'Worker' status and holiday pay for subcontractors
Increasingly Employment Appeal Tribunals are having to deal with the conundrum, ‘can a person be self employed and perhaps in business on their own account but not be a ‘real’ business? Recent decisions again raise the prospect that Employment law might identify a class of freelancer “whose degree of dependence is essentially the same as that of employees” and who might therefore qualify for certain employment rights.
Recent Employment Appeal Tribunals have found that self employed workers in the building trade fall into this new employment status area. There must be strong arguments to say that a freelancer who has been identified under IR35 as being a disguised employee could also meet the same “dependence” tests.
The issue has come into prominence as a result of the application of the Working Time Directive. Several cases have arisen in recent years where self employed contractors have claimed for holiday pay under the provisions of the WTD. A recent example was a conjoined appeal by building companies Redrow (Yorkshire) Limited and Redrow (North West) Limited against decisions by Employment Tribunals that two groups of contractors, Mr Wright and Mr Roberts (& others) were entitled to holiday pay in respect of their period of work at the building company.
The appeals were heard together because of their commonality and the decision of the EAT was handed down in May this year (EAT/337/02/ILB and EAT/1232/02/ILB).
The cases involved the same question of law, namely the meaning of the expression “worker” as defined in regulation 2(1) Working Time Regulations 1998 (WTR).
The background facts
Mr Wright was a bricklayer. Between 9 October 2000 and 23 April 2001 he worked as a bricklayer on two of Redrow’s sites. He worked with another bricklayer, Robert Milner. They did their own labouring.
Wright and Milner jointly approached Redrow for work and work was offered on Redrow’s standard terms. Remuneration for the work done was on two different bases, measured work and day work. The former involved a set price for a given number of bricks laid, e.g. £200 for every 1000 bricks laid; the latter involved an hourly or daily rate for the job; e.g. £6.50 per hour or £250 per day for both men, each taking £125.
For the measured work Wright received an official order form from Redrow on one of its printed forms. On the back of the form was printed the Respondent’s standard trading terms. The Tribunal found that those standard terms applied both to labour-only tradesmen and contractors supplying goods and services to the Respondent. On the two sites where Wright had worked the fixed rate measured payment basis had applied to 96 per cent and 78 per cent of the work.
On site Redrow provided the bricks and pre-mixed mortar, together with a forklift truck and driver, scaffolding and normally one labourer. Redrow also provided a set of drawings and the men were subject to a building programme, which allowed between two to three weeks for the brickwork to be completed, depending on the size of the house under construction. Wright and Milner used their own handtools. There were no set hours of work. The men were free to work elsewhere although in practice these two worked solely for Redrow throughout the period. They were paid weekly.
In the Roberts case two teams of four bricklayers, including Mr Roberts worked at two Redrow sites for several months from the summer of 2000 to February 2001. The bricklayers were claiming for holiday pay over the Christmas period.
The men supplied the hand tools but no other materials. As in the Wright case Redrow provided a forklift truck and driver to move materials around the site; scaffolding and all necessary construction materials, including bricks. If work was unsatisfactory the site manager would give instructions for its rectification. Redrow provided public liability insurance and undertook all necessary risk assessments for health and safety purposes. The Applicants used Redrow’s welfare facilities and took breaks with their direct employees.
The Tribunal found that the Applicants bore no financial risk. They were paid in respect of work done. Each held CIS4 certificates which meant that 80 per cent of their tax liability was deducted at source. They were responsible for their own national insurance payments.
The Redrow contracts contained the following material terms:
[6] LABOUR
In respect of all operatives employed by the Contractor, the Contractor is responsible for and shall keep the Company indemnified against any claim or liability for National Insurance, Graduated Pension Contributions, Pay-As-You-Earn, Holiday Pay, Construction Industry Training Board levy, Travelling Expenses and other emoluments payable, all other payments required by Law or otherwise which may be necessary for the proper execution of the contract work whether current or introduced during the period of the contract.
The Contractor must at all times provide sufficient labour to maintain the rate of progress laid down from time to time by the Company, and shall supply such labour with all necessary tools and equipment.
On each site where the work is in progress the Contractor must maintain a competent foreman or chargehand who has complete control of all labour engaged on the work. Any instruction given to such foreman or chargehand shall be deemed to have been given to the Contractor
[20/21] SUBLETTING
No order, nor any part order issued by the Company shall be assigned, sublet or transferred without the prior consent in writing of the Company. In the event of any such assignment, subletting or transfer, the Contractor shall be responsible for securing compliance with these conditions in every respect.”
What is a ‘worker’?
Regulation 2(1) WTR provides that:
“ ‘worker’ means an individual who has entered into or works under (or, where the employment has ceased, worked under) -
(a) a contract of employment; or
(b) any other contract, whether express or implied and (if it is express) whether oral or in writing, whereby the individual undertakes to do or perform personally any work or services for another party to the contract whose status is not by virtue of the contract that of a client or customer of any profession or business undertaking carried on by the individual.”
The Wright ET had considered several European cases but the most relevant decision was in another EAT case; Byrne Brothers (Formwork) Ltd v Baird [2002] IRLR which we will look at in some more detail shortly.
Having considered this EAT case, the ET in the Wright case concluded that Wright fell within the second part of the WTR legislation 2(1)(b).
In the Roberts case the ET found that the Applicants were being employed by Redrow for their labour. They found that the “sub-letting” clause in Redrow’s Conditions was consistent with a contract for personal service; further, they found that the “Labour” Clause did not apply to the contract into which these Applicants entered with Redrow. They noted that the Applicants provided only their own hand tools and were subject to a degree of control by the site manager. They did in fact work exclusively for Redrow during the relevant period. The pricing of work was consistent with the Applicants being self-employed individuals carrying on their own business.
This ET also directed themselves in accordance with the principles enunciated in Byrne Brothers v Baird and having done so concluded that Roberts and the others also fell within the regulation 2(1)(b) definition of “worker”.
The Appeal
Because the appeals were conjoined they were heard together.
The main issue it had to consider was whether the definition in regulation 2(1)(b) was satisfied and, in particular, whether:
(1) the individual must by that contract “undertake to do or perform personally any work or services”.
(2) under the contract, he must do so for another party to the contract whose status is not (for present purposes) by virtue of the contract that of a customer of any business undertaking carried on by the individual.
Personal service
Redrow argued that their standard contract did not require personal service – pointing to the two clauses noted above and arguing that the individuals could get others to help them do the work or, with Redrow’s agreement, engage a substitute. Redrow also argued the dominant purpose of the contract was the laying of bricks, not personal labour by any particular bricklayer.
However the EAT dismissed this argument. They accepted the argument put forward by counsel for the respondents that, under clause 1 of the contractual terms, which says:
“the contractor ... hereby agrees to be bound by [the Conditions] insofar as they are applicable to this sub-contract”.
it is plain that the Conditions are drafted on the basis that “one size fits all” and that it is specifically envisaged that not all the terms will be appropriate to all contracts entered into by Redrow.
The EAT noted, for example, that while clause 6 referred to ‘operatives’ employed by the contractor:
“these Applicants employed no-one. Each was in business on his own account. A self-employed bricklayer.”
This seems, on the face of it, to be a surprising statement, inferring as it does that if you are in business on your own account as a self employed bricklayer you are not likely to employ anyone!
The EAT also noted that while the contract required the respondents to provide sufficient labour to meet the schedule laid down by Redrow they had in fact only ever done the work themselves. Again this seems to be something of a red herring. There is no indication of whether the respondents had decided, for example to maximise their profits by doing additional hours themselves to keep the work on track rather than split the profit by engaging additional labour.
The EAT also noted that, despite the contractual terms, the Respondents had only provided hand-tools and all other equipment had been provided by Redrow and that Redrow had also provided the supervision despite the requirement to provide a competent charge-hand or foreman.
Again this view seems a somewhat subjective view. The “supervision” undertaken by Redrow appears to be that required to ensure that the contractual terms are met – i.e. that the bricks are laid as per the design and to meet building standards. Even if there had been a foreman or charge hand supervising the respondents Redrow presumably would not have relied upon their view of whether the work was up to scratch! It seems that a foreman or charge hand was not required because the bricklayers were operating on their own account. Had they decided to use additional labour then they would have been their own foreman!
However, the EAT concluded that clause 6 of the contract had not actually applied to the cases in question.
On the issue of the sub-letting clause the EAT concluded that:
As to the sub-letting clause, again we are satisfied that this provision applies to the contractor who, with the consent of the Respondent, sub-contracts all or part of the work. On the facts of these cases that provision is not inconsistent with a contract for personal service
The EAT concluded that “it was the common intention of the parties that under the contract the Applicants would provide their personal services” and that the purpose of the contract was not just to lay bricks but to engage labour for that purpose.
The Business Undertaking Exception
Here the main issue was whether these Applicants “fell within that intermediate class of protected worker, that is between the category of employee, properly-so-called, under regulation 2(1)(a) and those carrying on a “business undertaking”.
The EAT found the reasoning used in the earlier EAT case of Byrne Brothers (Formwork) Ltd v Baird [2002] IRLR was very helpful in considering this issue. This had raised the point that the legislation was aimed at protecting those who were in a subordinate or dependent position, that is akin to an employee. Redrow’s counsel argued that the issue was whether, in respect of the worker, “the individual is in business on his own account; not whether he is in a subordinate and dependent position.”
The EAT concluded that:
“In fact, the statutory question is whether the contractual relationship is one of customer of the business undertaking carried on by the individual. It seems to us that a worker within the extended definition in regulation 2(1)(b) will necessarily be in business on his own account, as opposed to being an employee, that is an individual employed under a contract of service”
The EAT went on to note that, at the ET, counsel for Mr Roberts had noted 6 factors that indicated that Roberts and the others were not carrying on a business undertaking. These were:
(1) the Applicants worked exclusively for Redrow during the relevant period;
(2) they could be ordered to rectify defective work;
(3) the method of payment;
(4) the absence of the chance to profit or the risk of loss;
(5) CIS4 certificates;
(6) fixed prices
The EAT decided that these were questions of fact that only the ET could conclude on. In the view of the EAT the ET’s approach to these factors had been “Unimpeachable”!
The EAT may have been justified in concluding that they could not re-examine the ET’s conclusions in this area but I find it hard to understand how the ET could have accepted that these factors all pointed towards not carrying out a business!
Working on a fixed price is a clear indication of taking a risk and being in a position to profit if the bricklayers could lay the bricks at a faster rate. Similarly, being required to rectify defective work is clearly a condition that the self employed are subject to just as much as employees.
In conclusion the EAT decided that the workers fell “properly within the intermediate category described in Byrne Brothers” and the EAT upheld the earlier decision of the ETs.
Byrne Brothers Case
In view of the significance that the EAT placed on the earlier Byrne Brothers case it is worth looking at that case as well.
The decision in Byrne Brothers (Formwork) Limited vs Baird and others (EAT/542/01) was issued in September 2001. It was an appeal by Byrne Brothers against an ET decision that Mr Baird and three others were ‘workers’ within the meaning of the Working Time Directive 1998.
The four respondents started working for Byrne at various dates in 1999 and all signed a standard “sub-contractor’s agreement” which identified the sub-contractor, the site and the service. This agreement had little by way of substantive terms, other than a confirmation that the sub-contractor had “read and understood the terms of this Agreement on the back of this form and agree that they accurately reflect the terms under which I/We provide the Services.”
The most pertinent clauses in those terms and conditions were:
1 The Contractor will from time to time offer the Sub-contractor assignments on a self-employed basis under the terms of this Agreement.
2 The Sub-contractor will indemnify the Contractor against any liabilities arising under this Agreement due to negligence or misrepresentation by the Sub-contractor or by his agents or employees on his behalf.
5 The Sub-contractor will be responsible for all tools necessary to undertake the Services. If the Contractor provides equipment a charge may be made. Any price-work should reflect such charges which may become due.
7 In the event that faults or defects are found to be the responsibility of the Sub-contractor they will be made good at the Sub-contractors own expense.
8. Payment will be made in accordance with the agreed schedule of rates or any agreed fixed price which may be subject to negotiation and alteration on a competitive basis.
9. The Sub-contractor is not entitled to holiday pay, sick pay or pension rights.
10. The Sub-contractor accepts that the Contractor will incur no liability should it fail to offer an assignment to the Sub-contractor.
11. The Sub-contractor has the right to refuse to accept an assignment and shall incur no liability to the Contractor.
12. The Sub-contractor acknowledges that he is entering into a contract for services with the Contractor and acknowledges and declares that this Agreement shall not constitute a contract of employment.
13. The Sub-contractor is free to employ at his own cost whatever suitably trained additional labour which may be necessary to fulfil the requirements of the Agreement. Where the Sub-contractor is unable to provide the Services the Sub-contractor may provide an alternative worker to undertake the Services but only having first obtained the express approval of the Contractor.
14. The Contractor and the Sub-contractor shall be entitled to terminate this Agreement forthwith and without notice.
15. The Sub-contractor is responsible for ensuring that he has appropriate public liability insurance cover. Where the Sub-contractor fails to take out such insurance cover, the Contractor will enter into an appropriate insurance policy agreement and such premium costs may be payable by the Sub-contractor or deducted from the schedule of charges.
The contractors claimed for holiday pay over the Christmas 1999 period. The ET and the EAT had to consider the same key issues as the later case, namely the interpretation of Regulation 2(1) of the WTD 1998. It appears that the four contractors argued that their agreement with Byrne Brothers did not reflect the working reality of their relationship with Byrne and that none of them had understood the agreement.
The ET rejected that argument. It looked at the terms and conditions and concluded that :
“the lack of mutuality of obligations in the Subcontractors Agreement meant that none of the Applicants can be an employee.” “
However, the main issue again was that of Regulation 2(1)(b) – and in respect of this the ET concluded “It held that they were obliged “to perform personally … work or services” for Byrne Brothers (see paragraph 26) and that they did not do so in the capacity of a “business undertaking” of which Byrne Brothers was the customer”
At the subsequent EAT they summarised the main issues as being:
(1) Personal service: Did the Applicants undertake, under the contracts under which they worked, personally to perform work or services for Byrne Brothers? In practice, this turns on the effect of clause 13 of the Terms and Conditions.
(2) Business undertaking: Was the status of Byrne Brothers by virtue of the contract that of a customer of a business undertaking carried on by each of the Applicants?
(3) Mutuality of obligation: Mr Stafford contends that the relationship constituted by the Terms and Conditions was one under which there was no mutuality of obligation between the Applicants severally and Byrne Brothers.
Personal service
The EAT seemed convinced that personal service was required. It noted the substitution clause (clause 13) but deals with it as follows:
“It is of course true that the effect of the provisions of clause 13 is that in certain circumstances the services may be provided by someone other than the sub-contractor himself. But the clause falls far short of giving the sub-contractor a blanket licence to supply the contractual services through a substitute”
It also noted that the clause was part of a standard agreement and one which, they said, was “
“plainly at least to some extent lawyer-driven” .
They argued that the clause did not allow the contractor to substitute whenever he chooses but only when he was unable to do the work and with the prior approval of Byrne Brothers. The EAT looked at the leading case law on personal service, such as Ready Mixed Concrete, Express and Echo v Tanton and MacFarlane v. Glasgow City Council and concluded that the case was closest to MacFarlane in that “The power which the Applicants had under the contract to appoint a substitute is qualified and exceptional”
This decision seems a little surprising. The key aspect of the MacFarlane case was that the substitutes had to come from a list of approved substitutes maintained by the Council and they would be paid direct by the Council. This is fundamentally different from a situation where a client has the ability to reject a substitute who lacks the necessary qualifications or expertise but the original contractor remains responsible for the work and for paying any substitute.
Business Undertaking
The EAT considered the reference in the legislation to “a customer of any business undertaking carried on by the individual”
In their view this could not just mean a self employed person. They concluded that the intention behind the regulation is “plainly to create an intermediate class of protected worker, who is on the one hand not an employee but on the other hand cannot in some narrower sense be regarded as carrying on a business.”
They decided that the underlying rationale of the legislation was to protect people who were, substantively and economically, like employees. So they concluded that:
the essence of the intended distinction must be between, on the one hand, workers whose degree of dependence is essentially the same as that of employees and, on the other, contractors who have a sufficiently arm’s-length and independent position to be treated as being able to look after themselves in the relevant respects.
“
The EAT decided that the same considerations as arise in drawing the distinction between a contract of service and a contract for services – “but with the boundary pushed further in the putative worker’s favour. It may, for example, be relevant to assess the degree of control exercised by the putative employer, the exclusivity of the engagement and its typical duration, the method of payment, what equipment the putative worker supplies, the level of risk undertaken etc. The basic effect of limb (b) is, so to speak, to lower the pass-mark, so that cases which failed to reach the mark necessary to qualify for protection as employees might nevertheless do so as workers”
In their opinion “typically labour-only subcontractors will, though nominally free to move from contractor to contractor, in practice work for long periods for a single employer as an integrated part of his workforce: their specialist skills may be limited, they may supply little or nothing by way of equipment and undertake little or no economic risk. They have long been regarded as being near the border between employment and self-employment”
Turning to the original ET decision the EAT accepted that the ET had not set out very clearly what its reasons were for concluding that they were ‘workers’ rather than a ‘business undertaking’. However the EAT accepted that the ET had:
“It identified the facts that the Applicants worked (and, it may be inferred, that the contract intended that they should work) exclusively for Byrne Brothers…. for a significant, and indefinite, period; that they worked under the close direction of Byrne Brothers; and that they were paid on a time basis. Those were plainly the factors which it regarded as decisive, and as outweighing the fact that they were taxed as self-employed and the various points that might be made based on the provisions of the Terms and Conditions of Engagement. That explains adequately why the Tribunal reached the decision which it did; and we believe that it was a conclusion which was open to it in law on the material before it.“
Mutuality of obligation
The EAT examined the contention that the contract lacked mutuality of obligation but concluded that it made no difference whether the contract was made up of one overarching assignment or a series of individual assignments. In their view the only issue that might have made a difference was whether an individual assignment had finished immediately before the Christmas break and a new one started after the holiday. However no arguments or facts had been introduced into the ET on this point so it was not considered.
Hence the EAT concluded by dismissing the appeal against the ET’s decision.
Conclusions and lessons for freelancers
So what are freelancers to make of these cases? First we must recognise that these cases involve self-employed workers not freelancers working through their own company. However, it is interesting to see that, for certain employment rights, while the traditional status tests are still being used there is, in effect, a new ‘pass mark’ that is lower than that used in other employment or tax status cases. So cases like this have introduced a new dimension into employment status law – the worker who is neither an employee nor someone who is carrying on a business. It is not clear whether the distinction will be directly relevant to most freelancers.
Nevertheless, employers should be concerned that these cases raise the possibility that Employment lawyers may try to widen the application of the view that there is a class of worker who “whose degree of dependence is essentially the same as that of employees and, on the other, contractors who have a sufficiently arm’s-length and independent position to be treated as being able to look after themselves in the relevant respects” to include workers who work through their own intermediary.
This may give heart to those freelancers who might have been caught by IR35 and who then seek to claim employment rights. They might at least find a more sympathetic hearing when their claim falls under the WTD.
These cases are also interesting, if not particularly helpful, for their comments about key status tests such as personal service, fixed price payment and risk. It seems that the issue of substitution in particular may need further refining under case law to draw clear distinctions between say the view in the case of Express and Echo Publications and Tanton and the decision in MacFarlane and Skivington v Glasgow City Council.
Whether it is correct to try and draw a distinction between someone who is self-employed but not really in business and someone who is both seems to be a very subjective distinction. These cases only serve to reinforce the view that status issues remain complex and uncertain and tax legislation like IR35 that depends on tax status issues is inherently uncertain.