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IR35: A Warning to End Users

Support contractors or face the consequences

A ruling earlier this year by an Employment Tribunal paved the way for self-employed locum pharmacist to make a claim for unpaid holiday pay over a three year period. With the recent increase in IR35 enquiries, the ruling provides a timely reminder that unhelpful end users could face a counter claim by the contractor if their status case is lost.

Mrs Wooler began working for Paydens Ltd, a chain of approximately 100 pharmacies in South East England and South London, in September 2010. In July of last year she presented a claim to the Employment Tribunal for unfair dismissal, sex discrimination, maternity discrimination, breach of contract, unauthorised deductions, and a failure to make payment in respect of holiday pay. The claims were based on that she was either an employee or a ‘worker’ and not an independent contractor, which was the basis on which she was engaged.

Unlike employment status for tax purposes which seeks only to discern between employment and self-employment, the Employment Rights Act 1996 provides for a third category, that of ‘worker’. Section 230(3) of the act states that a “worker means an individual who has entered into or works under:

  1. a contract of employment; or
  2. any other contract, whether expressed or implied (and if it is express) whether oral, or in writing, whereby the individual undertakes to do or perform personally any work or services for another party to the contract whose status is not by virtue of the contract that of a client or customer of any profession or business undertaking carried on by the individual;

and any reference to a worker’s contract shall be construed accordingly.”

During the course of her relationship with Paydens, Mrs Wooler signed three different written agreements, the principal terms of which remained the same, with any differences between the contracts being minor ones. Each contained the following clauses:

  • “The Locum may in his/her discretion arrange for some other registered pharmaceutical chemist to deputise him/her at the pharmacy in his/her absence subject always to the Director’s right, for reasonable cause, to refuse to accept the services of any particular deputy.”
  • “The Locum or his/her deputy shall exercise all professional skill and diligence in the rendering of the aforesaid services and shall not be subject to the direction or control of the Director as to the manner in which he/she shall perform such services.”
  • “During the subsistence of this agreement the Locum shall be an independent contractor……”

The relationship was characterised by the following circumstances:

Basis of Payment

The Locum was paid £25 per hour, a rate that was higher than pharmacists who were employed by Paydens.

Sales invoices were submitted by Wooler using pro-formas provided to her by the client.

Mutuality of Obligation

Initially Wooler agreed to work shifts of 12 and 15 hours each, on Sundays and Mondays. This arrangement then changed whereby Paydens would inform the Locum of upcoming shifts on a 6 week basis. Wooler would then notify her client of the days she was not available.

There were many occasions when Mrs Wooler chose not to work and there were also times when she declined to work a shift that she had previously agreed to work, to which Paydens did not object. On some of those occasions she informed her client at quite short notice of a change in her plans that prevented her from working.

There was no question that the Locum had to request time off.

Right of Substitution

On more than one occasion Mrs Wooler offered to provide a replacement pharmacist when she was unable to carry out the work but each time her client declined the offer. Paydens were only willing to allow pharmacists who were known to them to be used as a substitute. The reality was that Paydens themselves arranged any such replacement workers and therefore the purported right of substitution was a fiction.

The tribunal judge found that Mrs Wooler was not an employee because no mutuality of obligation existed. However, it was ruled that the Locum was a ‘worker’ because she was engaged to provide her personal service.

Although ‘workers’ have narrower rights than employees, mainly to do with not being discriminated against, nevertheless this is not something to be sniffed at.

The Supreme Court also appear to have widened the number of person’s entitled to claim worker’s rights following their ruling this year in the case of Clyde & Co LLP v Bates van Winkelhof. Here the Supreme Court said the law distinguishes between two different types of self-employed people:

  • those who carry on their own profession or business & enter into contracts to provide work on services to clients or customers; and
  • those who provide their services as part of a profession or business undertaking carried on by someone else.

The Supreme Court considered that there was nothing to prevent someone in the second category being a ‘worker’, depending on their particular circumstances, including a member of a Limited Liability Partnership.

So for those contractors that end up getting caught by IR35 because of incriminating end client evidence this may provide some succour and a way of damage limitation. It may also be a useful lever for those freelancers suffering an IR35 enquiry who are faced with an end client who is unenthusiastic about supporting them by providing valuable evidence about their working practices. Where however a contractor is still engaged by that end user during the time of enquiry then, quite understandably, that contractor may be reluctant to remind their client of the ramifications of being classed as a ‘worker’.

By Andy Vessey

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