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	United Kingdom Employment Appeal Tribunal
You are here: BAILII >> Databases >> United Kingdom Employment Appeal Tribunal >> Levy MccAllum Ltd v. Middleton [2005] UKEAT 0020_05_0908 (9 August 2005) URL: http://www.bailii.org/uk/cases/UKEAT/2005/0020_05_0908.html Cite as: [2005] UKEAT 0020_05_0908, [2005] UKEAT 20_5_908

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APPEARANCES

 

 

For the Appellant	Mr D Reid, Solicitor Of- Just Employment Law 7 Greens Road Blairlinn CUMBERNAULD G67 2TU
For the Respondent	Mrs M Hutchison, Solicitor Of- Messrs Macroberts Solicitors 152 Bath Street GLASGOW G2 4TB

SUMMARY
CONTRACT OF EMPLOYMENT

Definition of employee

C in order to avoid possible redundancy agreed with R to being "self employed". ET correctly directed itself on the law and its finding that he continued in employment could not be challenged on the facts found.


 


HIS HONOUR JUDGE SEROTA:

1. This is an appeal by the Respondent employer from a decision of the Employment Tribunal at Glasgow (C S Watt Esq, Chairman). The decision was entered onto the Register on 1 February 2005. The Employment Tribunal held at a Pre-Hearing Review that the Claimant was an employee of the Respondent from 1 October 2003 to 2 March 2004, so he had sufficient continuous employment, having regard to his earlier service to qualify to make a claim for unfair dismissal. The appeal was referred to a full hearing by Wilkie J on 11 April 2005.
2. We now turn to the factual background which we gratefully take from the judgment of the Employment Tribunal. There is little dispute as to the underlying facts.
3. The Respondent is an advertising agency. On 19 March 2001 the Claimant was employed by the Respondent as an account manager. He was later promoted to the position of account director and he remained in this post until 30 September 2003. He principally dealt with one account, the Glenvarigill Group of companies. We shall refer to this account as the Glenvarigill account. We understand that Glenvarigill was a car dealer. Some 85% of the Claimant's time was taken up with this account. He worked to some extent at the Respondent's office but also at Glenvarigill's offices. His duties were to act as liaison and adviser to Glenvarigill in relation to its advertising which was placed through the Respondent. He used his own laptop computer and mobile telephone but otherwise all items were supplied by the Respondents, including his car. The Respondent also provided him with an assistant, a Mr Bob Stephen.
4. In the summer of 2003 the Respondent was facing trading difficulties and saw a need for redundancies. The industry was contracting and it had reduced its headcount by about 11 since 2002 and needed to reduce its headcount further. There were 10 employees who might be affected and they were consulted. The Claimant was one of these. On 6 September 2003 the Claimant met Roy McCallum, a director and Sandy McKinnon, company secretary. He said he knew that he was at the risk of redundancy and offered as a solution to accept redundancy but at the same time to supply the Respondent with management services for a fee through the medium of a company he owned, Lagopus Limited. Mr McCallum and Mr McKinnon agreed to discuss this matter with the third director, Mr Levy. According to the Employment Tribunal, he was strongly opposed to such an arrangement but was persuaded to go ahead with a trial period from 1 October 2003 to 29 February 2004. On 30 September 2003 the Claimant was given a redundancy notice and his P45. He received a redundancy payment.
5. From 1 October 2003 until 2 March 2004 the Claimant now maintains he remained an employee of the Respondent; the Respondent maintains that he was engaged to provide services on a self-employed basis between those dates.
6. The terms upon which he continued to work for the Respondent (we put this in a neutral manner) were set out in the terms of a letter dated 8 October 2003 from the Respondent to the Claimant and countersigned by the Claimant on 24 October 2003. The relevant terms were as follows:-

"From 1^st October 2003 we offer you, in your capacity as a self employed Consultant Executive, a contract to provide account-handling services to specified clients.

The fee for your services will be rendered monthly and be calculated at £200 plus fifty percent of the gross profit earned on the specified clients accounts. Gross profit will be defined as income from the company's client gross profit reports, less studio costs from the company's production gross profit reports.

The Respondent agreed to rent a motor car to the Claimant and to pay for the cost of his fuel while performing account-handling services. The fee to be paid was to be exclusive of VAT. The clients were identified as various companies within the Glenvarigill Group. If the Claimant were to introduce new business which was serviced by him as a consultant executive that business would be added to his list of specified clients and he would be entitled to a fee of 50% of the gross profit. The contract was to run initially for a fixed term from 1 October 2003 to 29 February 2004 and would thereafter renew itself automatically each calendar month and could be terminated by either party by the tendering of one calendar month's notice. We do not believe that the Respondent (or the Claimant for that matter) sought legal advice before entering into this agreement.

7. The Claimant maintained that he continued to work as before servicing the Glenvarigill account and only the "label" of his position changed. He worked with the same people in the Respondent's organisations as before; he continued to attend twice-weekly meetings of account-handlers and he continued to be responsible for CPD submissions to the Respondent's professional body. The Employment Tribunal was satisfied there was no prohibition on the Claimant carrying out further work for other companies, although he would not have been allowed to carry out work for a competitor. He continued to use his own laptop computer and mobile phone, but as we have noted his car was provided by the Respondent. He used the same desk and chair in the Respondent's office as well as the Respondent's stationery. He was assisted where appropriate by the Respondent's staff. There was no provision in the agreement for holiday pay or sickness benefits.
8. It is common ground that he was paid gross without deduction of PAYE or national insurance on presentation of invoices he presented in the name of Lagopus. The company, Lagapus Limited had been struck off the Register and the Claimant had registered the name "Lagopus" as a business name under which he traded as a sole trader. The VAT registration had been transferred to Lagopus as a sole trader, which rendered the invoices. Payments were made, so we were told, directly to the Claimant. It was accepted before the Employment Tribunal that there were other employees of the Respondent who did the same work as the Claimant and were regarded at all times as employees. On 2 March 2004 the Claimant's "employment" was terminated.
9. The Employment Tribunal found the facts we have briefly set out above. It directed itself by reference to a number of well-known cases which give guidance as to the circumstances in which an individual may be said to work under a contract of employment rather than a contract for services. These cases included Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497, Nethermere (St Neots) Ltd v Gardiner [1984] ICR 612 and Carmichael v National Power plc [2000] IRLR 43.
10. In particular the Employment Tribunal directed itself by reference to the well-known and oft repeated dictum of MacKenna J in Ready Mixed Concrete at page 10:-

"A contract of service exists if these three conditions are fulfilled. (i) The servant agrees that, in consideration of a wage or other remuneration, he will provide his own work and skill in the performance of some service for his master. (ii) He agrees, expressly or impliedly, that in the performance of that service he will be subject to the other's control in a sufficient degree to make that other master. (iii) The other provisions of the contract are consistent with its being a contract of service."

The first two arms of this dictum are sometimes said to refer to mutuality of obligation and control by the employer. The Employment Tribunal had little difficulty in finding that there was clearly mutuality of obligation, control by the respondent employer and the provision by the Claimant of non-delegable personal services. The Employment Tribunal then went on to consider the third arm or limb of the Ready Mixed Concrete test, namely whether the other provisions of the contract were consistent with it being a contract of service. The Employment Tribunal at paragraph 31 identified a number of factors that pointed to employment, these were:-

(i) The similar work pattern.

(ii) His integration into the workplace including the requirement he attended twice-weekly account-handlers meetings.

(iii) The Claimant's continued working from the Respondent's offices using the same desk, chair and stationery and staff.

(iv) The fact that other persons employed by the Respondent to do the work carried out by the Claimant were employees.

(v) Absence of any professional insurance between October 2003 to March 2004 by the Claimant.

(vi) Reimbursement by the Respondent to the Claimant of his expenses.

11. The Employment Tribunal then identified two neutral factors (i) the ability of Mr Middleton to work for other persons subject to the proviso that he could not work for a competitor. (ii) the degree of financial risk undertaken by the Claimant. This was such that the Employment Tribunal regarded that factor as neutral.
12. The Employment Tribunal then went on to identify four factors which might suggest that there was no contract of employment, these were as follows:-

(i) Absence of any provision for holiday pay or sick pay.

(ii) Payment being made gross without deduction of PAYE or national insurance.

(iii) The Claimant's registration for VAT and the charging and payment of VAT.

(iv) "The main factor indicating that Mr Middleton was not an employee was the question of the intention of the parties. It is agreed by both parties that the intention in this case was that Mr Middleton become genuinely self employed. This was really quite clear in this case…"

(see paragraph 33(4)).

Both parties "genuinely believed that Mr Middleton was "self employed".

13. The Claimant urged the Employment Tribunal to take particular account of the parties' intention relying upon the decision of the Court of Appeal in Massey v Crown Life Insurance Company [1978] IRLR 31. It is convenient to refer to the judgment of Denning L J who said this at paragraph 13:-

"The law, as I see it, is this: If the true relationship of the parties is that of master and servant under a contract of service, the parties cannot alter the truth of that relationship by putting a different label upon it. If they should put a different label upon it and use it as a dishonest device to deceive the Revenue, I should have thought it was illegal and could not be enforced by either party and they could not get any advantage out of it… On the other hand, if their relationship is ambiguous and is capable of being one or the other, then the parties can remove that ambiguity, by the very agreement itself which they make with one another. The agreement itself then becomes the best material from which to gather the true legal relationship between them."

Lord Denning continued at paragraph 15 as follows:-

"15. It seems to me on the authorities that, when it is a situation which is in doubt or which is ambiguous, so that it can be brought under one relationship or the other, it is open to the parties by agreement to stipulate what the legal situation between them shall be. That was said in the Ready Mixed Concrete case in 1968 by Mr Justice McKenna. He said (at page 513) that 'if it were doubtful what rights and duties the parties wished to provide for, a declaration of this kind might help in resolving the doubt and fixing them in the sense required to give effect to that intention.

16. So the way in which they draw up their agreement and express it may be a very important factor in defining what the true relation was between them. If they declare that he is self-employed, that may be decisive."

The Employment Tribunal was also asked to place weight on the fact that it was the Claimant who had initiated the question of self-employment.

14. The Employment Tribunal concluded as follows:-

"37. The Tribunal take the view, in this case, that the elements of mutuality of obligation, control and personal performance must be taken into account in the balancing exercise that has to be carried out. These are factors which are extremely important in considering this difficult question. The Tribunal do not agree with the submissions eloquently made by Mr Reid that the balancing exercise is only on the third element of the Ready Mixed test. The Tribunal take the view that the first two limbs are also to be considered in the balancing exercise. The Tribunal, therefore, consider that, when the balancing exercise is complete in this case, there is a balance in favour of employment. The Tribunal, therefore; consider that Mr Middleton was an employee of the respondents between 1^st October 2003 and 2^nd March 2004.

38. The Tribunal have considerable sympathy with the respondents in this case, since it appears to the Tribunal that they were really trying to help Mr Middleton when, in October 2003, they agreed to his suggestion that a new arrangement should be entered into by both parties that he was to be "self-employed". The Tribunal realise how galling it must be for them to be advised that, in spite of agreeing to a suggestion by Mr Middleton that he become "self-employed" in fact, in terms of the law, he was still their employee."

Before considering the grounds of appeal we will briefly refer to certain other authorities that touch on the question as to how a Court or Employment Tribunal should approach questions of determining whether a contract is one of employment or of services. In Hall (H M Inspector of Taxes) v Lorimer [1994] IRLR 171 the Court of Appeal approved the dictum of Mummery J at first instance:-

"In order to decide whether a person carries on business on his own account it is necessary to consider many different aspects of that person's work activity. This is not a mechanical exercise of running through items on a check-list to see whether they are present in, or absent from, a given situation. The object of the exercise is to paint a picture from the accumulation of detail. The overall effect can only be appreciated by standing back from the detailed picture which has been painted, by viewing it from a distance and by making an informed, considered, qualitative appreciation of the whole. It is a matter of evaluation of the overall effect of the detail, which is not necessarily the same as the sum total of the individual details. Not all details are of equal weight or importance in any given situation. The details may also vary in importance from one situation to another."

In Young & Woods Ltd v West [1980] IRLR 201 the Court of Appeal revisited Massey v Crown Life Insurance Company to which we have already referred. Stephenson L J at paragraph 207 considered the dicta of Lord Denning M R in Ferguson's case [1976] IRLR 346:-

"I do not think that they would justify me in concluding that, wherever there is an agreement openly made that a particular person shall be treated by a company as self-employed, it follows that he must accept the position and cannot claim compensation for unfair dismissal as if he was not self-employed but an employee. It must be the Court's duty to see whether the label correctly represents the true legal relationship between the parties in that case as in every other."

He went on to say at paragraph 24:-

"I am satisfied that the parties can resile from the position which they have deliberately and openly chosen to take up and that to reach any other conclusion would be, in effect, to permit the parties to contract out of the Act and to deprive, in particular, a person who works as an employee within the definition of the Act under a contract of service of the benefits which this statute confers upon him."

There is also a helpful passage at paragraph 28:-

"There are, of course, here pointers in both directions. Mr West was paid his wages without deductions. He would not have been entitled to holiday pay or sickness benefits. I do not go to the authority which says that those circumstances alone do not prevent a contract from being a contract of service, but the pointers in the other direction, which I have read from the decision of the Industrial Tribunal, were, in my judgment, strong enough to satisfy the burden which no doubt rested on Mr West to show that the label was a false label and that, though the mutual intention of the parties was undoubtedly to call the work which Mr West was going to do for them services under a contract for services, nevertheless it was in reality service rendered under a contract of service. There is no such ambiguity in the relationship between Mr West and the company as could make their declared intention as to what it should be decisive of it."

15. We would also refer to what Lord Ackner said at paragraph 30:-

"It is by now well settled that the label which the parties choose to use to describe their relationship cannot alter or decide their true relationship; but, in deciding what that relationship is, the expression by them of their true intention is relevant, but not conclusive. Its importance may vary according to the facts of this case."

16. We would deal with one particular submission before we turn to the Notice of Appeal. Mr Reid, on behalf of the Respondent employer submitted that the purpose of employment protection legislation was to protect employees. In the instant case the proposal that there should be a contract for services was initiated by the employee, Mr Middleton, so the policy arguments against permitting contracting out of the Statute had less force. He drew our attention to what Lawton L J had said in Massey's case at paragraph 23:-

"In the administration of justice the union of fairness, commonsense and the law is a highly desirable objective. If the law allows a man to claim that he is a self-employed person in order to obtain tax advantages for himself and then allows him to deny that he is a self-employed person so that he can claim compensation, then in my judgment the union between fairness, commonsense and the law is strained almost to breaking point."

We recognise that it is in a sense unattractive for Mr Middleton on the one hand to propose that he should be treated as self employed and then on the other to seek compensation on the basis that he was not but was in reality an employee. However as was made clear in Hall v Lorimer the function of the Employment Tribunal or Court in a case such as this is to look at the reality of the arrangement rather than the label that the parties chose to put on it bearing in mind that one cannot contract out of the protection offered by the Statute. We would add this. The matter is not as clear cut as Mr Reid has submitted. Mr Middleton was faced with possible redundancy and made the offer in order to secure his job. The benefits of the arrangement proposed by Mr Middleton were mutual. The Respondent was able to reduce its headcount and expenditure and Mr Middleton was able to continue in his employment.

17. We now turn to the Notice of Appeal. The first ground of appeal criticises the Employment Tribunal for taking into consideration in paragraph 37 of its judgment issues of mutuality, personal performance and control in determining the third "arm" of the test propounded by McKenna J in the Ready Mixed Concrete case. He submits they should have been excluded and by taking them into account they were in effect given a double weighting by the Tribunal. We can find no fault with the way in which this matter was dealt with by the Employment Tribunal which, having regard to the authorities we have cited, was bound to have regard to the whole picture taking all relevant circumstances into account before concluding whether the contract was truly a contract of employment or a contract of services.
18. It is convenient to take the second and third grounds of appeal together. It was submitted that the Employment Tribunal should have treated the intention of the parties as decisive because the Claimant's status was in doubt or ambiguous, all the more so as he had brought about the change in status himself. Once the Employment Tribunal found that there was a "balance" in favour of employment it was necessarily faced with a sufficient doubt or ambiguity for the parties' intention to have been decisive. The Employment Tribunal, it was further submitted should at least have dealt with the issue as to whether the intention was decisive and as to why it was not. It was also submitted that greater weight should have been given to the fact that the Claimant had submitted invoices together with VAT, which was paid. Mr Reid submitted that ambiguity did not need to be high. There was no authority to suggest that it was only in cases of a "tiebreaker" that intention was to be given a decisive weight.
19. It is clear from the authorities we have cited that the relevance of any particular factor will depend on all the circumstances of the case. It is also clear that for intention to be regarded as a decisive factor there must be some ambiguity or doubt. We do not understand the decision in Massey's case as meaning that providing a party can raise an argument that a relationship has some of the attributes of a contract of services the parties' intention will always be decisive. In our opinion it is only when after taking account of the parties' intention that there is still some real ambiguity and the case is relatively finely balanced that the parties' intention should be decisive. We note that the learned editors of Harvey at paragraph A84-85 consider that:-

"…in a borderline case where, apart from the label attached by the parties, it would be equally reasonable to conclude that the worker was a servant or that he was an independent contractor, then an express declaration by the parties may be conclusive."

20. If parties agree to create a horse but instead create a camel, the fact that they intended to create a horse and even call what they have created a horse is of little assistance in determining whether it is in fact a horse. Save in cases of deliberate deception one can generally find something upon which to base an argument that there is a contract of services rather than a contract of employment. Nonetheless, the label placed on arrangements by the parties and their intention is not determinative. This appears clearly from the passage we have cited in the judgment of Stephenson L J in Young & Woods v West, paragraph 28, another case in which there were pointers in both directions. In the instant case the balance is clearly heavily in favour of there being a contract of employment on the facts found by the Employment Tribunal. This is all the more so as the matters relied upon (other than the parties' intention) as being consistent with a contract of services rather than a contract of employment are the consequences of the parties' intention to create a contract for services and consequent ability to take advantage of the benefits of such an arrangement. Thus the Respondent was not obliged to pay PAYE or national insurance contributions. This represented a saving to the Respondent and the Claimant was entitled to take deductions as a self employed person and to set off his expenses against his tax liability. So far as VAT was concerned Mr Reid accepted that the Respondent would be able to reclaim the VAT if paid and similarly the Claimant was in a position (although obviously to a lesser extent) to reclaim the VAT element of expenses incurred by him in the course of his work. The two factors we have just referred to come nowhere near outweighing the significance of the other factors found by the Employment Tribunal.
21. It is convenient to take grounds 4 and 5 of the Notice of Appeal together. The Respondent submits that by stating there was a "balance in favour of employment" the Employment Tribunal did not say if it accepted or rejected the submission that extra weight should be given to the charging of VAT and the parties' intentions. Nor did the Employment Tribunal say whether extra weight was attached to these features but it nevertheless decided the balance was in favour of employment, nor did it say how much weight it had given to factors other than mutuality of obligation, personal performance and control. It was submitted that the presence of mutuality of obligation, personal performance and control was not inconsistent with a contract for services. The Employment Tribunal said "they were extremely important" but did not explain why in the opinion of the Employment Tribunal they carried so much weight or why they outweighed other factors.
22. The Respondent was clearly relying on the principle set out in Meek v City of Birmingham District Council [1987] IRLR 250 and English v Emery Reimbold & Strick Ltd [2003] IRLR 710. In that case in a dictum frequently cited Lord Phillips M R who delivered the judgment of the Court of Appeal had this to say:-

"The essential requirement is that the terms of the judgment should enable the parties and any appellate tribunal readily to analyse the reasoning that was essential to the judge's decision."

23. In the present case we are satisfied the Employment Tribunal judgment is quite sufficient to explain its reasoning. The Employment Tribunal was under no obligation in our opinion to list the weight given to each factor. It was entitled to reach a conclusion and then look back at the overall picture as it did. There is nothing in this point.
24. In the circumstances therefore the appeal must be dismissed. We would wish to express our gratitude to Mr Reid and Mrs Hutchison, who appeared on behalf of the Claimant, for their helpful submissions and skeleton arguments, thank you very much.