Contractor loses EAT appeal in HP dismissal case

At the end of 2002 UKTECH reported on the Employment Appeal Tribunal (EAT) case of John Williams. More details about the judgment are now available.

John had worked at Hewlett Packard via his company J M W Software Services Ltd (JMW) and an agency Certes.

His contract at HP had been cancelled in 2000 and John had decided to claim for unfair dismissal. As my previous report indicated John had taken this challenge on as much to prove that he was not an employee of HP – and hence, hopefully not a disguised employee under IR35 - as to actually succeed in his unfair dismissal claim.

His case at the Employment Tribunal had followed shortly after another case involving HP – the case of O'Murphy v HP. In this case another freelancer working via his own company – Mr O'Murphy - had won his claim for unfair dismissal against HP at an ET. Despite the earlier ET decision in favour of the contractor John's ET had found against him. Hence John had appealed to the EAT.

However, between the time of John's ET decision and his EAT hearing the O'Murphy case had also been appealed to an EAT and the earlier decision overturned. So by the time of his appeal at the end of 2002 Hewlett Packard had already successfully fought off a similar claim at an EAT.

Background

In the autumn of 2000 John's company JMW Software had just renewed a contract with his agency Certes Computing Limited to supply his services to HP – having contracted at HP since 1996. John had been negotiating with Certes and HP to try and get his working relationship into line with his contract terms with Certes. John was concerned to clarify his rights of substitution. He had the right in his contract with Certes – subject to Certes' written approval – but had become aware that HP had told the agent that they would not accept a substitute.

John was well aware of the IR35 implications of contract terms versus working reality and was trying to make the agents and HP see that, for IR35 purposes, his right of substitution needed to be reflected in the reality of the relationship. He had also been talking to his fellow contractors at HP to try and make them aware of the implications of IR35 and of the employment law issues that IR35 might lead to. According to John, having renegotiated his contract the week before, he was told by HP on the following Monday that his contract was to be terminated.

John represented himself at his EAT as his legal team withdrew from the case just before the EAT hearing. Appearing before the Honourable Mr Justice Elias, who was assisted by Mr K Edmundson and Mrs A Gallico, John had tried to argue that, in respect of the main issue identified at the earlier ET – the lack of a contractual nexus between himself and HP – Certes were really only acting as HP's agents and that HP had, by virtue of their conduct on a number of occasions taken actions that showed that, they rather than Certes, were controlling the details of the relationship between his company and the agency.

However the EAT had not accepted this argument and after hearing both sides the EAT deliberated for 30 minutes before delivering their decision to reject John's appeal. That was back on 11 December 2002. Unfortunately, as a result of not being advised that, in the event that the Court did not order the document to be produced, he should have applied within 14 days of the EAT for the said document it has taken John many months to get the written judgement produced and it was not sent out to the parties until the end of March 2004.

The judgement

In this judgement the EAT sets out briefly their reasons for their decision. In this they noted that the earlier ET had concluded that " There is no contractual nexus in this case and no mutuality of obligation".

They also noted that the ET had stated:

" The contractual provisions between Hewlett Packard and Certes provided for full notice of termination of the agreement between those parties, work to be initiated only by Hewlett Packard and under the contracts with Certes and Hewlett Packard prior written consent had to be given by Certes for the Applicant to have a right to undertake an different services other than that contracted with a similar limitation on his taking of holidays and conditional substituted labour. We agree that these were contractual rights (my emphasis) which would take priority over rights arising from the relationship, whatever its nature, between the Applicant and the First Respondent and inconsistent to what we feel would be a contract of employment. "

and

"Whilst ……. he was closely supervised in the sense his supervisor always being available to deal with any problems it was nothing more than that envisaged within the terms of the contractual agreements and very importantly HP never had the responsibility of dealing with discipline or the negotiation of remuneration"

Having weighed the arguments the EAT concluded that:

"But, it is also right to point out that in this case, as the Tribunal found, Mr Williams has benefited significantly from the nature of this relationship and we consider that the Tribunal was fully entitled to conclude that the contractual arrangements were not a sham, that they meant what they said, and that there was no direct contractual relationship between Mr Williams and HP. In those circumstances this appeal fails"

Conclusions

It is important to remember that this was an employment rights case not an IR35 case. IR35 requires the consideration of what, hypothetically, was the reality of the relationship between the worker and the end client. Employment tribunals and EATs do not consider hypothetical relationships. They focus on contractual relationships. Clearly it is very difficult for an ET or EAT to get past the basic issue of the lack of a contractual relationship between the worker and the end client, particularly when there is an agency involved adding another layer of contractual separation.

It is hard, therefore, to assess how this judgement might impact on an IR35 case. It is clear that for employment law purposes there is a lack of mutuality of obligation in the typical contractor > service company > agent > client chain of relationships. But IR35 requires you to ignore the chain, which makes it more difficult to know how mutuality of obligation might be regarded. We have now had IR35 decisions in this area that appear to go both ways.

It is also difficult to see how the comments in this judgement regarding "contractual rights" carry over into an IR35 situation but it must be helpful to have the EAT conclude that:

"We agree that these were contractual rights which would take priority over rights arising from the relationship, whatever its nature, between the Applicant and the First Respondent and inconsistent to what we feel would be a contract of employment (my emphasis) "

Overall, therefore, I think this case is probably of limited relevance to IR35 issues. But, nevertheless, it must help rather than hinder the situation to have what appears to be a typical contractor situation clearly labelled by employment tribunals as not being a contract of service.

One final point of note. John has mentioned to me that at the time of the case he was already embroiled in an argument with the Revenue regarding travelling expenses. At a late stage in the argument, well after the introduction of IR35, he exercised his subject access rights under the Data Protection Act and asked the Revenue for their internal records concerning the dispute. To his surprise they duly complied. As well as interesting details regarding the actual calculations, deep in the notes there was a reference to John's ET case and a possible challenge under IR35. No such challenge has (yet) materialised.

John's conclusion is that "It is clear to me that the IR did not proceed with an investigation because I had lost at the ET."