13 June 2018

UK employers: new Supreme Court decision on employment status


It's personal

Where is the dividing line between genuine self-employment and worker status? The Supreme Court has today considered this elusive question, which has kept the tribunals and courts busy for years, in the well-publicised case of Pimlico Plumbers Ltd v Smith. The key question is what it means for a contract to involve an obligation to do work personally ('personal service') and whether a limited right to send someone else to do the work means that 'service' ceases to be 'personal'. The Court of Appeal in this case had found that it does not and the Supreme Court has agreed with that principle, rejecting an appeal by Pimlico Plumbers against the Court of Appeal's ruling.

The decision

The case involved Mr Smith, who worked exclusively for Pimlico Plumbers ('Pimlico') from 2005. As is often the case with cases of this kind, the documentation governing how he worked was a bundle of mixed messages. On the one hand for example, he was described as an independent contractor, in business on his own account, and it was clear from the payment system in place that a proportion of the risks of the business fell on his shoulders – if a client did not eventually pay then he himself did not get paid. On the other hand Pimlico exercised a high degree of control in some areas, expecting him to wear its livery, drive its branded van, carry an ID card and make himself available for 40 hours per week. The documentation issued to Mr Smith contained language such as 'dismissal' and 'gross misconduct' and contained a set of restrictions on what he could do after he ceased working for Pimlico.

When in 2011 his services were terminated he brought proceedings in the employment tribunal claiming unfair dismissal, disability discrimination and seeking holiday pay and underpaid wages. His claims depended on his convincing the tribunal that he was either an employee or a worker. The employment tribunal came to the conclusion that he was not an employee of Pimlico and could not therefore claim unfair dismissal, but it concluded that he was a worker for the purposes of his other claims. In reaching that view the tribunal considered the extent of the right Mr Smith had to substitute someone else to do the work if he was unable to do it, on the basis that if he was not obliged to provide personal service, then he could not be a worker under any of the statutory definitions. On the facts the tribunal decided that Mr Smith's right of substitution was limited to what was in effect a system of shift swapping with other Pimlico operatives – hence it was such a limited right that it did not cut across the obligation of personal service and Mr Smith's claims could proceed.

The tribunal's decision was upheld in the Employment Appeal Tribunal and the Court of Appeal. The Court of Appeal went into some detail about the right of substitution and, although every case will turn on its particular facts, gave guidance to the effect that:

An unrestricted right to provide a substitute will negate personal service (and tends to suggest the individual is self-employed);

A conditional right to provide a substitute may or may not negate personal service. It will depend on the exact terms of the contract and how much the right is limited or occasional. For example, a right to substitute:

  • Only when the contractor is unable to carry out the work, does not negate personal service (and tends to suggest that the individual is a worker/employee);
  • Only with the consent of another person who has an absolute and unqualified discretion to withhold consent, does not negate personal service (and tends to suggest that the individual is a worker/employee);
  • Limited only by the need to show that the substitute is as qualified as the contractor to do the work, does negate personal service (and tends to suggest the individual is self-employed).

In dismissing Pimlico's appeal the Supreme Court decided that the employment tribunal was entitled to decide as it did on the question of substitution – on the facts it was open to it to find that the only right to substitute was to arrange for another Pimlico operative to cover the shift – and those operatives themselves were bound into a set of stringent obligations to Pimlico. It contrasted that situation with one in which the employer is uninterested in who does the work as long as the work gets done. In such a case there would be an unlimited right of substitution that could not be consistent with personal service.

The Supreme Court also considered Pimlico's appeal on the basis that the tribunal had been wrong to find that Pimlico was not a client or customer of Mr Smith – had the tribunal been wrong on that point, that too would have defeated Mr Smith's claim to be a worker. However on this issue the Supreme Court again decided that the tribunal had been entitled to find as it did, pointing to the degree of control exercised by Pimlico as inconsistent with Mr Smith being in business on his own account.

What this means in practice

The Supreme Court decision falls short of providing much in the way of further clarification of the kind of substitution clause that will defeat a claim to worker status. It did not criticise or even refer to the Court of Appeal guidance in its judgment and the principles that Court set out in this case will therefore still stand when employers are working out how best to approach the issue in their documentation.

Employers (in particular in the gig economy), can expect the 'substitution' clauses they have used as a method of avoiding worker status to continue to be heavily scrutinised by the courts – likewise any employer who has tried to avoid the consequences of worker status by using the device of substitution.

Businesses using self-employed contractors should therefore:

  • carefully consider their arrangements in light of this ruling to decide if changes need to be made – either to the contracts or to the rights and entitlements that their contractors have (for example, to holiday pay); and
  • when dealing with issues arising with contractors, consider both the contractual terms and the nature of the relationship between the business and the contractor to decide whether there is a risk that the individual could be found to be an employee or a worker. Management of the situation may need to be adapted accordingly.

Meanwhile the Court of Appeal may shortly be looking at the question again. The Independent Workers Union of Great Britain is seeking to appeal against the judgment of the Central Arbitration Committee earlier this year that a substitution clause in Deliveroo contracts defeated any claim that Deliveroo personnel are workers for the purposes of the right to seek trade union recognition.

If you want further information or assistance, please speak to our employment team.

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