Skim Milk Masquerading as Cream?
It has become increasingly difficult for a company, which engages an individual
to provide a service, to avoid assuming the sorts of obligations which have only
previously been owed to employees. Increasingly, traditional employment
rights, such as the right to holiday pay, are being given to workers who are not
employed in the normal fashion (most recently, by the Agency Worker
Regulations 2010 which are due to come into force in October 2010).
To what extent can an employer rely on the express written terms of a contract
to limit his exposure to these sorts of statutory protections and to reduce his
costs, tax obligations or other potential liabilities? Where a legislative right is
afforded to a worker or employee (such as the right to paid holidays under the
Working Time Regulations 1998) can a person be deprived of that benefit simply
because the contract under which he is working expressly denies that he is a
worker or employee?
The problem, at first blush, does not appear too intractable. Two people may
agree to call a spade a fork but this does not of course make the object a fork.
However, where clauses purport to change the actual nature of the contract itself
the situation is more difficult; for example where the contractual rights or duties
created by the contract are themselves inconsistent with the employment or
worker relationship. One common clause, which is often included to
demonstrate that a contract is not one of employment, is a substitution clause.
These allow the contractor to send a different person in his stead to do the work.
Such a clause is incompatible with an obligation to provide work personally – a
fundamental requisite to the existence of an employment contract.
Autoclenz v Belcher is an important case. It considers whether and in what
circumstances an Employment Tribunal may disregard terms which were
included in a written agreement between the parties. It deals with the tricky
question of whether a tribunal can base its conclusions on a finding that the
documents do not reflect what was actually agreed between the parties or do not
reflect the actual intention or expectations of the parties. Prior to Autoclenz the
approach of the higher courts and tribunals to this issue has fluctuated.
The Claims
The Respondent, Autoclenz, provides car cleaning services to motor retailers and
auctioneers. The claimants were engaged by Autoclenz to provide car valeting
services. They asserted that they were “workers” within the meaning of the
National Minimum Wage Regulations 1999 (“NMWR”) and the Working Time
Regulations 1998 (“WTR”) and that they were therefore entitled to be paid in
accordance with the NMWR and to receive statutory holiday pay in accordance
with the WTR.
A “worker” under both the NMWR and the WTR is an individual who works
either (i) under a contract of employment; or (ii) under any other contract
whereby he undertakes to perform personally any work or service. A person
will not be a worker if the employer is in fact a client or customer of any
profession or business undertaking carried on by the individual.
The Contract
There were a number of written contracts between Autoclenz and the individual
claimants. The first contract was drafted in 1991. This contract stated that “the
subcontractor hereby confirms that he is a self-employed independent contractor”
and also that “the sub-contractor and Autoclenz agree and acknowledge that the
sub-contractor is not, and that it is the intention of the parties that the subcontractor should not become, an employee of Autoclenz”.
In 2007 a new contract was devised which said “Autoclenz wishes to engage the
services of car valeters FROM TIME TO TIME on a sub-contract basis. We
understand that YOU ARE AN EXPERIENCED CAR VALETER and might be prepared
to offer your services to Autoclenz”. The 2007 contract also contained a
substitution clause and a clause stating that Autoclenz was not obliged to
provide work and the person was not obliged to provide services.
It was not disputed, if the terms of the 2007 contract were contained solely
within the documents, that it was impossible, for the purposes of the NMWR and
the WTR to describe the claimants as employees and very difficult to describe
them as workers undertaking to perform a service personally.
Autoclenz’s Operation
The ET at first instance found that the claimants were employees and that they
were not in business on their own account. The claimants were not in control of
the way in which they did their work or over the hours that they worked. They
had no economic interest in the way that the work was organised. The invoices
submitted by the claimants were prepared entirely by the respondent (based on
the hours that the claimants had submitted). Although the Respondent made a
deduction from the amounts paid to the claimants for insurance and materials
there was no evidence that the deductions bore any real relation to the actual
cost of the materials. There was nothing that the claimants could do to make
their business more profitable.
Autoclenz made no secret of the fact that it regarded the claimants as self
employed. It advertised any vacant positions as available for “self-employed”
people. However, despite this, the tribunal at first instance held that the contract
did not reflect what was actually agreed between the parties. For instance,
although a substitution clause was introduced in 2007, the ET found that the
parties had actually agreed that the claimants would show up for work each day
and that the respondent had agreed to offer work provided that it was there for
them to do. In fact some of the claimants had been employed for long periods of
time on a full time basis (one since 1991).
The Decision of the Supreme Court
The decision of the Supreme Court is surprisingly straightforward. Lord Clarke
gave the Judgment of the Court and held that the ET was entitled to find that the
claimants were employees within the meaning of the NMWR and WTR (there
was therefore no need to consider whether they were workers undertaking to
perform a service personally).
The principle area of dispute in the Supreme Court concerned the extent to
which tribunals are entitled to investigate what terms were actually agreed
between the parties.
The Supreme Court adopted the Court of Appeal’s description of the position
under standard contract law (see Lord Clarke’s judgment at paragraph 20):
ordinarily where the terms are in writing and there are no oral terms then the
written terms will, prima facie, represent the whole of the parties’ agreement;
the parties are bound by the written terms when they sign the contract; the
written terms will stand unless they do not accurately reflect what was agreed
because of a mistake (generally common to the parties); and no terms which
conflict with the express terms can be implied into the contract.
However, the Supreme Court also agreed with the Court of Appeal’s decision that
a different approach is to be taken in respect of employment contracts.
The previous authorities’ approaches to the primacy of the written employment
contract were inconsistent. On the one hand, cases such as Snook v London and
West Riding Investments Ltd (“Snook”) [1967] 2 QB 786 appeared to provide that
the express terms could only be overridden if they were found to be a sham. A
contract was a sham where the parties had a common intention that the acts or
documents were not to create the legal rights and obligations which they gave
the appearance of creating. In Consistent Group Ltd v Kalwak [2008] EWCA Civ
430 the Court of Appeal held that there would only be such a sham where both
parties intended to paint a false of their respective obligations.
On the other hand in cases such as Protectacoat Firthglow v Szilagyi [2009]
EWCA Civ 98 the Court of Appeal took a broader approach and held that there
was no need for the parties to have intended to deceive anyone before the
written terms were overridden. Instead, in the event of a dispute about whether
the agreement described the true relationship between the parties, the court
must determine what the true relationship was.
The Supreme Court’s Conclusions
It is clear that the Supreme Court’s decision is peculiar to employment contracts.
Lord Clarke stated at paragraph 21 of his judgment that “nothing in this judgment
is intended in any way to alter those principles which apply to ordinary contracts
and, in particular to commercial contracts….. “.
The Supreme Court decided that, where one party alleges that the written
contract terms do not accurately reflect the true agreement, the question the
court has to answer is: what contractual terms did the parties actually agree?
The tribunal must consider whether or not the words of the written contract
represent the actual legal obligations of the parties, not only at the inception of
the contract, but also at any later stage. This enquiry requires the tribunal to
examine all relevant evidence, including the written terms. Importantly, both
Aikens LJ, in the Court of Appeal, and Lord Clarke in the Supreme Court,
cautioned against focusing on the “true” intentions of the parties because of the
risk of concentrating too much on what were the private intentions of the
parties. The important focus should be on discovering what the actual legal
obligations in the employment contract were.
One of the main reasons given by Lord Clarke for not always enforcing the black
letter terms of written employment contracts was taken from the decision of
Elias J in the EAT in Consistent Group v Kalwak [2007] IRLR 560: “The concern to
which tribunals must be alive is that armies of lawyers will simply place
substitution clauses, or clauses denying any obligation to accept or provide work in
employment contracts, as a matter of form, even where such terms do not begin to
reflect the real relationship.”
Focusing on all of the circumstances, including the written documentation, to
determine what the actual obligations of the parties are prevents the “armies of
lawyers” from excluding employment rights through clever contractual drafting.
It allows tribunals to remedy the situation where things are not what they seem
and the skim milk is masquerading as cream.
Conclusion
Autoclenz lost the appeal. The tribunal was entitled to examine the realities of
the contractual relationship that Autoclenz had with its employees despite the
express contractual wording of the contract denying an employment
relationship. When examined the relationship was, in reality, one of employer
and employee. The terms which pointed towards the relationship being other
than one of employment, such as the one entitled the contractor to send a
substitute, did not in fact reflect the actual dealings between the parties.
This decision has been eagerly awaited by employment lawyers. In the end the
judgment was not as controversial as it might have been and employers have not
been provided with an easy escape route from the increasing number of
obligations to which they are subject. The law governing employment contracts
continues to diverge from the ordinary contract law.