IR35: Mutuality of Obligation: what it is and what it is not

Article kindly provided by John Antell, a barrister at Godolphin chambers specialising in employment and related tax law. He is the author of "Employment Status" published by Butterworths.

Since the IR35 legislation was enacted in 2000, the finer details of employment law have become a subject of keen interest to many contractors. This article is about one particular essential feature of employment contracts known as Mutuality of Obligation.

One of the difficulties in discussing the topic of Mutuality of Obligation is that the term has come to be used, outside of the legal profession, in different senses. To a employment lawyer "mutuality of obligation" refers to the obligation of an employer to provide work and pay for it, together with the obligation of the employee to personally do the work. An "obligation" is a legal requirement that someone does something in the future. It could be one minute in the future, one hour in the future or 3 months in the future but legally it is important to distinguish between doing something you have a prior obligation to do and doing something which you have no obligation to do.

Outside of the legal profession, the phrase "absence of Mutuality of Obligation" is now often used to mean something like "the absence of any obligation to provide and do further work when the current (relatively short term) piece of work which the worker is obliged to complete has come to an end" and to avoid confusion with terminology I will refer to contracts which lack such further obligations as "one off contracts".

It is, of course, possible to do work without being under any obligation to do so. One party could promise to the other that if the other party carries out work then they will be paid. In this case there would be a valid contract but only one side has any obligations. The worker is never obliged to work, or to continue working, but if he does the other party is obliged to pay him. This type of contract (where only one side has obligations) is called a "unilateral contract". There is a complication here in that someone who starts work under a unilateral contract could be held to have impliedly agreed to a short term bilateral contract where there is Mutuality of Obligation (e.g. once a worker has started to remove old paint from a door there may be an implication that the worker is obliged to carry on and paint it). This is an area (indeed the whole topic is an area) where independent legal advice is important but if we leave that complication aside for the moment, then the following statements are generally true:

1. Without Mutuality of Obligation (i.e. without obligations entered into by both worker and the person for whom he works that work will be provided, done personally, and paid for) a contract (if there is a contract) cannot be a contract of service (employment). With Mutuality of Obligation a contract may or may not be a contract of service depending on a number of other factors.

2. Both a "one off" contract under which a worker agrees, in return for payment, to perform some task likely to take 2 hours, and a long-term agreement that the worker will, in return for payment, carry out work until he is of retirement age, contain the essential element of Mutuality of Obligation which makes it possible that the contracts are contracts of service (employment).

3. If there is Mutuality of Obligation and sufficient control then whether the contract is one of service depends on a number of factors such as whether the worker has the opportunity to profit from sound management in the performance of the task, the degree of continuity in the relationship, how many engagements the worker performs and whether they are performed mainly for one person or for a number of different people, and so on. All other things being equal if a worker has a number of "one off" contracts in succession with the same client, it is less likely that they will be contracts of service than if there is one long contract covering the same period.

4. All other things being equal if a worker has a number of "one off" contracts with different clients, it is significantly less likely that they will be contracts of service than if there is a succession of "one off" contracts with the same client.

If will be seen from the above that both the absence of Mutuality of Obligation and the fact that a contract is "one off" can affect the question of whether there is a contract of service (employment). This being so, does it matter if "one off" contracts (i.e. contracts where there is an absence of any obligation to provide and do further work when the current piece of work which the worker is obliged to complete has come to an end) are wrongly described as lacking Mutuality of Obligation? After all, what is in a name?

In fact I believe it does matter. It is well-known that if there is no mutuality of obligation then there cannot be a contract of service (employment). If someone erroneously believes that because a contract is "one off" that means that there is an absence of mutuality of obligation, he will inevitably draw the conclusion not that its being "one off" makes it less likely that it is a contract of service (which is true) but that its being "one off" makes it impossible for it to be a contract of service under any circumstances (which is not true). This could lead to a worker assuming that a "one off" contract is a contract for services (with the tax implications which follow from that) when in fact that cannot be taken for granted and further investigation and advice are needed to determine the status of the contract. So correct usage of the term Mutuality of Obligation is of no little importance.

Some contractors will be surprised to hear that having a series of one "off contracts" does not negative Mutuality of Obligation. It will be asked: what about the casual power station guides whose claim to be employees "foundered on the rock on absence of mutuality" as the Employment Tribunal decided in Carmichael v National Power plc? In fact there are a number of cases which at first glance appear to support the common misunderstanding that where there are "one off" contracts there cannot be Mutuality of Obligation. To understand why these cases are not saying what they might initially appear to be saying it is necessary to understand the system of "pleading" used by the legal profession in litigation.

Mutuality of Obligation has been an important issue in many unfair dismissal and redundancy cases concerning casual workers. Typically there is an arrangement that the workers are "on the books" of the company and when the company has a day's work for them to do the company will ring them up and the worker is then free to accept or decline the work. The company is not obliged to offer any work and the worker is not obliged to accept though in practice it is in the commercial interests of both parties to be accommodating to the other.

There may come a time when the company takes a worker off its books because of some dissatisfaction with the work carried out by the worker, or because the company decides not to use casual workers any more. When this happens the worker may try to claim unfair dismissal or that they are entitled to a redundancy payment. Generally only people who have been continuously employed for at least a year can claim unfair dismissal so a casual worker claiming unfair dismissal first has to persuade the Employment Tribunal that they have been continuously employed for at least a year.

There are a number of reported cases along these lines and often if you read a summary of them you will find that they say something like "Mr X claimed to be an employee but the court found that there was no mutuality of obligation in that the alleged "employer" had no obligation to provide work and so Mr X's claim failed" Of course this is bad news from Mr X who wants to be an employee so that he can claim unfair dismissal or a redundancy payment but some people looking at the case who (perhaps for tax reasons) don't want to be employees are rather pleased because the case appears to show that all they need to do in order to show that they are not employees is to ensure that their "client" is under no obligation to give them further work when the current piece of work ends.

This is not, however, what these cases actually decide but to understand why these cases are not saying what they might initially appear to be saying it is first necessary to understand the system of "pleading" used by the legal profession in litigation.

The first thing which needs to be explained is that when anyone brings a claim before any court they have to "plead" their case. This means that they have to set out in advance what they are claiming and what they are seeking to prove. This is done to save time and money: the other side needs to know what is being claimed so that they know what evidence they need to collect and present. The court will only decide the issues "pleaded". Any other issues it will make no finding on.

Now imagine that you are a lawyer considering how to draft the pleadings for your client who is a casual worker. You have to establish that there is a contract (written or unwritten). You could argue that every time the worker is offered a piece of work and agrees to carry it out there is a contract for that piece of work and he is obliged to complete it. You are on strong ground here because it is very unlikely that it is the intention of the parties that the worker, having accepted a piece of work, should be free not to show up, or be free to walk away half way through the day. So if you want to argue that each day's work is a contract your argument will almost certainly succeed. But hang on a minute. If you prove that the worker was employed for 8 hours that is not going to help him because he needs to establish that he has been continuously employed for 365 days in order to claim unfair dismissal. So you are forced to plead, and to try to prove, that the contract consists not in each day's work (or not only in each day's work) but that there is an "overarching" continuing contract of employment between the parties which carries on even when your client is not actually working. This is going to be more difficult to prove because in terms of an overarching contract there appears to be no continuing obligation to provide, or to do, any work. But perhaps you can argue that there is an implied term that the employer will provide "a reasonable amount of work" and the worker will accept "a reasonable amount of the work offered". That is not such a strong argument but it is the best available because you have to show that he has been continuously employed for at least a year. So you draft the claim accordingly. The claim is that there is an overarching contract which continues even when the worker is not actually working so that he has been continuously employed for at least a year. You do not claim that there are individual contracts every time he works for a day because such a claim will not help the worker to establish that he is entitled to claim unfair dismissal.

The Employment Tribunal hears the case but decides that the implied term which you argue for "to offer/accept a reasonable amount of work" is too vague to support a contract so you lose. The summary of the court report says "Mr X claimed to be an employee but the court found that there was no mutuality of obligation in that the alleged "employer" had no obligation to provide work and so Mr X's claim failed". But at this point it is a crucial to understand that the court has not found that Mr X was not employed under daily contracts. The court has made no finding on that question because that was not how the claim was "pleaded". The court only makes findings on the issued pleaded so all the court has decided is that there is no overarching continuing contract of employment. It has made no finding on any other issue. Sometimes the court, in order to be helpful to those reading the report will emphasise this point. For example in Carmichael v National Power the final paragraph of the judgement of the House of Lords reads:

"Once it is accepted that the tribunal's finding as to the lack of mutuality of obligation between the applicants and the C.E.G.B. cannot be disturbed, it follows that the engagement of the applicants as guides in 1989 cannot have constituted in itself a contract of employment. It laid down the terms upon which it was expected that they would from time to time work for the C.E.G.B. and it may well be that, when performing that work, they were being employed. But that would not be enough for the applicants. They could succeed only if the 1989 engagement created an employment relationship which subsisted when they were not working. On the findings of the tribunal, it did not in itself give rise to any legal obligations at all and the applicants' claim must therefore fail."

In summary, unfair dismissal cases concerning casual workers are generally concerned only with whether there is an overarching contract of employment which continues when the worker is not actually working. However Taxation under Schedule E, unlike the right to claim unfair dismissal, only requires a contract of employment, it does not require continuous employment over any minimum period so if the case is between the worker and the Inland Revenue it is sufficient for the Revenue to prove that a contract of service exists however short that contract may be. Contracts of service lasting only for a day are sufficient for the worker to be taxed under Schedule E even though they are insufficient for a claim of unfair dismissal.

Neither the author nor the publisher can be held responsible for any actions undertaken as a result of the opinions expressed in this article which are necessarily of a general nature and cannot be a substitute for individual legal advice on your own particular situation.
 

May 12, 2004