Contract lawyer (UK) Roger Sinclair Egos Ltd – IR35

Right of dismissal - A right to terminate an engagement by giving notice of a specified length is a common feature of employment. It is less common in a contract for services, which usually ends only on completion of the task, or if the terms of the contract are breached.[1]

· The following paragraphs are extracted from the Employment Status Manual, section ESM1085: [2]

A power to terminate an engagement, for a reason other than a serious breach of contract, by giving notice of a specified length, may be indicative of a contract of employment but is not conclusive. The power can be expressly stated in the contract or it can be implied.

Equally, the absence of such a power would not point conclusively towards self-employment. For example, where an engagement is for a specific piece of work, or a specified period of time, there is unlikely to be scope for dismissal by period of notice. The interviewer in the Market Investigation case (1969) 2 QB 173 was found to be an employee. The absence of a right of dismissal other than for serious breach did not mean that the worker was necessarily self-employed. Cooke J remarked

'So far as concerns dismissal irrespective of breach, it is of course clear that the interviewer in this case could not, in the absence of a breach, be dismissed in the middle of an assignment. But there is nothing in this which is inconsistent with the contract being a contract of service. It is quite common for contracts of service to be entered into for fixed periods with no provision, express or implied, for dismissal during the specified period.'

· Curiously, here we appear to have the guidelines saying that existence of a right to terminate on notice is common in contracts of employment, and less common in contracts for services, and the ESM quoting a case in which it was said that the lack of a right to terminate on notice is not inconsistent with a contract of service.

· The cases suggest:

· In McManus v Griffiths [3], the incorporation of a three month notice period was regarded as a neutral factor.

· An engager's right to terminate without notice may be a pointer towards self-employment [4]

· The lack of a right to terminate on notice may be a pointer towards self-employment

· Clumsily worded provisions on termination may import undesired implications of submission to control – in Battersby it was said:

- In the performance of his work the Appellant was subject to Pennyright Bank's control inasmuch as the contract provided that it could be ended for incompetence or misconduct and that responsibility for the quality, quantity and performance of the services rested with Pennyright Bank at all times.

And in FS Consulting:

In the performance of his work Mr Simpson was also subject to Better's control to the extent that the contract between the Appellant and Topper provided that it could be terminated immediately if Better terminated its agreement with Topper because of the incompetence, unsuitability or unprofessional conduct of Mr Simpson.

· On the other hand, in Synaptek, the termination provisions appeared to undermine the arguments against MOO:

27. In my judgement that is not the correct way to read this provision. Its purpose is to emphasize that payment is dependent not only on the completion of proper timesheets and invoices, but also on actual work having been done. It does not, in my judgement, detract from the obligation on the client reflected in Clause 4.3 to "allocate work to the Company". Moreover, if the contract is read as containing no obligation on the client to provide work, it is quite impossible to see what purposes is served by the termination provisions in Clause 8.

Comment

· what would the position be likely to be in relation to this factor for a hypothetical employee? Logic and experience suggests that a hypothetical employee would probably

have the right to give notice to terminate, unless the employment contract was for a fixed term which did not contain such a right; where there is a right to so terminate, the period for an employee who has been employed for a month or more is one week, or such longer period as provided for by the contract [5]; and

be subject to the like right on the part of the employer, unless the employment contract was for a fixed term which did not contain such a right; where there is a right to so terminate, the period an employer has to give an employee who has been employed for a month or more is one week, and if employed for 2 years or more, one week for each year's service, up to a maximum of 12 weeks - or, again, such longer period as provided for by the contract [6];

· what would the position be likely to be in relation to this factor for a hypothetical obviously self-employed person or consultancy (eg Andersens, or by PWC, or EDI?) Logic and experience suggests that a hypothetical obviously self-employed person or consultancy would probably either

be engaged for the duration of the project, or

(particularly in the case of a longer project, to allow for flexibility) be so engaged subject to rights of termination on notice (either by one party only, or mutual); or

perhaps less usually, be subject to a right on the part of either or both parties to terminate at any time and without notice (or cause).

· do the facts here actually provide a helpful pointer towards either view?

If you're another lawyer or an accountant reading these pages, I'd be happy to discuss any points arising with you - particularly if you'd like to debate any points where you disagree with my views - mail me!

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[1] http://www.inlandrevenue.gov.uk/ir35/guidance.htm

[2] http://www.inlandrevenue.gov.uk/manuals/esmmanual/part1000/esm1085.htm

[3] McManus v Griffiths 1997 70 TC 218

[4] O'Kelly v Trusthouse Forte 1983 3AER 456

[5] Employment Rights Act 1996

[6] Employment Rights Act 1996

Right of dismissal / termination

The issue

· The issues here would appear to be whether there is anything either in the contract, or in the actual relationship between Individual and Client, in relation to this factor which

helps towards a decision on whether that relationship, had it been direct and without a company in between, would have been an employment contract - a contract of service - or a contract for services, or

would be inherently inconsistent with a contract of employment.

· Here we are considering rights to terminate without cause - ie in the absence of fault by the other party.

Legal issues, and the Revenue Guidelines

· Guidelines