Court of Appeal ruling on the control test

A case reported in the Times on 22 March seems to add another possible twist to the complex legal issue of when is a worker an employee.

Over the years many different criteria have held centre stage in employment status case law. The traditional master servant concept led to issues of direction, supervision and control being seen as crucial. Then judges looked beyond that to concepts such as whether the worker was integrated into the organisation or whether they were in business on their own account. More recently judges tried to concentrate on the overall picture and pattern of business while some of the latest judgements have clarified issues of personal service and the rights of substitution.

In the PCG’s recent judicial review of IR 35 Mr Justice Burton, himself an employment lawyer, made some pertinent comments about the employment status tests that the Revenue will apply in trying to determine whether a contractor is caught by IR 35 or not. In particular, he emphasised the relevance of one of the older concepts – that is the need for there to be an irreducible minimum level of mutuality of obligation between the client and the worker for there to be a contract of service (employment). He queried the Revenue’s Employment Status Manual, which suggested that status officers carrying out an investigation should not raise this issue at all, unless it was first raised by the company or the worker. He also remarked that a contractor who failed the IR 35 tests would at least have strong grounds for claiming employment rights from his “disguised employer”.

In The Times’ law reports on 22 March 2001, we see a new judgement that seems almost to bring the status test issue round full circle. The Report of the Court of Appeal judgement in Interlink Express Parcels Ltd v Night Trunkers Ltd and Another, which was heard by Dame Elizabeth Butler-Sloss, President, Lady Justice Arden and Lady Justice Hale, concluded that the control test was paramount in the circumstances of the case.

In the case in question Interlink offered a parcel delivery service across the UK on a next day basis, whereby parcels were brought or taken to a sub-depot from which they were then collected and taken to Interlink's main depot. Here they were sorted and taken to the nearest sub-depot for delivery to their final destination. Trunking, the process of taking the packages from a sub-depot to the main depot and back to a sub-depot again, was carried out in vehicles owned by or leased to Interlink. While most of the drivers of those vehicles were employed by Interlink, some of the drivers were supplied by Night Trunkers who appears to be acting as an intermediary or agency.

The case arose, not as an issue of employment law, but because the two parties were in dispute as to whether the contract was void for illegality. This was claimed on the grounds that the user of goods vehicles carrying goods for hire or reward is required to have an operator's licence and, under section 58(2) of the Goods Vehicles (Licensing of Operators) Act 1995, the user of a goods vehicle is deemed, by that section of the Act, to be the person whose servant or agent the driver was. In this case Interlink had the necessary operator’s licence but Night Trunkers did not.

The Courts had originally found that the drivers were the employees of Night Trunkers Limited and that, therefore, the contract was void. The lower Court noted that Night Trunking decided which of the trunking routes allocated to it were to be driven by any particular driver and was also responsible for wages, entitlement to holidays and discipline. A further clause, which provided that Interlink would employ Night Trunking's staff should the agreement come to a premature end, also seemed to assume that, for the duration of the agreement, the drivers remained the employees of Night Trunking.

However, as noted above the Court of Appeal has reversed the lower Court’s decision. It noted that:

“In the context of actual employment the effect of current jurisprudence was that the court had to take into account a wide range of factors and the right to control the supposed employee's work was one of those factors.”

But then Lady Justice Arden went on to state that:

“ In the context of temporary deemed employment, however, the paramount test was that of control as laid down in Mersey Docks and Harbour Board.”

The Court noted that:

“the right to control how the drivers drove the vehicle rested with Interlink who specified the driver qualifications necessary, directed the routes, instructed the drivers on, inter alia, cleaning, time sheet completion, and servicing and were able, through Night Trunkers, to institute disciplinary action for failure to observe those instructions express or implied, there was a strong inference of fact that the hirer of the driver had the right to control how that driver operated the vehicle.”

The Appeal Court concluded that, despite the fact that Night Trunkers paid the workers, the lower court should have concluded that “those drivers were the temporary deemed servants of Interlink for the purposes of section 58(2) of the 1995 Act”.

It will take an employment lawyer to divine exactly what the implications of this judgement are in the wider context of employment law and tax status cases. The Mersey Docks case cited above was one where the Courts were concerned with a claim in respect of a stevedore working for one company who was driving a crane belonging to another company. It is inevitable that in cases of professional indemnity claims the issue of control will be more significant. It is not yet clear to what extent this judgement is specific to the issue of the requirements of the Goods Vehicles (Licensing of Operators) Act 1995.

However, the judgement does not appear, at first glance, to be confined purely to situations involving that legislation. Instead the key comment was couched in terms of “the context of temporary deemed employment,” and this could bring it within the circumstances envisaged by IR 35. Hopefully the full text of the case, when available, will make this aspect clearer.

Nevertheless, as this case suggests and as Mr Justice Burton’s comments in the judicial review indicate, it appears that clients employing temporary workers through agencies cannot always place reliance on the assertion (often made by agencies) that using an agency protects the client from potential employment liability claims. It also suggests that even employees of body shops might acquire employment rights against the client where they are engaged.

These issues seem to reinforce the claims that PCG has long made on behalf of its members. Namely, that it is only sensible for agents and clients to work together with contractors to ensure that, as far as possible, the working relationship between a contractor and the agent and client is one of self employment and that this is reflected in all the relevant contracts.

If I were head of risk management in a major company traditionally using the services of many contractors, often for long periods, I would think long and hard about this. Which is the greater potential liability and which is more likely to occur?

· The employment risks posed by using a contractor under a contract that fails the IR 35 tests, or

· The risks inherent in the possible loss of control that might accrue from using a contractor under a contract that was clearly one for services rather than one of service?

Using contractors who are clearly on self-employment terms may make life a little more difficult for personnel departments who find it convenient to try and deal with contractors as if they were temporary employees on standard contracts. But it seems something of a no-brainer that, if the relationship with the contractor passes the self-employment tests, then there can be little or no risk that any employment risks could ever arise and this may well affect other types of risk as well, such as professional negligence. Having a contract for services rather than of service gets contractors outside the onerous tax requirements of IR 35, it gives clients access to the best contractors who will not work inside IR 35 and it reduces or removes considerable risks to the client.

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KevinM