Author: Mike Tremeer
Widespread use of contractors, consultants, casual workers, agency staff and other types of “non employee” workers by organisations has been in place for some time, due to the advantages that such arrangements can offer to both parties. Individuals providing services on a contractor or consultant basis are afforded a cash flow advantage (and perhaps even a perceived tax advantage) until self assessment at the end of a financial year, whilst businesses have what they hope will be the benefit of reduced cost and risk but also flexibility in disposing of or altering the numbers of workers within an organisation when necessary.
Indeed, such are the perceived advantages of engaging consultants and contractors that it is not unusual for either or both parties to want to characterise a work arrangement as such, even where it is really an employment relationship.
Historically, the Courts (when deciding whether the “contractor” is really an employee and therefore entitled to a range of statutory rights as such) and HM Revenue & Customs (HMRC) (in determining how to tax the earnings of that individual) have looked at the practical aspects of the working arrangement, as well as the contractual documents that evidenced it. Contractual documents that do not accurately portray a self-employed relationship will fatally undermine an arrangement that is presented as such. However, two cases in 2011 also now serve as pertinent examples of how even having documents that reference all the classic elements of a self-employed relationship will not be sufficient to persuade a Court, or HMRC, to view a working relationship as such if the documents do not reflect the reality of the whole arrangement.
Autoclenz Ltd v Belcher & Others  UKSC 41
Autoclenz Ltd (Autoclenz) provided car valeting services to British Car Auctions. Autoclenz subcontracted Mr Belcher and other individuals (Valeters) to provide those services. Written contracts were drawn up between Autoclenz and the Valeters, which included the following terms:
All of these terms reflect key elements of a genuine “contractor” relationship and, indeed, HMRC reviewed the arrangements between Autoclenz and the Valeters in 2004, and was satisfied that the Valeters were self-employed.
However, the above terms did not reflect the reality of this particular arrangement. In fact, the Valeters:
In 2007, the Valeters brought claims in the Employment Tribunal against Autoclenz seeking a declaration that they were employees and, therefore, entitled to the national minimum wage and paid annual leave. The Employment Tribunal upheld their claim and the decision was subsequently appealed all the way to the Supreme Court, which also found for the Valeters. The Supreme Court’s judgment confirmed that it is the actual legal obligations of the parties that must be considered when determining employment status and, indeed, that these obligations will override any inconsistent written terms of contract that may exist.
Weight Watchers (UK) Ltd & Others v HMRC (2011) FTC/57-59/2010
In this case, it was HMRC, rather than the Courts, which considered the employment status of Weight Watchers’ (WW) “Leaders”.
WW engages approximately 1,000 individuals at any one time, known as Leaders, who are responsible for arranging and conducting weekly meetings with WW members in their area. Leaders are also responsible for collecting membership fees and expected to introduce and sell WW products during the meetings. In return, Leaders are paid for conducting the meetings and also receive a commission for any WW products sold during them.
Written agreements were in place between WW and the Leaders which stated the Leaders:
The agreements also contained confidentiality provisions and a restrictive covenant seeking to prevent Leaders from approaching members for a period of six months from the date of their last meeting.
On review of these arrangements, however, HMRC assessed the Leaders as employees of WW, a decision which resulted in WW facing a reported tax liability of £23 million following “many years” of failing to deduct Income Tax and National Insurance contributions, pursuant to the PAYE system, from the earnings of Leaders. WW’s appeal against the assessment has been rejected by both the First Tier and Upper Tax Tribunals who agreed with HMRC that the Leaders were correctly viewed as employees. The appeals were dismissed, despite the written documentation in place, on the grounds that:
There have been a number of cases in recent years where the status of workers – whether they are employed or self-employed – has been considered by the Courts and Tax Tribunals. In the main, these cases have been brought by HMRC or aggrieved contractors who have been “dismissed” and who subsequently allege that they were employees all along, thus allowing them to sue for unfair dismissal or, at least, a redundancy payment.
On the whole, the Courts and Tax Tribunals have become much more inclined to look behind the contractual documents presented by the parties and to find that many contractor arrangements are, when viewed in the round, more properly to be seen as employment relationships. The decisions in Autoclenz and Weight Watchers continue this trend.
As a consequence, whilst it remains as important as ever for businesses to have well drafted contractor or consultancy documents, they must also ensure that the arrangement, as it is actually operated “on the ground”, is entirely consistent with the principles of a self-employed relationship. A failure to do so may result in the business being exposed to considerable employment-related, and tax, costs. This should be of particular concern to organisations who engage large numbers of consultants or casual staff (such as care industry and NHS employers). Indeed, with one significant scalp and windfall payment already in the bag, it seems likely that further HMRC investigations could follow in sectors such as these. With the prospect of interest, penalties and fines on unpaid Income Tax and National Insurance deductions also likely to be applied, failing to learn lessons from WW’s mistakes could prove costly.
The reason for any continued consultancy agreements or self-employed contractual arrangements should be considered in detail, not least because many of the perceived advantages of engaging contractors have in practice been eroded in recent years. Depending on the specific aims of the particular business, a fixed-term contract or more judicious use of probationary periods with extensions, where necessary (provided that the total duration of a probationary period is less than one year), may achieve the desired results or, at the very least, limit the legal risk to which the business is exposed.
Mike Tremeer, Solicitor, Fladgate LLP (email@example.com)