actual agreement trumps written terms
29 July 2011
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.
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 should
now bear in mind that a skilfully drafted written contract (which
this one was) designed to make someone a contractor not an
employee, will be disregarded if there is evidence (as there was
here) that a different agreement was actually reached.
The facts
In the long-running case of Autoclenz Limited v Belcher
and 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 - HMRC (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.
The law
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.
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 for employers to take
Look at the contracts for your workforce. 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 you must
ensure that you, as the employer, are complying with your statutory
obligations in order to protect your organisation from any future
claims for failing to comply with those obligations.
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of aspects of the subject matter and does not provide comprehensive
statements of the law. It does not constitute legal advice and does
not provide a substitute for it.