The hot topic of the moment is the decision of the
Employment Appeal Tribunal (EAT) in the case of O’Murphy v Hewlett
Packard. The case is interesting, because
the original decision on March 2001 had been thought to offer some consolation
to contractors caught by IR35, in that it may have given them employment rights
against clients who were unwilling to cooperate in IR35-friendly arrangements. Such a result appeared consistent with some
of the comments of the Judge in the PCG case in April. However, this apparent trend has now been
reversed.
History
Mr O’Murphy had worked as a contractor for Hewlett Packard
(HP) through his own limited company and an agency for 6 years, until a day in
October 2000, when HP appear to have decided that he was (in their view)
‘incapable of efficiently performing the work’, and terminated his
contract. Quite how it took them 6 years
to figure this out, and indeed whether or not the Tribunal originally hearing
the case believed this to be true, are both equally unclear. His contract appeared to be of an
IR35-unfriendly type, at least so far as issues of control and working
practices were concerned - one which suggested that if the contractual
relationship had in fact been directly between HP and Mr O’Murphy, he may have
been deemed to be an employee of HP – though I should stress that so far as I
can see, the IR35 status of the relationship was not a matter which was actually
brought up or considered, before either Employment Tribunal or EAT.
The contractual chain was of the type most contractors will
be familiar with, and included terms in the initial agency-client contract
denying that he was an employee of HP, and (in a later agency-client contract
which came into force in 1999) spelling out in a little more detail that the
relationship of Mr O’Murphy to HP was that of an independent contractor, and
denying that either agency or client was (in the legal sense) the agent of –
and therefore entitled to act so as to legally bind - the other. Save for the fact that Mr O’Murphy had also
entered a confidentiality agreement direct with HP (which did not specifically
govern the carrying out of the work), there was no express direct contractual
relationship between Mr O’Murphy and HP.
There appeared to be nothing in the contractor-agency contract expressly
denying that he would be employed by the client, although the Confidentiality
agreement did expressly begin by him saying that he was an employee of his own
company.
Mr O’Murphy claimed (1) that he had as a matter of law been
employed by HP, despite the contractual chain;
and (2) that he had been unfairly dismissed from that employment.
The
Employment Rights Act 1996 s230 defines a "contract of employment" as
‘a contract of service or apprenticeship,
whether express or implied, and (if it is express) whether oral or in writing’.
The EAT Decision
Earlier this year an Employment Tribunal decided as a
preliminary issue that he had as a matter of law been employed by HP. If he had been an employee, then he would
have had the right not to be unfairly dismissed. HP appealed to the EAT; and their decision was that he had
not been employed by HP.
The EAT’s decision in this case will now stand as binding
legal authority (which, incidentally, the earlier decision by the Employment
Tribunal did not), until and unless that authority is changed, whether on
appeal, or by a Court in another case having the power to do so (ie not just an
Employment Tribunal), or by parliament.
To identify exactly what that legal authority is, we have to carefully
consider the judgment itself.
At the original hearing, the Tribunal made (in the view of
the EAT) the mistake of assuming that they could get the answer to the question
to which they needed an answer - whether there was a contract of employment –
by simply looking at the relationship between individual and client, and
following a ‘picture-painting’ process.
They assumed that if the answer which they came up with was ‘employment’
(as opposed to ‘self-employment’), then that would incidentally also prove that
there was an implied contract of
employment – the reasoning (presumably) being that one can’t have employment in
the absence of a contract. But no, the
EAT said, you can’t do it that way – you have to decide first whether there is in
fact a contract between supposed employer and employee under which the work is
carried out, and only if the answer to that is ‘yes’ can you then move on to consider
what type of contract it is.
Therefore, whilst the relationship under which the work was
to be done might look like employment rather than self-employment (as Mr
O’Murphy’s did), nevertheless it can’t actually be employment, unless an actual
contract for the carrying out of the work between the employer and the
employee can first be shown to exist.
And here, it couldn’t be employment – because whilst the relationship
itself may have had a preponderance of employment characteristics, it was clear
from the wording of the various contracts in the chain that it was never intended
that there should be any contract between HP and Mr O’Murphy,
in relation to the carrying out of the work.
And so Mr O’Murphy’s claim failed.
Effects of the
decision
The effect of this EAT decision is that in answering the
question of whether or not there is a contract of employment, one has to do so
through a two-stage process:
1
Is there a contract between supposed
employer and employee under which the work is carried out?
This would appear to be decided under usual contract law principles – ie
are the essential elements of a contract in fact present? (As a reminder, those essential elements are
a.
consensus
ad idem – true agreement on the material terms of the arrangement;
b.
consideration
– each party must put something into the arrangement; and
c.
mutual
intent to be legally bound.)
2
Only
if the answer to that first question is ‘yes’, can one then move on to the
question of whether the contract is or
is not one of employment?
Here, the Tribunal made the error of overlooking that it
must be shown that there is a contract between individual and client, under
which the work itself is to be carried out, before one can move on to
consider question 2 - whether or not that contract it is a contract of
employment. And if there is no such
contract, you simply don’t get past first base.
The judgment also makes clear that if the contracts that do
exist appear genuine, then their terms can’t be disregarded:
a.
Those
contracts may show eg that the individual works for the client because he is
hired out by and paid by the agency – and not because of any mutuality of
obligation between individual and client (of client to provide work and pay for
it; and of individual, to do the work) –
that simply happens because of the actual contractual chain that is in fact
there. It is not necessary to imply a
contract between individual and client in order to explain what happens, when
there is already another perfectly satisfactory explanation.
b.
You
can’t imply a contract between individual and client in relation to the
carrying out of the work where to do so would conflict with the express intent
of the parties, as appears from such documents as are in the chain (even if
there is no such document directly between individual and client. Forming a contract requires an intent to
create a legally binding relationship, and where it is clear that there is no
such intent, then there can be no contract.
And where there is no contract, a
fortiori there cannot be a contract of employment, whether express or
implied.
c.
Further,
if the contracts that are in the chain deny that eg the relationship of
principal-agent (in the legal sense) between client and agency, then one can’t
infer the opposite to be true – so you can’t get round this by assuming that
the agency is (in the legal sense) the agent of the client, and therefore that
acts of the agency are in law acts of the client.
It was clear that the parties did not intend there to be any
contract between individual and client under which the work was to be
done, And it was clear that the
arrangements governing the work were adequately covered by the contracts that
did exist. There was no basis on which a
contract between individual and client under which the work was to be done
needed to be implied, since that was adequately explained by those existing
contracts. And in any event it would be
inconsistent with the express intentions of the parties, as recorded in the
contracts that did exist, to imply such a contract between individual and
client.
The key point is this:
whilst the question of intent
rears its head in both stages of the process, the effects are different.
On the question of whether or nor there is a contract,
the declared intent of the parties is (more or less) conclusive. People are free to make – or not make –
contracts as they choose. And so where
individual and client decide not to
do so (which may be clear from the contracts those people make with the third
parties in the contractual chain), then it is generally clear there cannot be a contract between individual
and client. It may be that if there were
silence on the issue, one could imply such intent (and that will be the meaning
of the term ‘implied contract’ in s230 Employment Rights Act 1996) – but not
where the parties expressly make clear that such an implication is not intended
– even of that is made clear in a contract with a third party, rather than
directly between individual and client.
Indeed, that would be consistent with the usual situation when
considering whether or not a term could or could not be implied.
If however there is a contract, then whether the parties intend
a contract to be one of
employment is considerably less definitive – it is but one factor in the
equation, one element of the overall picture that is to be painted (Hall v Lorrimer 1994). Where the true nature of the relationship is
genuinely ambiguous, then the parties’ mutual intent may decide the issue – but
where it is not, then their intent cannot change the nature of what is already
clear. It all depends on the true nature
of the relationship.
Employment rights–the
client
The O’Murphy case makes clear that a relationship between
two parties which is not intended to be a contract cannot as a matter of law
amount to a contract of employment.
In the PCG case, the Judge said (para 50):
‘i) There is no binding conclusion that he is an employee
simply because he is to be treated as if he were one for tax purposes, but if
so advised he could seek to raise arguments to that effect.’
I have to say that these words – on which so much weight was
placed at the time that the issue became described as the ‘nuclear option’ –
now appear somewhat hollow. They do not
appear to help us over what has become clear is the precondition of showing
that there is a contract between individual and client under which the work is
done in the first place.
The effects of this judgment are to reverse what had
appeared to be developments in this area of the law. The original decision in the O’Murphy case
had expanded the possibility of there being an ‘implied contract’ as suggested
by s230 Employment Rights Act 1996.
However, as in the case of implied contract terms (where an express
statement in a contract will generally prevent a contrary term being implied
into a contract), so an express indication in such documents as do exist that
there is to be no contract between two parties can operate so as to prevent an
implication arising that they intended to enter a legally binding commitment,
and thus prevent the implication of any contract between them. And it is now clear that such an express
indication may be in a document involving only other parties in the chain, but
not necessarily both of the parties in question.
For an employment rights claim to succeed in the future, the
individual contractor will have to prove (1) that there is a contract between
that individual and the client under which the work is carried out, and (2)
that the
true nature of that contract is ‘employment’.
Get over those two hurdles, and the door would remain open
for an employment rights claim. But to
establish that there is in fact such a contract requires demonstrating all the
usual elements of a contract (in relation to the work itself – including an intent to be legally
bound. Such intent may be implied, but
not if other documents in the chain make clear that there is no such intent. And if the written contractual chain makes
clear that there is no intention for there to be such a contract between
individual and client, then that fact may be fatal.
Employment Rights -
the Agency
It is an open question as to what Mr O’Murphy’s position
would have been if he had sought to establish employment rights against the
agency. No claim appears to have been
brought against them. So far as can be
seen from the report, there was no term in the agency-contractor contract
denying the existence of an employment relationship between agency and
individual. Thus here, a claim against
the agency may not have failed for the same reasons as the claim against the
client failed. However, if that contract
had contained a term expressly denying employment by the agency – as is often
the case nowadays- that would probably have been conclusive on the issue, in
which case a claim against the agency would probably also have failed, for the
same reasons.
Consequences – IR35
Can a contractor end up being (1) within IR35, but (2)
unable to secure employment rights from the Client? The answer to that appears to be ‘most
certainly’ – because the tests for the two questions are fundamentally
different.
Under IR35, there is no need to show the existence of a
contract between individual and client under which the work is carried out –
the legislation sidesteps that by imposing a hypothetical such contract – the
question for IR35 liability is whether ‘the
circumstances are such that, if the services were provided under a contract
directly between the client and the worker, the worker would be regarded for
income tax purposes as an employee of the client’ (Finance Act 2000,
Schedule 12, para 1(1)(c)). The statute presupposes the existence of an
individual-client contract, and then moves on to require us to consider the
nature of that hypothetical contract. So
for IR35 purposes, we move straight to question 2 - whether the (hypothetical)
contract is or is not one of employment.
If a contractor cannot secure employment rights because
(s)he is unable to show that there is a contract between that individual and
the client under which the work is carried out, will this help the Contractor
to demonstrate a stronger IR35 position?
The assumption IR35 forces upon us would get round the obstacles that
the O’Murphy case might otherwise raise.
It could certainly be argued that the lack of employment rights might
suggest that the relationship could not be one of employment. However, it may be that that argument is a
little circuitous, because employment rights are a legal consequence of the
employment relationship, rather than an indicator to its existence. Perhaps the best one might say is that the
lack of employment rights reinforces the genuineness of the intent of the
parties in intending the relationship not to be of the employment type – in
other words, that intent has real consequences, which operate to the
individual’s detriment. Perhaps this
might justify greater weight being put on the parties’ intent as to the nature
of the relationship.
This judgment does appear to make clear that terms in a
contract with a third party (ie an agency) which affect or declare a party’s own intentions
or obligations can certainly affect the nature of the relationship between that
party and someone further down the contractual chain. Terms in an agency-client contract declaring
a client’s intentions or obligations (and likewise terms in the
contractor-agency contract declaring an individual’s or the contractor’s
obligations) can negative contrary implications, when considering the
individual-client relationship. Whilst
it is the real nature of the actual relationship that is important for IR35
purposes, the contract terms are of fundamental importance in determining the
intentions and obligations inherent in that relationship.
You can see the whole judgment on the Employment Appeals
Tribunal’s website http://wood.ccta.gov.uk/eat/eatjudgments.nsf–
though beware, this is sometimes one of the slowest websites I’ve encountered,
and it can take a long time to access the pages.
Postscript:
Shortly
after uploading this article, I had a mail from a reader, to which I replied:
> I've
read your O'Murphy analysis here:
>
http://www.egos.co.uk/fREEL139_140.HTM, and was surprised at your lack of
> comment
on the EAT findings. By that I mean not
your extensive and
>
informative comment on what the judgement means, but rather the lack of an
> opinion
as to whether the EAT were right in their assessment.
I suppose
the starting point to answer to that is to say that I am a practical
lawyer; I see my role as to (1)
interpret what the law actually is, and then (2) to seek to work within what it
in fact is, apply it for the benefit of my client base. The important thing, I think, is for me to
try to extract and report what the case really means, so as to help to avoid
confusion and misunderstanding.
Against that
background, the O'Murphy judgment seems to me to make sense, as a matter of
law. Whilst the original decision made a
degree of moral sense, with the 20:20 clarity of vision that hindsight brings,
after reading the EAT judgment I can see exactly where they are coming from,
and as a matter of applying the law it 'feels' right. I cannot say that I can see any way in which
the judgment is legally flawed. It makes
logical sense, viewed against the existing legal background. So yes, I think the decision is probably
right.
I had much
difficulty with the concept of an 'implied contract' as envisaged by s230 ERA
1996, until I realised that it was an expression which had an application in
the area where people may be obviously entering a contract, without expressly
turning their minds to whether or not they are in fact doing so - where the
officious bystander might ask 'do you actually intend to enter a contract for
this', and both parties would reply 'yes of course'. But it's also the case that terms will not be
implied into a contract, at least under this principle, where to do so would conflict with the
express intention of the parties. You
can't imply a mutual intent to be legally bound, where one party declares that
he does not so intend. Such a
declaration shows there is no such intent, in the mind of at least one of the
parties. And therefore there cannot as a
matter of simple logic be mutual intent.
Our culture,
our entire constitution (albeit unwritten) is founded on the principle of the
rule of law, interpreted by the courts.
Such interpretation often has to take the form of filling in gaps by
declaring what the law is, where issues arise that have not previously been
ruled upon. Such gap filling is by
reference to existing decisions, and must be in a way that is logically
consistent with them. And overall, that
probably offers the best route to anyone being able to work out where he or she
stands in relation to the law, what his/her legal position actually is. Consistency, predictability, and the ability
(1) to divine where one stands, (2) to be able to plan one's affairs
accordingly, and (3) to make a reasonable judgment as to the outcome.
> It
seems to me that if this is such an easy cut and dried issue, that the
> agency
very effectively shields the client from employment rights by the
>
inclusion of a simple: "We don't intend on creating an employment
>
contract" clause, then why have there been all the employment cases there
have
> been.
Uncertainty
as to what the law actually was, coupled with a developing trend to push the
boundaries which has now been halted, because in O'Murphy the EAT basically
said 'hang on chaps, this trend actually conflicts with a fundamental principle
of contract law'.
> I'm
surprised that this clause has never been used before to deny
>
employment rights and so would have thought that there would be precedents to
this
> case
that conflict with it, though you mention none.
Smith v Costain: relevant facts (contract chain) similar,
except that Smith did not use a company.
O'Murphy is consistent with Costain and indeed the EAT said the ET
should have considered and followed the Costain principles in this case.
>
Contractors have long been saying that agencies don't automatically
> protect
clients and claims to that effect are propaganda. Is it true that there
> is no
basis in case law for this claim? Can it
be that there is no prior
> case
that found an agency worker / contractor to be an employee of the client
> despite
a written intention that this was not the case?
So far as
other cases are concerned, so far as I can see either (1) the client contract
did not contain a term expressly denying any intent on the part of the client
to become contractually bound to the individual, or (2) if it did, then the
point which was the decider in O'Murphy does not appear to have been
considered. And so any future decision
in such a case would be bound by the principles set out in the O'Murphy
decision.
> Also
where you state that: "This judgment does appear to make clear that
> terms
in a contract with a third party (ie an agency) which affect or
> declare
a party’s own intentions or obligations can certainly affect the
> nature
of the relationship between that party and someone further down the
>
contractual chain.", does this not contravene the common law doctrine of
> privity
of contract?
Two angles:
The question
is whether or not there was a mutual intent on the part of individual and
client to be legally bound by contract. A
declaration by client in another contract at the same time that the client does
not intend to be legally bound to the individual may be evidential ie tending
to prove that as a matter of fact he did not intend to be so bound. That's not a matter of privity, but simply of
evidence, of something tending to prove.
Secondly,
there is a trend away from strict privity of contract in English law, as shown
by the recent Contract (Rights of Third Parties) Act.
> In
conclusion, a very informative article as I have come to expect, but
> light
on critical comment.
Sorry about
that. I suspect the reason is that (1)
as a matter of law, I do not see the grounds for criticism - I suspect that the
decision is indeed legally correct, (2) whilst it may be open to criticism from
a moral point of view, my role as I see it is to use such skills as I may have
to interpret, explain, and apply the law as is for the benefit of my client
base - rather than to adopt a moralistic standpoint.
If I were to
adopt that standpoint then I'd reserve my criticism for IR35, which alters the
groundrules from a tax point of view only, and disrupts an industry which had
been working very well beforehand, to the benefit of the entire economy. We probably wouldn't be anything like as
concerned about employment rights, were it not for IR35, resulting in us saying
'if we're going to be taxed as if we were employees then we may as well have
the benefits'.
[Full text of the case report]
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