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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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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries 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.

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