Contractors were disguised employees, says appeal court

A limited company must fork out for backdated employment rights for 20 workers it took on as self-employed contractors after they were deemed to be the company's employees.

In its judgement, the Court of Appeal said the legal status of 20 car valeters who worked at Autoclenz Ltd indicated that they were right to pursue claims for holidays and unfair dismissal.

These statutory rights for the workers, Belcher & Ors, were contested by Autoclenz, of Derbyshire, on the grounds that they were self-employed and therefore had no entitlement.

The firm said its agreement with them stated, "any contractual relationship between Autoclenz and yourself is one of client and independent contractor and not of employer/employee."

The written document also provided that there was no obligation on the valeters to accept work if it was offered to them, nor on Autoclenz to provide work if it was available.

The agreement often labels the worker a "sub-contractor" and uses terms inconsistent with employment to, it admits, "protect Autoclenz against any claim…for Income Tax and/or NICs."

But the Appeal Court decided that the terms were "unreal" and determined that the relationship between the firm and the workers was, "in truth", one of employment.

In line with the employment tribunal before it, the court found that Autoclenz controlled the manner in which the valeters worked, their rates of pay and work materials.

Requiring each worker to "perform the services…for Autoclenz with a reasonable time and in a good and workmanlike manner" – also smacked of employment, the court said.

However it was the 'right of substitution,' another legal test like 'control' used to determine whether an individual is truly self-employed or a disguised employee, which decided the case.

The court stated that the right of substitution within the contract, was a "sham" because it did not ultimately reflect the true intentions of both parties involved.

This was largely due to Belcher & Ors never having seen a later contract, where the clause was added, leaving the workers unaware they could apparently send a substitute worker.

Moreover, Autoclenz gave no evidence to undermine claims that not a single valeter working at any of the firm's premises over the last 17 years had exercised the right of substitution.

While this signals there was no intention behind the substitution clause, the mere claim by one party that a contractual clause does not reflect their intentions is enough for it to be meaningless, the court said.

Self-employed IT contractors are therefore advised to ensure they have seen the contract of services and agree that it mirrors the true working practises, and intentions, of those involved.

"As a lot of contractors work through recruitment agencies to find work, there is likely to be a substitution clause in the contract between the contractor and the agency," explained Martin Hesketh, of contractor accountancy firm Brookson.

"However, if there is no such clause in the contract between agency and client, the client can easily argue they were not aware of the right to provide a substitute, which will enable HMRC to argue the right is a sham."

The firm, which runs an IR35 helpline, says that changing a contract mid-way through an assignment is not an issue, as long as all the parties have sight of the contract and agree the changes within it.

It provided the following "best practice advice" for independent contractors when taking on a new assignment, or when changing the terms of an existing contract:

The end client must agree that:

i) The contractor is not subject to their control

ii) The contractor is not integrated into its business

iii) The contractor is under no obligation to accept work from them

iv) The contractor has the right to provide a substitute as required

Contractors unsure of their employment status, with new or existing assignments, were advised to seek specialist advice to ensure that their operation would not fall within the Intermediaries legislation (IR35).

"In this case, the substitution clause was considered a sham because the other party didn't know about," Mr Hesketh said. "This case provides excellent guidance on where things can fall down [but] it hasn't changed the law on employment status."

While the case serves as a reminder to contractors, it represents a "salutatory warning" to employers that hefty claims could be incoming, said Jane Elgar, partner at Liddlle Solicitors.

"Individuals are not prevented from arguing that they are employees simply because they have been content to accept the tax benefits of self-employed status for many years.

"Employers should look very carefully at the arrangements that they have in place for workers (possibly agency workers) and self-employed contractors."

She added: "Having written agreements is a good starting point, but these should be carefully drafted to minimise the risk for employers of facing unexpected claims for employee or worker status, which many employers are currently ill-prepared to defend."

However, it is the employer/client company which is increasingly commanding the most clout in drawn out examinations of employment status.

"The IR35 cases that have gone before the courts and the commissioners demonstrate that the written contract counts little and it is the evidence of the end client that is
everything," said Kate Cottrell, of IR35 advisory Bauer & Cottrell.

"We are also seeing time and time again the ET's and the courts are starting with the contract and then looking beyond it and asking whether the parties ever realistically intended or envisaged that the terms would be carried out.

"This [judgement] is a senior court decision which should serve as another warning to all who ignore their responsibility to take reasonable care over their IR35 status."

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