With IR35, the actual agreement trumps its written terms

In a case that impacts IR35 status, the Supreme Court has clarified that a written contract which makes it look as if a person is a contractor and not an employee may be disregarded, if the evidence shows that a different agreement was reached, writes Hayley Roberts, of legal firm Browne Jacobson LLP.

Too narrow just to go on the terms

Previously, as long as the written contract is not a ‘sham’ (which was a high threshold test), the written terms prevailed. The Supreme Court says this approach is too narrow. Employers and end-users should now bear in mind that a skilfully drafted written contract (which this one was) designed to make someone a contractor and not an employee, will be disregarded if there is evidence (as there was here) that a different agreement was actually reached.

Every ‘non-employee’ clause in the book

In the long-running case of Autoclenz Limited v Belcherand others, twenty valeters signed contracts with Autoclenz to provide car cleaning services. The contracts contained every clause you would think of to undermine any possible argument that they were employees:

  • there was no duty to accept work
  • there was a right of substitution i.e. a right for a valeter to send along someone else to do the work
  • they described themselves as self-employed
  • they paid their own tax – HM Revenue & Customs (and then Inland Revenue) carried out a review of the arrangements and said it felt that the balance of probability leant more towards self-employment than PAYE
  • they purchased their own insurance, uniforms and some materials.

Everyone accepted that if the agreement was solely contained in the documents the valeters signed, they were certainly not employees or workers for National Minimum Wage purposes.

Terms won’t alter the true nature of your engagement

The Supreme Court considered when a tribunal can disregard written terms and conclude that they do not reflect the true intentions of the parties. If the reality of the situation is that no one seriously expected an individual to ever provide a substitute or to refuse the work offered, the fact that the contract referred to these unrealistic possibilities will not alter the true nature of the relationship.

It was found that the valeters were always expected to attend work and undertake the work themselves. In fact the business could not have operated otherwise. They had no control over the way in which they did their work or the hours they worked. They were therefore employees.

How courts will decide the true agreement

So how is the parties’ true agreement decided? According to the Supreme Court, this will involve consideration of the true intentions at the inception of the contract and at any later stage where evidence shows that the parties have expressly or impliedly varied the agreement between them. In order to determine this, a tribunal must examine all the relevant evidence. This includes the written terms, any difference in bargaining power and also how the parties conducted themselves, in practice, if evidence indicates that an agreement was reached which was different from the written agreement (- not normally permissible when interpreting contracts).

Action employers/end-users might take

Employers are advised to look at the contracts for their workforce. End-users should consider whether those contractual terms reflect the true agreement (and therefore the true relationship) at the time the contract was entered into, including any subsequent variation of those terms.

If it appears that the individual is an employee, then the employer must ensure they are complying with their statutory obligations in order to protect their organisation from any future claims for failing to comply with those obligations.

Implications for IT contractors

The principles in this case are applicable to every sector including the IT sector. What matters is the true intention at the time the contract is entered into. That might (and should) be what is written down, but is not necessarily, and was not so in this case.

The subtext of the Supreme Court’s Autoclenz V Belcher judgement is that it would be even more stupid than it was previously to create documentation that falsely records the agreement between the parties. As was the case before the judgement, it would be extremely unwise for companies to create documentation which does not reflect the true agreement between the parties. To do so would be an obvious fraud. And this case illustrates that the courts will not necessarily assume that the written contract does represent the true agreement between the parties if there is evidence to the contrary - making it even more dangerous and unwise to create misleading documentation.  

Implications under IR35

However in terms of contractors defending themselves against IR35, I do not believe that the case will reduce the influence of so-called confirmation of engagement letters, also known as a letter of engagement (singular), because more often than not these letters do reflect the parties actual agreement. Letters of engagement aren't a way round an IR35 investigation - but it would be sensible to have all documentation in order, including letters of engagement, to be able to demonstrate that an arrangement should not be caught by IR35. If the documentation isn't clear, then HMRC are more likely to investigate. 

Wednesday 10th August 2011