Employees, Shams and the Supreme Court

July 28th, 2011 by Christopher Knight

One of the most vexed questions Tribunals have to deal with on a regular basis is the characterisation of the claimant in front of them: are they an employee, a worker or are they self-employed? Interpreting the situation where the contractual documents have left the issue of status unanswered is one thing, but it is instinctively more difficult to go behind clear terms of an agreed contract. Where the business and the individual have agreed particular terms, such as the right to substitute performance or the right to decline offered work, why should the Tribunal rewrite that agreement?

The Supreme Court has answered that question very firmly. In Autoclenz Ltd v Belcher [2011] UKSC 41 Lord Clarke, giving the only judgment, stressed that the inequality of bargaining power in the employment context means that a purposive approach is necessary: at [33]-[35]. Employment contracts are different to ordinary commercial contracts, and the principles do not read across: at [21]. This conclusion will come as no surprise to watchers of the Court, because precisely the same refusal to apply ordinary contractual case law to the employment concept of the effective date of termination was seen in Gisda Cyf v Barrett [2010] UKSC 41; [2010] ICR 1475.

Practitioners faced with a potential ‘sham agreement’ case will still wish to focus their attention on the triumvirate of cases consisting of: Consistent Group Ltd v Kalwak [2007] IRLR 560, EAT; Firthglow Ltd (t/a Protectacoat) v Szilagyi [2009] EWCA Civ 98; [2009] ICR 835; and Autoclenz in the Court of Appeal [2009] EWCA Civ 1046; [2010] IRLR 70. The Supreme Court essentially quoted large parts of the Court of Appeal judgments in Autoclenz and added the words “I agree”. However, by virtue of status, Lord Clarke was able to formally approve the reasoning of Elias J in the EAT and disapprove that of Rimer LJ in the Court of Appeal in Kalwak, resolving a clear disagreement which Smith LJ had had to fudge in Protectacoat. All three of those earlier cases were expressly approved by Lord Clarke, along with their willingness to approach ‘sham clauses’ with a broader brush than simply applying the well-known decision in Snook v London and West Riding Investments Ltd [1967] 2 QB 786.

The question for the Tribunal is always what the true agreement between the parties was: at [29]. In order to discover this, the Tribunal must look to the realities of the situation and the actual legal obligations of the parties: at [30], [32]. The written agreement is just one of the circumstances of the case to be considered: at [35]. The Court agreed that the findings of the Tribunal meant that certain terms had been agreed, and those terms were indicative of a contract of employment rather than being a worker or self-employed. The prior suggestion of HMRC to the contrary was not a factor to be given any significant weight.

So where are we after Autoclenz in the Supreme Court? In terms of the development of the law, not a great deal further than after the Court of Appeal decision. No significant new reasoning appears out of the appeal. However, the law is clearer in that the highest court has given very clear approval to the line of reasoning in Kalwak, Protectacoat and Autoclenz. Employment contracts are not commercial contracts. A more inquisitive approach must be taken by the Tribunals to establish the true agreement between the parties, and whether the outcome of that agreement is the status of employee, worker or self-employment.

For those wishing to match this discussion with the relevant analysis in Tolley (2010), please refer to paragraphs 17.3 and 47.2c.


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