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Supreme Court Update on Establishing Employment Status

The Supreme Court has recently given its judgment in a case that provides an important reminder for businesses who contract – or at least purport to contract – with individuals on a self-employed basis, as opposed to on an employed basis.  Although this case involved car valeters, the principles apply to all individuals and sectors.

The valeters were engaged under contracts with a company called Autoclenz Limited which referred to them as “sub-contractors”.  The contracts also stipulated that the valeters could send substitutes to do their work, there was no obligation on the valeters to provide their services, there was no obligation on Autoclenz to provide work and that the valeters confirmed that they were not employees of Autoclenz.

The employment tribunal held that the valeters were employees and, following a series of appeals, the case ended up in the Supreme Court – which also determined that the valeters were employees.

The Supreme Court held that contracts did not reflect the true agreement between the parties and that the reality was that there was no right of substitution, there was mutuality of obligation in relation to the provision and carrying out of work and that the valeters would be paid for that work at rates determined by Autoclenz. The question courts and tribunals should ask in such cases is: what was the true agreement between the parties?  The answer may not necessarily be found in any written agreement.

Businesses looking to engage consultants/sub-contractors should take care to ensure that there is a written agreement which is carefully drafted to minimise scope for finding that the consultant/sub-contractor is in fact an employee, whilst also reflecting the reality of what the relationship is.  This not only affects what employment rights the consultant/sub-contractor has, but also is likely to affect how HMRC views the relationship.  Businesses should seek legal advice should there be any doubts about the employment status of their relationship with a consultant/sub-contractor as it can be a costly lesson if they later discover that there is in fact a contract of employment.

HMRC can claim from businesses’ unpaid employer’s national insurance and, to the extent an individual has not accounted for the correct amounts, personal national insurance contributions and income tax, going back up to 6 years – plus interest and penalties – where they find that an individual has been treated as self-employed, when they were in fact an employee.  Businesses can, to an extent, protect themselves when dealing with contractors by including tax indemnities in the terms of the contract.

Businesses who deal with contractors should also remember that, whilst certain terms are implied into employment contracts, such as in respect of the employee’s duties regarding confidential information, good faith and also that any intellectual property created by the employee in the performance of his duties will belong to the employer, the same does not apply in the case of contractors and provisions should be included in written agreements to address these points.