Every employee costs his employer over and above salary and immediately related costs. This is because of the statutory rights that the employee acquires (such as the right not to be unfairly dismissed) and because of the employer’s National Insurance Contributions, currently charged at 13.8% of earnings.
Many businesses want to try to avoid these costs to hire or later convert the members of their workforce as independent “consultants”. This is not an easy exercise to carry out successfully. Courts and tribunals look at the reality of the relationship and will not pay much notice to the way that the parties describe themselves (and their intentions) if the ‘consultant’ is treated in practice as if he were an employee carrying out the same job.
Also, the fact that the relationship is treated as “self-employment” for tax purposes (typically, by the consultant ”invoicing” for services with VAT applied) does not mean that a court or tribunal will consider that no employment exists.
Each case turns on its own facts and there are a number of issues to consider. However, an important factor in recent years in making a decision about the status of one of these “consultants” has been to consider whether the consultant providing the services in question has the right to appoint a substitute. Such a right, which would normally be contained in a contract, is considered to be inconsistent with being employed, on the basis that an
employee is obliged to perform work personally.
However, in May in the case of Autoclenz Ltd v Belcher & ors the Supreme Court (“SC”), which seems seldom to hear employment law cases, upheld an earlier Court of Appeal decision that car valets, whose contracts did state that they were self-employed, were nevertheless actually employees. This was the case even though the contracts contained an express term allowing the valets to appoint a substitute.
SC held that express contractual terms may be disregarded where they do not reflect the
two parties' actual agreement. This could be wholly innocent and an intention to deceive a third party was not required. So in this case, it was both permissible and appropriate to disregard the express term allowing for the appointment of a substitute.
It should be noted that the clause in the contract was introduced in a new contract issued some years after the “employee” had started working for the company so it did not reflect what had been the working practice before its introduction, a practice that was continued after.
Deciding what is the correct status of any given ‘consultant’ will undoubtedly
remain difficult. The classic approach is that a contract of employment exists when:
n work is performed personally for wages or other remuneration;
n the work and when it is done is controlled by the employer; and
n the employer is obliged to provide work and the employee to
undertake work personally.
The Autoclenz decision has made it more difficult for businesses to avoid the extent of this test simply giving a contractor label which they apply to their arrangements.
In view of this decision, businesses should look more closely than before at the use of personal service companies. Placing such a company between contractor and client is likely in most cases to remain the only reasonably watertight way to ensure that the individual contractor is not found to be an employee but IR35 may make this unattractive to the worker. Where a service company is used, under Revenue rules the risk of liability for PAYE income tax and National Insurance Contributions rests with the individual and his service company, rather than the client.
