A recent case in relation to the
National Minimum Wage legislation has resulted in (1) a defeat for the IR (some
might say that is never a bad thing, I couldn’t possibly comment), and (2)
clarification of the relative importance of (a) the real world situation, and
(b) the contract terms.
The case is reported as JOHN CHESTER SMITH (NATIONAL MINIMUM
WAGE COMPLIANCE OFFICER OF THE INLAND REVENUE) v (1) T HEWITSON (2) A HEWITSON
(T/A EXECUTIVE COACH CATERING SERVICES) (2001)
The case was
an appeal by a company ('C') from an employment tribunal's decision that
stewarding staff provided by C to coach companies were in fact workers within
the meaning of the National Minimum Wage Act 1998 .
In the
early 1990s C's changed the formal status of its staff to that of self-employed
to prevent fraud. The staff members became required to sell refreshments that
they had purchased themselves. The majority of the stewards' time was devoted
to their catering function.
There was
no dispute that the contracts between the stewards and C were genuine: they
were not sham agreements designed to evade the national minimum wage. The
Inland Revenue was content to treat the stewards as self-employed in relation
to their shift payments. The stewards were not obliged to accept any work
roster. They wore the uniform of the national coach company in whose coaches
they worked.
The
tribunal concluded that C had held the stewards out to be part of its workforce
and that the stewards regarded themselves as such. That conclusion was reached
after the tribunal considered the test in s.54(3)(b) of the NMW Act and
concluded that the stewards were C's workers despite finding that they were not
C's employees. C submitted in its appeal that the tribunal had erred by its failure
properly to regard the material terms of the contracts between itself and the
stewards.
The decision of the Employment Appeal Tribunal was
that the Employment Tribunal had erred by
concentrating on what occurred rather than by seeking to determine what the
mutual obligations of the stewards and C actually were. Matters such as whether a company held others out
to be its workers were irrelevant to the construction of a contract.
Furthermore, it was clear that the stewards did not regard themselves as being
employees in the strict sense because they had been perfectly content
to represent themselves to Inland Revenue as being self-employed. Even if they were being held out to be
employees of anyone, it would probably have been the company whose uniforms they
wore. The tribunal should have asked itself whether the stewards provided
services and, if so, considered the nature of their contractual relationship
with C.
The implications of this case look
particularly interesting from an IR35 viewpoint, particularly given the way in
which the Revenue now appear to be seeking to interrogate the client about the
reality in pretty well every case coming before them.
The case cites with approval
various comments from the Express Echo
case:
"(This)
to my mind vividly illustrates the difficulty in approaching the
identification of the terms of the agreement by concentrating on what actually
occurred rather than looking at the obligations by which the parties were
bound. Of course, it is important that the industrial tribunal should be alert
in this area of the law to look at the reality of any obligations. If the
obligation is a sham it will want to say so. But to concentrate on what
actually occurred may not elucidate the full terms of the contract. If a term
is not enforced that does not justify a conclusion that such a term is not part
of the agreement."
In other words, if the contract creates
real obligations, then those
obligations cannot be disregarded when
assessing the overall nature of the relationship, and should not be regarded as
overridden by the simple day to day actuality – provided of course that the day
to day actuality does not undermine the reality of those obligations by
suggesting that they are not in fact real.
The EAT went on to say that:
‘In our opinion, the Tribunal should
have asked itself whether the stewards were providing services, and if so, what
was the contractual relationship between themselves and ECCS.‘
The point was made that:
‘This is not a case in which the
contract with the stewards was a device to avoid the effect of the minimum wage
legislation.’
And finally the case tails off
with what appears almost to be an unfinished sentence:
‘The case therefore should not be
understood as laying down any general principle, but applies to the specific’
This case seems to me to reinforce
1
the contract must genuinely reflect a reality,
rather then simply be a device to avoid the effects of legislation; subject to that, that interpretation of the
consequences of the contractual obligations is be of greater importance than
looking at what happens from day to day – provided that what happens from day
to day does not cast doubt on the reality of the contractual obligations.
2
that the way in which the individual is held out to
third parties is irrelevant to the primary issue of interpreting the terms of
the actual contract
I'd really appreciate your feedback on this FAQ - so mail me and tell me what you think of it, if it's been useful to you, or let me know of any specific problem you have where I may be able to help.
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