TimeServiceand TaskPerformance
We should considerfirstthe different
waysin whichrisksmay be allocatedin a
The standardriskscomprisethe
of
the
contractinvolving performance services.57
theriskof unforeseen
or carefully,
riskthattheemployeewillnotworkdiligently
of
which
hampercompletion designatedtasks,and the riskof the
contingencies
At thetwo extremes,theserisksmaybe allocatedentirely
of
work.
unavailability
relations.
eitherto one partyor theotheraccordingto twoparadigmcontractual
When the ownerof the businessassumesall theserisks,the partiesestablish
what may be termeda time servicecontract.Under this typeof contract,the
employerpays wages accordingto a fixednumberof hours of work, thereby
which
assumingthe risks of shirkingby the worker,unforeseencontingencies
of work.At theotherextreme,whenthe
delaycompletion,and theunavailability
contract.Here
workerassumesall theserisks,thepartiesselecta taskperformance
in returnforremuneration
a precisetask to be performed
the contractidentifies
(New York, 1975)Chap
57 For a moreelaborateanalysissee: OliverWilliamson,Marketsand Hierarchies
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4.
AUTUMN1990
Protection
Laws
Employment
363
fixedin advance. By linkingpaymentto the successfulcompletionof the job, the
contractplaces thestandardrisksdescribedabove upon theworker.
mode of acquisition
Now, of course,an ownerofa businessseekingan efficient
of labour poweris hardlylikelyto opt fora timeservicecontractwithoutsome
otherformofsecurityagainstthestandardrisks.A typicalresponseconsistsin the
adoption of bureaucraticcontrolswhich, throughcarefulsupervisionof the
worker,reduce the risks of poor performance.Thus the use of bureaucratic
controlsforefficient
acquisitionoflabourpoweris oftencloselyassociatedwiththe
riskallocationfoundin timeservicecontracts.In contrast,task
formofcontractual
contractscan be conductedat arm's lengthwithoutan apparatusof
performance
subordination.If the ownerof the businessis not satisfiedby the work,he can
refuseto pay and seek anothercontractingpartyfor the future.Managerial
into bargainingpower, and labour is treated
prerogativebecomes transformed
essentiallyas a commodity.58
Despite this frequentcoincidenceof time service
contractsand bureaucraticcontrol,I shallinsistthatthepresenceof bureaucratic
control is an independentvariable, which, though linked to the employer's
assumptionofstandardrisksin a timeservicecontract,is by no meansdetermined
by thatformofcontract.
Nor should it be forgotten
thatthesetwo patternsof contractualallocationof
riskrepresenteitherend of a spectrumofchoicesfortheownerofa business.The
ofcontractualarrangements
flexibility
permitsan employerin practiceto choosea
mixtureofthesetwoparadigmsofservicecontract.Throughproductivity
schemes
and profit-related
pay,theemployercan modifytimeservicecontractsto transfer
some of the risks of shirkingand unforeseencontingenciesonto employees.
Similarly,by makingtimeservicecontractsterminableon shortnotice,or relying
on casual or temporary
workers,thecontractrevertstheriskof theunavailability
of workback ontotheworker.In thisvein,we see thenew Nissan assemblyplant
a 'bank' oftemporary
workersto be calledon whenrequired,59
and the
establishing
froma 'pool'
CityofBirmingham
selectingitscleansingoperatives(street-cleaners)
of casual workers.60
The questionto be addressedhereis how shouldwe accountforan employer's
selectionofa particularmixtureoftheallocationofcontractual
risks?Whatfactors
influencethis choice? Three factorshave oftenbeen suggestedas important
determinants:
transactions
costs,thedivisionoflabour,and theprobabilityofthe
standardrisksarising.Each oftheseshouldbe consideredbriefly.
The importanceoftransactions
costsarisesin thefollowing
way. The choicefor
an employerlies between,on the one hand, the cost of direct management
supervisionof a relatively
unspecifictimeservicecontract,and, on theother,the
cost of specifyingin detail the natureof the job to be performedundera task
and Dualist Tendenciesin ModernWesternSocieties',
58 J. H. Goldthorpe,'The End ofConvergence:Corporatist
in JohnH. Goldthorpe(ed), Orderand Conflict
in Contemporary
Capitalism(Oxford,1984) 315, 335.
(1986) 125
59 G. Standing,'MeshingLabour FlexibilitywithSecurity:An Answerto BritishUnemployment?',
International
LabourReview87.
60 Byrnev
CityofBirmingham
[1987] IRLR 191 (CA).
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364
Oxford
JournalofLegal Studies
VOL.10
contractand monitoring
theoutcomeofwork.61In viewofthelikely
performance
and
administrative
costs
of
advance
of job content,for task
specification
legal
contracts
to
function
must be able to
satisfactorily,
management
performance
in advancewithprecisionand brevitytheoutcomessoughtfromperformidentify
ance of a service.If, therefore,
the natureof a job cannotbe easilyreducedto a
thecostsofwritingout a taskperformance
contractand
smallsetofspecifications,
measuringthe outcomesof work may exceed the costs of directmanagement
theemployer'schoiceon groundsofefficiency
towards
supervision,thusdirecting
timeservicecontracts.
It followsthat,wherethejob involvescomplextasksand considerablediscretion
on thepartof theworkerin identifying
needs and appropriatesolutions,as in the
case of nurses, teachers,solicitors,and supervisorsof highlyautomatedproduction,thisdegreeof specificity
maynot be possibleat a costwhichis less than
theexpenseofgeneralmanagerialsupervision.Where,on theotherhand,thetasks
to be performed
can be describedexactlyand the performance
readilymonitored
contracts
by observationof thecompletionof thosetasks,thentaskperformance
such as piece-workseempotentially
moreefficient.
But it is important
to notethatthe natureof the job dependsin partupon the
employer'schoiceswithrespectto the divisionof labourand the organizationof
withrespectto theextentthathe
production.An employerenjoyssomeflexibility
choosesto designatea givenjob as one involvinghighor low trust.62
He mayseek
to diminishthe employees'discretionover the mode of performancethrough
termssettingout,forexample,exactlywhatformsoftreatment
precise-contractual
a doctor should offerto patients.This choice in favourof task performance
contractsmayarisefroma perceptionthattheautonomyofworkersincreasesthe
costsofproductionso that,despitetheadded expenseofdevisingtaskperformance
ofreducedproduction
thismaybe regardedas acceptablein anticipation
contracts,
costs. Thus the transactions
costs analysisonlyprovidesa partialexplanationof
how an employerselectsbetweenthedifferent
contractualallocationof risks,and
of
its significance
may be overwhelmedin particularinstancesby considerations
otherkindsofcosts.
allocationofrisks,
thecontractual
Withrespectto thesecondfactorinfluencing
thedivisionof labour,thesimultaneousgrowthofmassproductionindustriesand
theincreasingpracticeofusingtimeservicecontractsduringthiscenturysuggests
thatan intensivedivisionof labouralong a conveyorbelt requiresa timeservice
Yet thislinkageseemsoverstated,fortaskperformance
contractualarrangement.
contractscan establishan equallyintensivedivisionof labour. A firmcan divide
contractswithworkerson
workup intodiscretetasksand maketaskperformance
the
thepremises,eitherindividually
or in gangs,leavingto theworkersthemselves
issues of the distributionof rewards,the pace of work, and the details of
remainscommonin somesectors
production.This practiceofinternalcontracting
of theeconomysuch as construction
and demolition,and perhapswe see signsof
J
61 J. C. McManus, 'The costsofalternative
economicorganizations',
(1975) 8 Canadian ofEconomics334.
62 The terminology
derivesfrom:Alan Fox, BeyondContract:Work,Powerand TrustRelations(London, 1974).
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AUTUMN1990
EmploymentProtectionLaws
365
its returnin mass productionthroughqualitycircles.A betterexplanationof the
use oftimeservicecontractsin massproductionseemsto be thattheconveyorbelt
itselfprovidesan effectiveand cheap means of supervisingwork, so that the
transaction
costsof makingtaskperformance
contractsusuallyexceed thecost of
undera timeservicecontract.This conclusionsuggests
monitoring
performance
that,althoughthedivisionoflabourmayhavesomebearingon thechoicebetween
different
contractualallocationof risks,it should be seen not as an independent
variablebut one linkedto considerations
oftransactions
costs.
of the choice of contractualallocationof
Finally,one importantdeterminant
risksconsistsin thelikelihoodofthoserisksmaterializing.
For example,theriskof
increases
involves
absence fromthe
where
the
poor performance
probably
job
officeor factory,as in the case of the sales forceor taxi-drivers.63
Here the
seems
to
a
to
employer
likely respondby linkingpay performance
by offering
commissionon sales ratherthanwagesbased upon timeserved.Similarly,therisk
of theunavailability
ofworkto be performed,
ifregardedby theemployeras subwill
the
taskperformance
towards
either
stantial, press employer
contracts,so that
he onlypaysfortheworkrequired,or short-term
timeservicecontractswhichcan
be readilyterminated.
But as thislast exampledemonstrates,
risksmaybe redistributedbycontractsin a varietyofways,so thatthepresenceofsuchriskscannot
providea reliableguideas to theeventualpatternofa contractinvolvingservices.
Moreoverthepreciseallocationoftheserisksmayreveallessaboutthenatureof
the economicrelationand the presenceof risksthan the respectivebargaining
in a strongbargainingpositionmayseeka
positionoftheparties.An entrepreneur
formof double insuranceagainstsuch risksby assertingsimultaneously
thata
workeris onlyhiredfora particularjob and thathe may be dismissedon short
notice.
What emerges,I suggest,fromthis briefconsiderationof the factorswhich
influencean employer'schoiceof how the standardrisksshouldbe allocatedby a
contractinvolvingtheperformance
ofservices,is thatnoneofthesefactorsis likely
to prove determinative
on its own, and thatfurthermore,
the flexibility
afforded
throughcontractualarrangementsoffersan employera varietyof pathways
towardsan efficient
or transacquisitionof labourpower. Whilstadministrative
actionscostsmaypush theentrepreneur
towardone formofcontractor theother,
thisseemsunlikelyto throwmuchlighton thedegreeofeconomicdependenceor
social subordinationof the worker.Similarly,the factthatthe entrepreneur
has
shiftedcertain risks onto the workermay indicate rathermore about their
respectivebargaining
positionsthanthetruenatureoftheireconomicrelation.The
exact pathwayto an efficient
acquisitionof labourpoweris therefore
unlikelyto
revealto a courtanyprofoundinsightintothenatureoftherelationsofproduction
under scrutiny.Does this pessimisticconclusionabout the significance
of the
contractualallocationof risksforlegal classification
apply also to the employer's
control?
adoptionof techniquesofbureaucratic
63 R. Russell,'Employee
Ownershipand InternalGovernance',(1985) 6 J ofEconomicBehaviorand Organization
217.
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366
Oxford
JournalofLegal Studies
VOL.10
andDistancing
Organization
The second tool available to employersforensuringan efficient
acquisitionof
consists
of
institutional
rules
and
of
labourpower
practices.Througha structure
an
can
bureaucratic
and
monitor
organization employer supervise,direct,
performance of work.These institutional
consistmainlyof a rankorderof
arrangements
of
authority,a gradingstructurebased upon job evaluationforthe distribution
rewards,an internallabour marketinvolvingpromotionladdersand systematic
evaluation,and a disciplinarycode. These devices,thoughcostly,
performance
permithigherechelonsof managementto controland directthe entireorganization. The availabilityof this organizationaltool forthe efficient
acquisitionof
labour power presentsemployerswith an importantchoice: eitherto integrate
workerswithintheorganization
or to keep themat a distanceoutsidetherangeof
bureaucratic
controls.
in location,often
Nothingturnshere on the place of work. This difference
describedin termsofthecontrastbetweeninternalcontracting
and putting-out
or
is notnecessarily
coterminous
withthefirm'sorganizational
out-work,
framework,
forhomeworkers
and specialistsor professionals
may be treatedas employees,64
Outworkmay
workingon thepremisesbe regardedas independentcontractors.65
offerattractivesavingsin overheadssuch as work-space,66and mayrequiretask
contractsbecause of the likelihoodof standardrisksarising,but it
performance
of thefirm.
does notrequireexclusionfrommembership
We have alreadyobservedthatone influenceon the adoptionof bureaucratic
controlsspringsfromtheearlierselectionbetweentimeserviceand taskperformis chosen,thenit seemsmorelikelythattheemployer
ance contracts.If theformer
willestablishbureaucratic
themanagerialtasksofmonitorcontrolsto systematize
ing, directingand discipliningthe workers.But thereis no necessaryconnection
betweenthesechoices. For example,temporary
agencyworkerswill not be fully
integratedinto the organization,falling outside the internallabour market
structures,
require
thoughtheyworkundertimeservicecontractsand therefore
contractscan be readilycombinedwith
supervision.Equally, task performance
intothe organization,
as in thecase of piece-workor a salesforcepaid
integration
solelybycommissions.Apartfromthislinkagebetweentimeservicecontractsand
organizationalmembership,what other factors determinethe province of
bureaucratic
control?
Once again, particularand contingentcost considerations
may provedecisive.
When in 1913 HenryFord introducedthemovingassemblyline systemformass
production of automobiles, the huge profitsit promised from productive
efficiency-by
reducingthelabourtimepercarfromtwelvehoursto an hourand a
AitfixFootwearLtd v Cope [1978] ICR 1210(EAT); Nethernere
(St Neots)Ltd v Gardiner[1984]ICR 612 (CA).
65 WHPT HousingAssociation
Ltd v SecretayofStateforSocial Services[1981] ICR 737 (QB).
64
66 For examplesofcostsavingamounting
to thousandsofpounds,see U. Huws, 'New TechnologyHomeworkers',
Humanand ManagerialImplications
Gazette13, 15; RichardJ. Long, New OfficeTechnology:
(1984) 92 Employment
(London, 1987) 85-6.
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AUTUMN1990
EmploymentProtectionLaws
367
half-dependeduponkeepingproductionrollingat all costs.67The additionalcosts
beside the staggering
of bureaucraticmanagerialcontrolpaled intoinsignificance
profitsto be won froma continuousassemblyline. But a rationalentrepreneur
controlsat each
mustevaluatethe costsand benefitsof expandingorganizational
stage of production,distribution,and sales. The remainingpresenceof many
in the motorindustrytodaybears witnessto the possibility
externalcontractors
of managerial
thatthecostsof subsumingeverystagewithina unifiedframework
contractsspecifying
the
controlmayfarexceedthecostofdevisingand monitoring
theabsence
in advance. Here, therefore,
obligationsof suppliersand distributors
of transof bureaucraticcontrolsmay resultfromthe particularconfiguration
of
subordination
actions costs, and may not reveal the real relations economic
and franchises.
whichmayexistundertheguiseofdistributorships
controlsover
Some historiansand sociologistsviewtheadoptionofbureaucratic
theworkplaceas a sophisticated
attemptto securecompliancefromtheworkforce
in the face of resistanceto the subordinationof the employment
The
relation.68
rationalizationand impersonalization
of authorityrelationsachieved by discithepowerstructure.
At thesametimethe
plinarycodes and worksruleslegitimates
internallabour market,with its promotionladders and ostensiblyobjective
determinationsof fair pay, provides materialincentivesfor compliance and
fordifferentials
in rewardsbased on merit.69Management
providesjustifications
to
at
the
same
time
the
broader
aim of instillinggood workinghabits
may
aspire
into the workforceand the local population.70From this perspective,the
bureaucraticorganizationspringsfromthefundamental
need to disciplinelabour
withina systemofvertically
integrated
production.
This accountof the originsof bureaucraticcontrolsin the workplaceaccepts
thatmanagement
wouldpreferto retainan unfettered
implicitly
prerogative
power
is forcedupon it by virtueof the resistanceof the
and that bureaucratization
workforceto managerialauthority.But the workersmay in fact have a more
positive interestin compellingmanagementto adopt a bureaucraticformof
oftheworkplace.71
to rulesand
government
By subjectingmanagerialprerogative
procedures,it becomesboth a morepredictableexerciseof power and also one
susceptibleto detailednegotiationand monitoringby the workforce,72
through
collectivebargainingor informalassertionsof the legitimacyof custom and
practice.The routine,impersonalapplicationof the principlesof the internal
labourmarketand thedisciplinary
a realgainto theworkforce,
code represents
or
67 AlfredD. Chandler,TheVisibleHand
(Cambridge,Mass, 1977)280; D. Raffand L. Summers,'Did HenryFord
Pay Efficiency
Wages?', (1987) 5 J ofLabourEconomicsS57.
68 Richard Edwards, Contested
Terrain(New York, 1979); ReinhardBendix, Workand Authority
in Industry:
intheCourseofIndustrialization
IdeologiesofManagement
(New York, 1963); AlvinW. Gouldner,Patterns
ofIndustrial
(London, 1955).
Bureaucracy
69 Claus Offe,Industry
and Inequality
(New York, 1977).
70 ReinhardBendix,above n 68, 59; SanfordM. Jacoby,Employing
(New York, 1985) 117-19.
Bureaucracy
71 Dietrich
n
above
Consent:Changesin theLabourProcess
Rueschemeyer,
36, 97; MichaelBuroway,Manufacturing
underMonopolyCapitalism(Chicago,1979) 101-8.
72 J.M. Malcomson,'WorkIncentives,Hierarchy,and InternalLabour Markets',(1984) 92 JofPoliticalEconomy
486.
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368
Oxford
JournalofLegal Studies
VOL.10
at least thelowerpaid partof the workforce,73
even thoughthebureaucratic
and
meritocratic
in theworkplacemayservesimultaneously
the
ostensibly
government
functionsof legitimatingboth the subordinationintrinsicto the employment
relationand thebroaderinequalitiesofopportunity
in society.74
Althoughthishistoricalaccounthas greatforce,it seemsto throwlittlelighton
the immediatequestionbeforeus, namelywhyan entrepreneur
mightpreferto
extendbureaucratic
ratherthanto leave the same taskto an external
organization
contractordisciplinedby the burdenof the contractualallocationof risk.But in
factit does suggestthatemployersoftentakeon thecostlyburdenof bureaucracy
unwillingly,and that any opportunitiesto reduce these costs throughexternal
contractingmay be seized upon. The absence of bureaucraticcontrolsmay
therefore
not indicatean abdicationof disciplinary
controloverlabourbut rather
itsachievement
at lowercostthroughcontractswithoutsiders.
We shouldalso doubt thatthe originsof bureaucraticgovernment
lie solelyin
the quest for labour discipline.Senior managementmay turn to bureaucratic
controlsas the best methodof instillinga corporateculturethroughouta large
organizationas part of the aim of attaininghigh qualityin productionand the
consequent good will of customers.Ultimately,therefore,the reach of the
organizationalframework
may depend criticallyon the marketfailureconsiderationsadumbratedabove, thoughon thisoccasionwitha particularconcernfor
qualityratherthanprice. Here the absence of bureaucraticcontrolsmayindicate
thatthe necessaryqualitycontrolcan be achievedmoreefficiently
by monitoring
the qualityof the suppliesand using the threatof discontinuanceof contractual
linksto ensuregood performance
of thecontract.
So we mustconcludeagain,as we did withrespectto thecontractualallocation
of risk,thatthe presenceor absence of bureaucraticcontrolsseems unlikelyto
reveal to a court the true natureof a contractinvolvingservices.The use of
bureaucracymay betraythe presence of staggeringprofits,an imperativefor
qualitycontrol,ora stronglabourmovement.Its absenceneed notindicatethatthe
economic relation is one where the employmentprotectionlegislationis
unnecessary.
oftheforms
Neverthelessthisanalysisof thesocial and economicdeterminants
considerable
sheds
of
labour
of arrangement
forthe efficient
power
acquisition
thescope ofemployment
thelaw in determining
lighton theproblemconfronting
and independent
between
The
division
employees
binary
protectionrights.
contractorsembedded in the legislationobviouslyattemptsto forceinto neat
what in factcomprisesa myriadof patternsof the allocationof
compartments
controls.Furthermore,
contractual
risk,and thedegreesand rangeofbureaucratic
forthe courtsto focusupon one of these techniquesforefficient
acquisitionof
labourpower,suchas a particularallocationofriskor thepresenceofbureaucratic
73 B. Elbaum, 'The Making and Shaping of Job and Pay Structuresin the Iron and Steel Industry',in Paul
Osterman(ed), InternalLabourMarkets(Cambridge,Mass, 1984) 71.
74 K. Weiermair,'WorkerIncentivesand WorkerParticipation:On the ChangingNature of the Employment
Studies547.
Relationship',(1985) 22 J ofManagement
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AUTUMN1990
Protection
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Employment
369
control, seems bound to lead them into errorsof classification,since these
protection
techniquesmay prove unrelatedto the real concernsof employment
laws forreliefof workersfromeconomicdependenceand social subordination.
these are preciselythe mistakeswhich the courtshave made in
Unfortunately,
applyingthelegislation.
3. A CrisisinLegal Concepts
of distinguishing
The difficulty
betweenemployeesand independentcontractors
of
has challengedlegal mindsforovera century.Clearlythisbinaryclassification
contractsinvolvingtheperformance
in
of servicesis bound to runintodifficulties
of results
borderlinecases. It is nottheresultinguncertainty
and unpredictability
in theseborderlinecases, however,whichhas provokedthe claim thatthereis a
crisisin legalconcepts.Rathertheproblemresidesin determining
howto go about
the
that
is
whichwould
in
criteria
the
relevant
answering question,
identifying
enable the courtsto police the boundarybetweenemployment
and independent
contracting.
When challengedto finda single test, courtshave emphasizedthreepossibilities.75The firstcomprisesthe 'control'test.Underthiscriteriona contractof
existswherethehireroftheservicescontrolstheworkerwithrespect
employment
to the time and mannerin which he performshis work. The second is the
'organization'test,whichasks whetherthe workerhas been integratedinto the
organization,by being graded,paid accordingto a job evaluationscheme,and
code. The thirdtestexamines
requiredto conformto theemployer'sdisciplinary
theallocationofrisksbetweentheparties.If theworkeris in 'businesson his own
and skill,
account'," meaningthatincomefromworkdependsupon productivity
and perhapsthat the workerriskscapital in the venture,thenhe or she often
countsas an independentcontractor.
These threetestsfalleasypreyto twostandardtypesof criticism.The testsare
in the sense that they do not provideclear criteriafor settling
indeterminate
borderlinecases. In addition,thetestsoftenappeardisfunctional
in thesensethat
in a
theydraw the boundarybetweenemploymentand independentcontractors
place whichseemsto deprivea workerof needed employment
protectionrights.
Let me brieflyrestatethese criticismsin the lightof the foregoingsocial and
economicanalysisofformsofservicecontracts,beforeidentifying
thefundamental
problemwithall theseapproaches.
Indeterminacy
All threetestssufferfromcertaincrucialambiguities.The controltesthas never
resolved the question of what type of controlsuffices.Because
satisfactorily
employerscannot literallycontrolthe mannerof work with respectto skilled
75 Paul Davies and Mark Freedland,aboven 49, 82-9.
76 Per Cooke J,MarketInvestigations
Ltd v Minister
ofSocial Security
[1969] 2 QB 173, 184 (QB).
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370
OxfordJournalofLegal Studies
VOL. 10
craftsmenand professionals,77
the natureof the controlrequiredunder the test
mustbe understoodratheras a residualrightto controlbytheexerciseofdirection
and monitoringof performance.But once the nature of the controlrequired
becomes so diffuse,thenit providesuncertainguidance.Externalcontractorson
servicesmightagreeto be subjectto
construction
sitesor providersofprofessional
such a generalpowerof directionand monitoring,
yetin all otherrespectsretain
theirautonomyand regardthemselvesas independentcontractors.Furthermore,
thecontroltestdoes notoffera clearanalysisofthenatureoftherequisiteformof
monitoring.It cannotbe limitedto directsupervisionof the worker,forin many
instancesof piece-workand sales on commission,the workeris largelyunsupervisedthoughhis workis closelymonitoredby quantifying
his productivity.
On the
otherhand, it has been held thatan orchestralconductor'scontroloverplayersis
insufficient,78
thoughit is hard to imaginea more scrupulouskind of quality
control.In addition,thecontroltestdoes notclearlyindicatewhetheran employer
mustdictatethenumberofhoursworked,thoughithas oftenbeeninterpreted
as a
in
cases
casual
and
a
freelance
workers79
necessaryrequirement
concerning
80
architect.
The organizationtest arose in part to overcomethese indeterminacies
of the
controltest. Yet it suffersfromsimilarweaknessesitself.Althoughthe organizationtestmakesit plainthata residualformofcontrolsuffices,
it triesto establish
the existenceof such controlby referenceto badges of membershipin the
organization.Of course, this test will founderin connectionwithsmallerbusinesseswhichlack clear marksof organizational
membership.Withinlargefirms,
for
a
search
of
of
however,
badges membership the organizationmakes better
sense. These badges consistin membershipof the firm'sinternallabour market,
rankingin its internalhierarchicalstructure,pay taxedat sourceas requiredfor
employees,subjectionto theworksrulesor employer'shandbook,subjectionto a
dress code, and so forth.The inevitableindeterminacy
of this approach in
borderlinecases residespreciselyin thefactthattheworkerholdscertainbadgesof
butnotothers.In a typicalcase theworkerwillbe
membershipoftheorganization
treatedforthepurposesof deferredremuneration
suchas pensionsand taxationas
an independentcontractor,but forthe purposesof discipline,calculationof pay
and gradingas an employee.The organizationtestoffersno guidanceon how to
classifysuch a worker,unless certainbadges of membershipare regardedas
conclusive.
The risktestwhichexaminesthefinancialarrangements
betweenthepartiesto
determinewhetherthe employee bears the risk of profitor loss also lacks
At firstsightthetestappearsto requirean independentcontractor
to
determinacy.
riskcapitalin the venture.But thiswould undulyrestrictthecategory,formany
such as a portraitartistonlybringhumancapital,skill,and a
genuinecontractors
77 O. Kahn-Freund,'Case Note', (1951) 14 MLR 505.
SocietyLtd v Secretary
ofStateforSocial Services[1981] ICR 445, 466 (QB).
78 MidlandSinfoniaConcert
FortePlc [1983] ICR 728 (CA).
79 O'Kelly v Trusthouse
v Secretary
ofStateforSocial Services[1981]ICR 737 (QB).
so WHPT HousingAssociation
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AUTUMN1990
Protection
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Employment
371
theriskof
toolsto themarket.It therefore
seemsbetterto interpret
fewelementary
to thelevelof remuneration
comparedto thetimeand
profitand loss as referring
undertakerisksof
effortinvolved.Both employeesand independentcontractors
thissort:theemployeenormallyassumestheriskthatwagespaid fortimeworked
are below the marketrate for his skills and the level of effortrequired; the
independentcontractortypicallyassumes the risk thathis estimateof the time
of the task will prove inaccurate.In these paradigm
requiredfor performance
instanceswe can discerna different
patternofrisks,butin anyrealexamplewe are
likelyto discovera complexallocationbetweenthepartiesoftheserisksconcerning
ignoranceand uncertaintyof markets,effort,and time involved. Ordinary
throughthe
employeesoftenbeara riskofreducedincomefrompoorperformance
benefit
stand
to
from
and
for
from
deductions
employer'sdisciplinary
system
pay,
and
increasedeffortfromprofit-related
promotion
pay schemes,commissions,
seekto shifttheriskofmiscalculation
systems.Similarly,independentcontractors
of timeinvolvedback onto the otherpartyby chargingon a costs-plusbasis and
otherslidingscalesofpayment.
Giventhesecomplexpatternsoftheallocationofriskin practice,it seemsthata
riskanalysismustseek to establisha distinction
betweenthefundamental
pattern
This will
ofrisksin a contractprovidingservicesand mereincidentaladjustments.
taskin manyinstances,sincecontractsmayallocateand subdivide
provea difficult
risksin a plethoraof ways. In orderto do so, it is suggested,the analysiswould
have to assume the conclusionof the enquiry,by assertingthatthe fundamental
or independentcontracting.
allocationof risksbetteraccordswithemployment
Disfunction
what is meant is that their
By allegingthat the threetests are disfunctional,
to
factual
circumstances
straightforward
application
producesresultswhichseem
to defeattheclearpurposesoflabourlaw regulation.This criticism
clearlyinvolves
an implicitjudgmentthat employmentprotectionrightsshould apply to a
particulareconomic relationdespite the contraryindicationof the test. This
thatit is wrongitself,and thatthe
vulnerableto thecriticism
judgmentis therefore
test produces the best result. Leaving aside thatproblem,however,it can be
thatall threetestsare disfunctional.
demonstrated
persuasively
The controltestsuffers
fromtheproblemthatit is potentially
bothunder-and
over-inclusive.We have noted already that the controltest is under-inclusive
and professionals,
becauseit tendsto excludeskilledworkers,seniormanagement,
since an employeronlyexercisesminimalcontrolover the performance
of their
work. But a furtherflaw in the test which leads to under-inclusiveness
is its
mustfitintothetimeservicemodeof
assumptionthatall contractsofemployment
acquisitionof labour powerdescribedabove. We notedthatonlyin thissortof
contractfor the acquisitionof labour power is it an essentialelementof the
thattheemployershouldexercisedirectsupervisionofwork.Under
arrangement
taskperformance
in contrast,monitoring
does notrequire
ofworkeffort
contracts,
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372
Oxford
JournalofLegal Studies
VOL. 10
controloverperformance
butmerelymeasurement
ofoutcomes.Yet thereis surely
no doubt thatmanyof thesetaskperformance
contracts,such as piece-workand
sales by commission,should count as contractsof employment.In short,the
controltestappearsto relyupon an undulynarrowparadigmofefficient
modesof
acquisitionof labourpower,whichtendsto excludean equallyimportant
strategy
in contractual
relationsforhiringservices.
At the same time,however,the controltestprovesover-inclusive,
because it
In many
includesas employeeswhathavebeen called'dependententrepreneurs'.8'
thereis a similar
contractors
betweenapparently
typicalarrangements
independent
degreeof subordinationbetweena large businessand a small contractorto that
betweenemployerand employee.This is immediately
obviousin connectionwith
individualstreatedby contractas independentcontractors,
such as labour-only
on constructionand demolitionsites, homeworkers,temporary
subcontractors
workers,and casuals. Less oftennoticedis thephenomenonthatmanyquite large
businesses share an equal degree of subordinationto the controlof a major
business.These dependententrepreneurs
fallunderthecontrolofa coreemployer
as a resultof the latter'smonopsonypositionwhichpermitsan insistenceupon
accepts considerable
oppressivecontractualterms.The dependententrepreneur
with
financialrisktogetherwithsubservienceto the core employer'sinstructions
Into
this
of
to
and
categoryfall
respect timing,quality,
quantity performance.
the
of
a fastfood
of
to
franchisee
automobile
manufacturers,82
suppliers parts
distributors
under
a
solus
of
the
tenant
of
a
station
agreement,84
petrol
restaurant,83
the
and
and
such
as
US
car
automobiles,85
products
components,86 newspapers,87
and gangsofmigrantfarm-workers.89
In
agricultural
systemsofshare-cropping,88
is no
contractors
the
instances
and
many
independence equalityoftheindependent
morethana mirage.'They sacrificematerialbenefitsforpettybourgeoisillusions
despite onerous termsand unsecuredexistence.'90In these circumstancesthe
iftakenas thedeterminative
controltestforemployment,
test,is boundto embrace
a wholerangeof economicarrangements
fortheprovisionof serviceswhichhave
hithertobeen generallytreatedas outsidethepurviewoflabourlaw regulation.
results.The testassumes
The organization
testalso runstheriskofdisfunctional
is coterminous
thatemployment
withfullbureaucratic
control,so thattheabsence
81 Folke Schmidt,Law and IndustrialRelationsin Sweden (Stockholm,1977) 91; Bob HIepple,'Restructuring
Employment
Rights',(1986) 15 ILJ 69, 74.
82 S. Macaulay,above n 35, 19.
83 P. H. Rubin, 'The Theoryof the Firm and the Structureof the FranchiseContract',(1978) 21 JofLaw and
Economics223.
84 The MonopoliesCommission,
(London,
Petrol.A ReportontheSupplyofPetrolbyRetailersintheUnitedKingdom
1965).
85 S. Macaulay,above n 35, 23.
MachineToolSales [1974] AC 235 (HL).
86 Eg Schuler(L) AG v Wickman
87 Eg Mirror
Ltd v Gunning[1986] IRLR 27 (CA).
GroupNewspapers
in
88 M. J. Wells, 'Legal Conflictand Class Structure:The IndependentContractor-EmployeeControversy
CaliforniaAgriculture',
(1987) 21 Law andSocietyReview49.
A Challenge
89 M. Linder,'Employees,Not-So-Independent
and theCase ofMigrantFarm-workers:
Contractors,
ReviewofLaw and Social Change
to the "Law and Economics"AgencyDoctrine',(1986-7) 15 New YorkUniversity
435.
Civil (Private)Lasw(Budapest, 1979) 260.
9'' GyulaEtrsi,Comparative
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AUTUMN 1990
EmploymentProtectionLaws
373
of the normalbadges of membershipof organizationsleads inexorablyto the
conclusionof the statusof independentcontractor.But our earlieranalysisof
efficient
modes of acquisitionof labourpower demonstrated
thatthe exerciseof
bureaucraticpower was not essential.A skilled craftsmanworkingin his own
contractsfora singlecorefirmprobablylacksany
workshopon taskperformance
badges of membershipof the organizationpreciselybecause the contractual
allocationof riskdispenseswiththeneed forsuchmechanismsof supervisionand
discipline. This individual may indeed be best classifiedas an independent
contractor,but theremustbe a seriousquestionwhetherhis degreeof economic
dependence combined with the realityof managerialcontrolthroughmarket
to bringhimwithinthefoldof
bargainingpowershouldbe regardedas sufficient
sharessomebadgesof
protection
employment
rights.In caseswheretheoutworker
membershipof the organization,as in the case of the marketresearcherwhose
mannerofworkwas closelyregulatedbythecorefirm,91
thenthecase forinclusion
testalone
as an employeeappearsmuchstronger.Relianceupon theorganization
withrespectto the plenitudeof mechanismsthroughwhichan
revealsa nai'vetd
resultsin
employermayacquirelabourpower,and thiswill lead to disfunctional
withoutincurring
cases wherethe employercan acquire labourpowerefficiently
the expense of bureaucraticcontrols.Furthermore,
as we noted earlier,labour
costsmayprofoundly
influencean employer'sdecisionin settingtheboundariesof
theorganization,
and in viewoftheseincentivestowardsverticaldisintegration,
it
makes littlesense to judge employees'need foremployment
protectionrightsby
referenceto managers'decisionswhichmay have been calculatedto limitthose
rights.
becauseitis contingent
Finally,therisktestalso becomesdisfunctional
uponthe
The moreclosely
parties'decisionswithrespectto the systemof remuneration.
thatthepartiestie remuneration
forservicesto productivity
and effort,
thegreater
the likelihoodthatthistestwilltreattherelationship
as one betweenindependent
contractors.Yet thereseems no reasonwhy this linkingof pay to productivity
shouldnecessarilydeterminethe worker'sentitlement
to employment
protection
rights.Even in an extremecase whereincomedependsentirelyupon a specified
shareof theprofitsof thebusiness,it is certainly
possibleto be an employee,as in
the exampleof thecrewof a fleetof fishingvessels.92By acceptinga considerable
the employeemay be
degree of risk concerningthe outcomesof performance,
but thereis no reason
bettingon hisownorhisworkgroup'ssuperiorproductivity,
to supposethathe or she also intendsto place job securityrightsat stake.
Similarly,where the risk analysis turnsits attentionto fluctuationsin the
ofworkto be performed,
once againthereseemsno good reasonwhya
availability
workeron a taskperformance
contractwho acceptsthatriskbyadoptingthestatus
of a casual shouldtherefore
be deprivedofemployment
protection
rights.Yet this
is preciselythe implicationof the reasoningof the Courtof Appeal in Nethermere
v Minister
ofSocial Security
[1969] 2 QB 173 (QB).
9' MarketInvestigations
92 Goodevev Gilsons[1985] ICR 401 (CA).
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Oxford
JournalofLegal Studies
374
VOL.10
The courtruledthat,in theabsenceofan obligationto
(St Neots)Ltd v Gardiner.93
workon one side and to provideworkor paywageson theother,therecouldbe no
contractof employment.To set up one criterionof risk for determiningthe
question of entitlementto employmentprotectionrightsis bound to prove
in thelongrun.An employershouldnotbe able to escape his duties
disfunctional
in thisrespectbymeansofavoidinga contractual
obligationto pay a regularwage.
The underlying
reasonwhythisapproachprovesdisfunctional
is thatit assumes
thatthereis a necessarylinkbetweentaskperformance
contractsand thestatusof
the
independentcontractor.The risk analysisis anotherway of highlighting
contrastbetweenthe two paradigmsof contractualarrangements
for acquiring
labour poweridentifiedabove. The task performance
contractplaces the riskof
unforeseen
fluctuations
in productdemand,and poor performance
contingencies,
on theproviderof services,whereasthe timeservicecontractallocatestheserisks
to theemployer.The inherent
liesin its
flawin theeconomicriskanalysistherefore
contractsrule out thepossibilityofan employassumptionthattaskperformance
mentrelation.But we have seen that,in manyinstancessuch as piece-workand
commissionsales,thesetaskperformance
commoninstancesof
contractsillustrate
whichclearlymeritemployment
rights.
employment
protection
The Problemof Choice
oftheemployment
In myearlieranalysisof thesocialand economicdeterminants
an
to
I
of
choice
the
seekingthe
entrepreneur
relation, emphasized
open
degree
the
of
This
labour
deliberatelyhighlighted point thatit is
acquisition
power.*
the
forlabourpowerand whichdetermines
the
which
initiates
search
management
relationand the size of thefirm.This analysisrevealsan
modelof thecontractual
evendeeperproblemof thethreeteststhanwe have so farconsidered.
All threetestsdeferto the parties'choiceof form.We have alreadynotedthat
testimplicitly
theorganization
acceptsthedecisionoftheownerof thebusinessas
to thedemarcationof theboundariesof his enterprise
by treatinghis selectionof
theriskapproach
the
issue.
as
determinative
of
of
Similarly,
badges membership
defersto theparties'choice,by allowingtheselectionofa paymentmechanismto
ofchoicein
theambitofemployment
determine
rights.The importance
protection
connectionwiththecontroltestis perhapslessobvious.Here we mustreturnto the
contracts.By opting
selectionbetweentimeservicecontractsand taskperformance
rendersit muchless likelythata
fora taskperformance
contract,theentrepreneur
relation.
courtwillfindtherequisitedegreeofcontrolto establishan employment
undera common
Ltd v Minister
For exampleinReadyMixedConcrete
ofPensions,94
thecompanyorganizedthedeliveryof
riskin distribution,
schemeforre-allocating
forthedriversto purchase
drumsbyarranging
concretein lorriescarrying
rotating
the lorrythrougha loan withan associatedcompanyand to receivepaymentfor
deliveriesbased upon mileage.Althoughthe courtrefusedto regardthe express
v ChampionEmployment
agencyworkers).
[1984] ICR 365 (EAT) (temporary
93 [1984] ICR 612; see also: Wickens
94 [1968]2 QB 497(QB).
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AUTUMN1990
EmploymentProtectionLaws
375
the driveras an independentcontractor
termin thecontractthatcharacterized
as
itfoundthatthedriver'sassumptionofriskthroughownershipand
determinative,
the paymentsystemas sufficient
to deprivehim of the statusof employee.The
was functionally
courtfailedto appreciatethatthistaskperformance
arrangement
identicalto a timeservicecontract;it achievedequivalentor evensuperiorcontrol
overthedriverwherethenature.oftheworkpreventedconstantsupervision.
of thischoiceofformbecomesapparentwhenwe considerthe
The significance
of thecourts'decisions.This restson theimplicitclaimthat
sourceof legitimacy
the courtsare merelyrespectingand enforcingthe parties'choice,not imposing
upon themparticulartypesof economicrelations.This in turnreflectsa basic
stance
dispositionin favourof freedomof contractcombinedwiththeunderlying
of companyand labourlaw to avoid meddlingwithmanagerialdiscretion.Given
thisconstraint
upon thescope oflegitimatedecisions,thecourtsmustrespectthe
choice of managementin the constructionof relationsof production,and this
inevitablycreatestheriskthattheownerof thebusinesswill severelyconfinethe
scope ofhis dutiesarisingunderemployment
protectionlaw.
In recentyears the courtshave edged away fromregardingthe employer's
thechoiceof theparties,as determinative.
Clarkand
expresschoice,theoretically
Wedderburnnotethatthecollusionof the partiesforthepurposeof avoidingtax
alertedthecourtsto thedangerofacceptingat facevalue theexpressnatureofthe
contract.95
But thisissueofcollusionis merelyone symptomofa deeperproblem:
the underlying
principleof freedomof contractgrantsthe ownerof the business
thechoiceto contractintoor outofthenormalincidentsoftheroleofemployer.In
workerclaimingunfairdismissal
Young& WoodsLtd v Westa skilledsheet-metal
was treatedas an employeein theteethofexpressprovisionsto thecontrary
in his
contract,the Court of Appeal arguingthat otherwisethe contractwould have
theparties'to contractoutoftheAct'.96Giventhelikelyasymmetries
of
permitted
availableto theparties,thecourtsare boundto
bargainingpowerand information
findreasonsin some cases forpaternalistinterventions
whichentailignoringthe
apparentchoiceoftheparties.
These rival strandsin legal reasoning-respectfor freedomof contractand
paternalistcontrolsoverthe employer'spowerto evade the legislation-generate
of principle.The Courtof Appeal seeks bothto
contradictory
generalstatements
respectthe choice of the partiesand to defeatthis choice forreasonsof public
policy:
A manis without
to carryoutcertain
workfor
questionfreeunderthelaw to contract
another
without
intoa contract
ofservice.
Publicpolicyhasnothing
tosayeither
entering
way.97
95 Lord Wedderburn,R. Lewis and J. Clark(eds), above n 23, 152.
96 [1980] IRLR 201, 207 perStephensonLJ.
& Sons (Engineers)
Ltd [1988] ICR 232, 250 (CA) perRalph GibsonLJ.
97 Calderv II. KitsonVickers
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376
Oxford
JournalofLegal Studies
VOL.10
I finddifficulty
ofintention
as towhat
in accepting
thattheparties,
bymereexpression
shouldbe,caninanywayinfluence
theconclusion
oflawas towhat
thelegalrelationship
is. I think
ifthatwereso.98
thatitwouldbecontrary
tothepublicinterest
therelationship
The courtshave repressedthiscontradiction
theenquiry.
bydiverting
two
model
contracts
to
the
contractof employment
They posit
corresponding
and thecontractforservices.These modelscombineall the elementsof thethree
testsconsideredabovein a lengthycheck-list.By comparingtheactualtermsofthe
economic arrangementagainst the model contracts,the courts purport to
determinethroughan elaborateinterpretative
exercisewhichtypeof relationthe
chosen.
criteriain an unobtrusive
have
into
these
standardized
parties
Slipped
the
courts
treat
the
of
status
declarations
manner,
by the partiesas a
express
can
be importantin
not
which
conclusive
one
but
relevant,though
factor,99
borderlineor ambiguouscases.100This practiceestablishestheuntenableposition
of the partiesgleaned
thatthe courtspurportto relyupon the impliedintentions
fromthe whole framework
of termsof the economicrelationshipin order to
overridethe parties'expressdeclarationson the subject. Althoughthe courts'
motivesforthispracticemaybe praiseworthy,
it inevitably
generatesincoherence
and a crisisin basiclegalconcepts.The problemofchoicecan neverbe resolvedas
longas thecourtsfeelcompelledto respectthechoiceofthepartieson thesurface
of intentratherthan
of their legal reasoningby engagingin interpretation
of
norms.
imposition
4. TheDual AxisofEmployment
ofemployment
and the
This examination
ofthesocialand economicdeterminants
originsofthecrisisin legalconceptsteachestwovaluablelessons.In thefirstplace,
and independent
contractors
cannot
betweenemployment
althoughthedistinction
thescopeofmanyemployment
rights,once
sensiblybe eliminatedfromcontrolling
in shaping
thislegal barrierhas been established,firmsenjoysufficient
flexibility
thescope oftheorganization
themodesof acquisitionof servicesand determining
that they can reduce labour costs, including the costs of compliancewith
in other respects.
employmentprotectionrights,with no loss of efficiency
of
the difficulty
experiencedby the courtsin
Secondly,the underlyingcause
and independentcontractors
springs
policingthe boundarybetweenemployment
ofthecourts'decisionsin
ofthesourceoflegitimacy
fromtheviciouscombination
deferenceto the parties'choice and the employer'sultimatepowerto shape the
termsof contractsand determinethe size of the organization.Armedonlywith
discoursesframedin termsof respectforfreedomof contract,the courtscannot
vjohn Dawson [1976] 1 WLR 1213, 1222(CA) perMegaw LJ.
98 Ferguson
vJohnDawson [1976] 1 WLR 346 (CA).
99 Young& Woodsv West[1981] IRLR 201 (CA); Ferguson
ofPay-rollTax [1984] ICR
looMasseyv CrownLife InsuranceCo [1978] 1 WLR 676 (CA); NartchPtyLtd v
Cormr
286 (PC).
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AUTUMN1990
Laws
Protection
Employment
377
protectionrights,foreverytestof employment
successfully
impose employment
in thelongrun.
becomesdisfunctional
It followsthatthe firststep towardsan adequate solutionto the problemof
settinglimits to employmentprotectionrightsinvolves an abandonmentof
deferenceto the contractualarrangementsagreed between the parties. This
withrespectto status.
expressstatements
requiresmorethansimplydisregarding
thecontractual
oftheattemptto interpret
It involvesan abandonment
arrangement
to discoverin whichdirectionthe termspoint. If an intelligiblesolutionto the
protectionrightsin the contextof the
problemof settinglimitsto employment
of verticaldisintegration
is to be found,thencourtsmustgraspthe
proliferation
not
bull by thehornsand acknowledgethattheboundariesmustbe set ultimately
to theexpressor impliedwishesof thepartiesbut by an act ofpublic
by reference
policy.
The legislaturecan onlyprovidelimitedassistancein this respect.In certain
such as a
instancesit could identifya standardpatternof servicearrangement,
and
in the toyindustry,102
labour-onlyconstruction
worker,1'0or homeworkers
establishan appropriateregulatoryframework.But to go beyond such limited
shouldbe regarded
and to declare,forexample,thatall homeworkers
interventions
the
of
as employeesfor
protectionrightsseemsdestinedto
purpose employment
since
we
can quicklyenvisageinstancesof independent
become disfunctional,
from
homeforwhomemployment
contractors
rightswouldbe
protection
working
rules
would invite
inappropriate.1'3Furthermore,any such generallegislative
achievethe
which
evasionby means of moreelaboratecontractualarrangements
goal of efficientacquisitionof labour power withoutrelyingupon the term
identifiedby the legislatureas conclusivelyindicativeof the existenceof an
relationship.
employment
thecourtsmustshouldertheprincipalburdenhere,thenhow can
If, therefore,
to urgethecourts
It is alwaystempting
criteriaofdistinction?
suitable
theydevelop
for
was
and
indeed
this
to adopta purposiveapproach,
attempted a briefperiodin
and
theUSA.104But withoutadditionalguidancethisseemshighlyindeterminate
it seems
vulnerableto judicial misconceptionsof purpose, and furthermore
unlikelythatthiswould overcomethe problemof choice describedabove. If the
courtsare to engage in the impositionof formsof governmentover economic
set of criteriawhichbothmake sensein theworld
relations,theyrequirea firmer
and establish intelligibleboundaries to the reach of employmentprotection
legislation.
of theemployMy earlierexaminationof thesocial and economicdeterminants
mentrelationfastenedon theinsightthatthe employercan onlyachieveefficient
acquisition of labour power througha combinationof risk allocation and
bureaucraticcontrols.This can be representeddiagrammatically
along two axes:
Reportof theCommitteeofInquiry,above n 9; Paul Davies and Mark Freedland,above n 49, 97.
102See ACAS, ToyManufacturing
WagesCouncil(ReportNo 13, 1978).
103 K. D. Ewing,'Homeworking:
A FrameworkforReform',(1982) 11 ILJ 94, 108.
104 NLRB v
Lines,331 US 704 (1947).
Hearst,322 US 111 (1944); but see Harrisonv Greyvan
101
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Oxford
JournalofLegal Studies
378
voL. 10
one movingfromthe directsupervisioncharacteristic
of time servicecontracts
towardsindirectmonitoring
of tasks; the
throughmeasurementof performance
otherrepresenting
diminishinglevels of bureaucraticcontrolsexercisedthrough
This suggeststhattheboundariesofemployrulesand institutions.
organizational
mentrelationsshouldbe set alonga curveas in Figure 1. This linerecognizesthat
task performancecontracts,which impose considerablerisks on workers,are
consistentwith an employmentrelation provided that the firm preserves
bureaucraticcontrols.Equally, the absence of such badges of organizational
membershipdoes not rule out an employmentrelationprovidedthat the firm
monitorsand supervisesperformance
of the services.Outside the fielddescribed
the
two
axes
the
and
oftheallocationofeconomicrisks
the
combination
by
curve,
on the workerwiththe absence of organizationalcontrolsdenotesthe statusof
independentcontractor.
Risk
Task
1
TaskFigure
Performance
Piece-
Independent
contractor
work
Employment
Temporary
agency
Time
service
Organization
Bureaucratic
control
Distancing
Translatingthistheoreticalspace into a workablelegal testsuitableforappliforthecourtsto reasonin
cationby the courtsprovesmuchharder.It is difficult
are
the mannerof a simultaneousequationso thatbothaxes and theirinteraction
for
a
test
my proposal
presentin theirmindsat once. In view of thisdifficulty,
rulethata contractof
suitableforapplicationby thecourtsconsistsof a simplified
employmentexistsforthe purposesof employment
protectionlaw if the worker
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AUTUMN1990
EmploymentProtectionLaws
379
servicesforanother,referableto a contractualagreement,1'5
unlessthat
performs
contractsatisfiestwoconditions:thatit is a taskperformance
contract,and thatno
badges of membershipof thefirm'sorganizationapply. In effectthistestraisesa
in servicearrangements,
whicha firmcan
presumptionin favourof employment
that it has managed to acquire labour power
only rebut by demonstrating
withoutusinganytechniquesofcontrolotherthanthatofcheckingthe
efficiently
adequacy of the completedservice.Althoughthe testremainsvulnerableto the
choice of the firmwithrespectto the modes of acquisitionof labour power,it
imposesa highhurdlebeforethedutiesofan employercan be evaded.
This testdiffers
in important
respectsfromthecurrentapproachin thecourts.
In the firstplace, it ignoresthe expresswishesof the parties,forthesecan only
frustrate
theproperfunctioning
laws. But thechangeof
ofemployment
protection
approachgoes deeper.Insteadofthecourtsseekingto ascertainthetrueintentions
ofthepartiesbyexaminingthenatureoftheircontractual
relations,theyshouldbe
testingthe arrangementto discover whetherit excludes any techniques of
eitherthroughdirectsuperof performance,
managerialcontroland monitoring
visionor bureaucraticstructures
ofauthority.
Secondly, althougha time service contractstronglysuggestsa relationof
as beforeunderthe controltest,my proposalrecognizesthata. task
employment
contractcan achieveequivalentmanagerialcontrolprovidedthatat
performance
leastsome otheraspectsof organizational
membershipremainin place. Thus any
oftheorganization
shoulddrivea courttowardsa findingof
badgesofmembership
an employment
relation,unlikethepresentapproachwhichmerelybalancesthese
issued to
againstotherfactors.Hence the extensivesupervisionand instructions
the marketresearcherin MarketInvestigations
Ltd v MinisterofSocial Security'06
should have sufficedin themselvesto establishan employment
relationwithout
oftheabsenceofotherpossible
extendingtheenquiryto considertheimplications
suchas holidaysand sickpay.
badgesofmembership,
of the allocationof risk
Thirdly,my proposedtestdiminishesthe significance
betweentheparties.For example,bybearingtheriskoftheunavailability
ofwork,
theworkercurrently
depriveshimselfofthestatusofemployeeunderthedoctrine
of mutualityof obligation.Under my proposedtest,however,the existenceof
oftheorganization
wouldbe fatalto theargument
in favour
badges-ofmembership
of independentcontractorstatus. For example, in O'Kelly v Trusthouse
Forte
since
there
were
of
the
into
such
as
Plc,'07
manyaspects integration
organization,
of
of
the
the
dress
and
rules
code
application
system,supervisionby
disciplinary
thedeductionoftaxand nationalinsurancefromwages,thesecasual
management,
waiterscould onlybe regardedas employees.Similarly,the lorrydriverin Ready
MixedConcrete
v Minister
ofPensions,'08
by bearingtheriskofcapitaldepreciation
Manchester
los This excludesrelationswherethereis no contract:eg Sheikhv ChiefConstableofGreater
[1988] ICR
743 (EAT) (special constable);R v Civil ServiceAppealBoard, Ex parteBruce[1988] ICR 649 (CA) (civil servant);
Davies v Presbyterian
ChurchofWales[1986] ICR 280 (HL) (Presbyterian
minister).
106 [1969] 2 QB 173 (QB).
107 [1983] ICR 728 (CA); see also: G. Pitt,'Law, Fact and Casual Workers',(1985) 101 LQR 217.
10o [1968] 2 QB 497 (QB).
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Oxford
JournalofLegal Studies
380
VOL.10
severelyweakenedhis chancesof countingas an employee,but thiswouldnot be
determinativeunder my test if the core firmmaintainedother systemsof
control.
organizational
the
testacknowledgesthatmanagerialworkersmay be employees,
Fourthly,
that
provided
theycarrybadgesof membershipof theorganization.This resultis
achievedby droppingthecommonlegislativerequirement
thatthe servicesmust
be performedpersonally,which has been interpretedas excludingthose who
organizeothersto performthework.On theotherhand,it avoidstheinclusionof
all dependententrepreneurs
thetestof
in thecategoryofemployee,bymaintaining
of
distributor
For
the
organizational
membership. example,
newspapersin Mirror
v
not
as an employee,but
Ltd
count
would
GroupNewspapers
Gunning'09
probably
thesub-postmaster
in Tannav Post Office,110
whowas subjectto all theregulations
of the government
service,would be treatedas an
governingthe administration
for
the
of
employee
purpose employment
rights.
protection
5. Conclusion
I haveargued,contrary
considerations
to manytheoriesofthefirm,thatefficiency
the
forms
of contractual
in
considerable
discretion
permitemployers
determining
relationsthroughwhichlabouris acquired,and thattheexerciseofthisdiscretion
to flourishin theUK as a result
has caused non-standard
patternsof employment
These developments
of
new
labour
costs.
have
to
reduce
primarily
opportunities
to
exacerbateda crisisin thelegalregulationofemployment,
which,bycontinuing
deferto theemployer'schoicewithrespectto themode oforganizingtherelations
of production,has failedto provideadequate conceptualand normativetools to
ensurea degreeofobservanceofemployment
protection
rightswhichmatchesthe
needs ofworkers.
The onlyrouteout of thispredicamentrequiresthe mandatoryimpositionof
theserightsby referenceto social and economiccriteriawhichreduce as faras
possibletheinfluenceoftheemployer'schoiceofform.These criteriacombinethe
in a novel
elementsof control,risk-allocation,
of an organization
and membership
way. They identifythose servicecontractswhich entwinethe two strandsof
and bureaucraticcontrolsat thehostofpoints
monitoring
throughrisk-allocation
whichcomprisethedoublehelixoftheemployment
relationship.
19 1[1986]IRLR 27 (CA).
[1981] ICR 374 (EAT).
110
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