IR35 – Worthless Contracts

Freelancers know only too well the importance of ensuring that what is written into their contracts has to be realistic and that the contractual terms are worked out in practice. This fact was reiterated in the recent Supreme Court ruling in the case of Autoclenz Ltd v Belcher & Others.

Autoclenz provides car cleaning services to motor retailers and auctioneers. Twenty workers who had been engaged as self-employed car valeters claimed that, despite signing contracts for services agreeing that they were self-employed and were to be taxed on that basis, they were actually employees.  As such, they should have been entitled to holiday pay and to be paid in accordance with the National Minimum Wage Regulations. The Employment Tribunal (ET) agreed that the contractual terms did not reflect the true agreement between the parties and could therefore be disregarded so that the workers could be considered to be employees.  

The Employment Appeal Tribunal (EAT) overturned the ET's decision on the basis that the ET had applied the incorrect legal test for identifying sham contractual terms. Both parties had to intend a contractual clause to mislead before it could be said to be a sham and there was insufficient evidence of such an intention.

The EAT's decision was appealed by both sides to the Court of Appeal which restored the original judgment of the ET. In response to this, Autoclenz appealed to the Supreme Court, the final court of appeal for civil cases in the UK.

All five Lord Justices unanimously agreed that the ET had been entitled to disregard the written agreement between the parties on the basis that it did not reflect the working practices and, in so doing , to consider that the valeters were workers working under contracts of employment within the meaning of National Minimum Wage Regulations 1999 and Working Time Regulations 1998. In reality there had been four essential contractual terms agreed:

1. that the valeters would perform the services defined in the contract for Autoclenz within a a reasonable time and in a good and workmanlike manner;
2. that the valeters would be paid for that work;
3. that the valeters were obliged to carry out the work offered to them and Autoclenz undertook to offer work; and
4. that the workers had to personally do the work and could not send a substitute in their place.

The Supreme Court stated that some employers may seek to include contractual terms with a view to avoiding a particular statutory result but which did not reflect the real relationship. Where one party to an employment contract seeks to challenge the authenticity of the terms there is no need to display an intention to mislead as it is sufficient that the written terms do not represent the intentions or expectations of the parties.

Whilst this ruling should serve as a reminder to contractors that although it is important for them to negotiate favourable terms but it is futile inserting bogus contractual clauses, end clients should also take notice that if they are unwilling to honour their side of the bargain then it could end up costing them if a disaffected worker sought to claim employment rights against them.