Creasey case confirms the value in an unfettered right to substitute

It might not be an IR35 case, but a recent Employment Appeal Tribunal is relevant to limited company contractors, for emphasising the importance of the existence of an unfettered right to substitute as a determinant of self-employment, writes Martyn Valentine, founder of IR35 advisory The Law Place.

The case of UK Mail Ltd V Creasey

In the case, UK Mail Ltd V Creasey, the EAT decided that a subcontractor, Mr Creasey, is not a worker within the meaning of the Employment Rights Act 1996, because there was an unfettered right to substitute, provided UK Mail Ltd’s conditions were met.

Mr Creasey had been engaged as a subcontracted van driver by UK Mail Ltd for over a decade under a subcontractors' agreement and sought a determination from the Employment Tribunal that he was a worker in order to commence a claim against UK Mail Ltd. The Employment Tribunal accepted his claim but UK Mail Ltd successfully appealed. 

The key issue was whether section 230 (3) (b) of the Employment Rights Act 1996 applied, i.e. whether there was an obligation on Mr Creasey to 'perform personally any work or services' for UK Mail Ltd. The second part of the test, whether there was a 'business undertaking carried out by the individual' was not considered due to lack of argument by counsel. The subcontractors' agreement crucially set out an ongoing right to substitute subject to UK Mail Ltd's prior written approval which would not be unreasonably withheld. In addition, there was no guarantee of regular work (mutuality of obligations).

Creasey didn’t know he could substitute

Although Mr Creasey claimed to be unaware of the right to substitute, UK Mail Ltd had accepted the use of substitutes on previous occasions and this was sufficient for the EAT to conclude that there was a genuine right to substitute in practice. So the substitution clause was genuine and the contract not therefore a sham, as it was in the Autoclenz case.

The judgment then focused on whether the right to substitute was adequate to displace section 230 (3) (b) by applying the case of Jozsa. The EAT decided that the right to substitute in the subcontractors' agreement was an ongoing right and NOT fettered, as in the case of Jozsa. In practice, this means that the right to substitute can only be invoked at the subcontractor's discretion and not on the end-user’s, UK Mail Ltd’s, orders. The fact that the substitute must meet obvious and reasonable criteria to undertake the work did NOT compromise the right to substitute.

Implications for IT contractors

This case has provided useful guidance for limited company contractors in respect of the much discussed question of substitution.

It remains vital that the contract in question sets out an ongoing and unfettered right for the limited company contractor to substitute its initial representative as a condition to operate outside the IR35 legislation.

Careful drafting of the substitution clause also remains vital to ensure that the right is not inadvertently compromised by excessive conditions (particularly in respect of IT contractors and project managers) or an obligation to replace the representative in the event of 'absence'.

In addition, where a recruiter is involved the contract between the recruiter and the client must mirror the contract between the limited company contractor and the recruiter; any ambiguity and inconsistency will, of course, be seized upon by HM Revenue & Customs and result in a protracted and expensive dispute. 

‘IR35-friendly’?

The EAT judgment did not consider the second part of the above test (namely; ‘whether there was a business undertaking…’), and it is fundamentally important that both the limited company contractor and client are absolutely clear from the outset on the true purpose of the contract. Is it for the limited company contractor to supply personnel or to provide a business service to its client? If the latter applies then it is likely that the client's main concern is completion of the work rather than the daily attendance of a particular individual. Unfortunately, recruiters often over sell and negligently misrepresent contracts as 'IR35 compliant' without suggesting that the limited company contractor seeks independent legal advice. If advice is sought immediately, at the outset, then nagging doubts about the drafting of the substitution clause can be resolved. All too often even 'industry standard' contracts contain serious drafting errors and commercially onerous terms which need to be resolved before it is too late.

Tuesday 18th December 2012