IR35 detailed comment

Substitution

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.

The obligation to provide personal service is an element of the 'irreducible minima' - 'the servant agrees that, in consideration of a wage or other remuneration, he will provide his own work and skill in the performance of some service for his master.  [1]   And if that obligation is not present, then the relationship cannot be of the employment type.

Note also that here we are considering obligation, not necessarily the actuality.  Where the (written) contract does not contain such an obligation, then unless such an obligation could be implied under the general legal provisions governing implied terms, and unless that contractual provision can be shown to be a 'sham', then the irreducible minimum has not been met.  Unless the actuality shows the lack of obligation to be a 'sham', the written contract is likely to override the actuality - so it matters not whether in fact the services are provided personally or not.  That said, the best way of being prepared to counter any argument that the lack of such an obligation is a 'sham' must be on occasion to demonstrate the absence of such an obligation, by substitution.

Legal issues, and the Revenue Guidelines

Guidelines:

The right to get a substitute or helper to do the job – Personal service is an essential element of a contract of employment. A person who has the freedom to choose whether to do the job himself or hire somebody else to do it for him, or who can hire someone else to provide substantial help is probably self-employed (Australian Mutual Provident Society v Chaplin[2] and Express and Echo Publications Ltd v Tanton (1999)IRLR 367[3]. However, this must be viewed in the context of the arrangements overall. For example, a worker may choose to pay a helper to take phone messages and deal with invoicing and general book-keeping work for the intermediary. But this would not be directly relevant when considering an engagement where the worker is engaged to lay bricks for a client.[4]

The following paragraphs are extracted from the Employment Status Manual, sections ESM1051-ESM1059:  [5]

 (Carrying out services personally)

An employment exists where there is a contract of service. Past case law shows that, for there to be a contract of service, the worker must be required to carry out, at least some of, the work personally. For example, in a 1967 High Court decision - Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance (2QB497) - see also ESM1009, MacKenna J said

'The servant must be obliged to provide his own work and skill. Freedom to do a job either by one's own hands or by another's is inconsistent with a contract of service'

If an individual undertakes to perform a task and is free to hire someone else to do it for him or her, or to get someone else to provide substantial help, it is most unlikely that that individual will be an employee. As Lord Fraser said in the Privy Council Appeal of Australian Mutual Provident Society v Chaplin and Another (1 978) 18 Australian Law Reports 385

'..... power of unlimited delegation is almost conclusive against the contract being a contract of service.'

The requirement for a worker to provide personal service was clarified by the Court of Appeal in March 1999 in Express and Echo Publications Ltd v Ernest Tanton (1999 IRLR 367). This case shows that where a worker does not have to perform the work personally, and can hire a substitute to carry out the work, that is inconsistent with employment and the worker will be self-employed regardless of other factors such as control, etc. However, there are three provisos

- the right to provide a substitute must be genuine

- the engager must not have an unreasonable right of veto over the substitute chosen

- the worker must engage and pay the substitute. Where a worker merely recommends another worker whom the engager takes on this is not what is meant by the original worker providing a substitute. It is no different from, say, an employed barman being unable to cover a shift suggesting someone else who may be able to cover.

This factor does not necessarily work the other way. Where a worker has to undertake the work personally that does not mean the worker must be an employee. There are many examples (for example, in the professional field) where self-employed individuals have to undertake the work they have agreed themselves. The lack of a right to provide a substitute may be a pointer to employment but it is certainly not conclusive on its own.

(Engager's rights to decline)

The right to provide a substitute was considered in the case of Express and Echo Publications Ltd v Tanton (1 999 IRLR 367). In that case the worker had the right to send another 'suitable' person to carry out the work.  That limited right of veto on the engager's part made no difference to the underlying principle that a right of substitution is inconsistent with employment (and the worker was found to be self-employed). Even where an engager's right to refuse to accept an unsuitable substitute is not expressly stated in a contract it would probably be implied into the arrangements by the Courts. Furthermore, even under a clear contract for services an engager is likely to be able to reject a substitute and sue for non-performance of the contract where the substitute is clearly unable or unsuitable to carry out the work.

You should therefore accept that a worker is self-employed where a genuine right of substitution exists even if the engager has the right to reject an unsuitable substitute. A reasonable right to reject a substitute would include

- refusal because of the substitute's inability to do the work effectively or within a reasonable time span (especially where payment is by the hour)

- the substitute being a known trouble maker

- other workers refusing to work with the individual

On the other hand, if an engager has the right to refuse a substitute for any reason at all, this has the effect of enabling the engager to insist that the worker carry out the work personally. In that sort of situation the worker's right to supply a substitute is clearly more limited. Care needs to be taken to establish the true agreement. Why would a worker who genuinely wants the right to supply a substitute accept such a restriction of that right and why would an engager want anything more than a right to prevent an unsuitable person from carrying out the work? It may be that it is clear that a substitute would never be accepted because of the nature of the work and the substitution clause is a 'sham' inserted mainly with the intention of dressing up the contract as a contract for services.

(The right, not the exercise of it, is important)

As explained above it is the right of substitution that is important. The fact that substitution has not actually occurred during a contract is not necessarily relevant. Workers with such a right are of course entirely free to carry out the work themselves if they wish. We may want to consider claims that there is a right of substitution critically if substitution does not occur over a long period of time. However, we should not automatically assume, in such cases, that this means that there is no real right of substitution.

(The right must be genuine - where such a right appears to be present, it is for the Revenue to prove that it is not genuine)

Disproving a claimed right of substitution can be difficult.  Unless there is reason to doubt a claimed right of substitution it may normally be accepted at face value. If the claim later turns out to be untrue we will normally be able to rectify the matter later. Enquiries are more likely to be appropriate where other alleged terms are found to be false or a claimed right of substitution does not seem to make sense in relation to the contract. For example, an engager is unlikely to want to accept a substitute

- when engaging a person with specialist skills etc personal to them (for example, a well known actor, footballer, designer, etc)

- where a high quality job is required and a particular individual is deliberately chosen because of his/her own abilities (for example, an 'ace' carpenter chosen to construct a particularly difficult film set)

- where the work involves a complex task worked on a team basis and is likely to take some time to complete and where ongoing work relies on a knowledge of the whole system being worked on (for example, in some computer programming situations).

A right of substitution is normally a strong pointer towards self-employment. Remember, if you are to ignore a claimed right of substitution it is for you to find the evidence that will show that the claimed right does not exist. In such cases you should always speak to the engager and the worker. You need a thorough understanding of how the work will be done and whether supplying a substitute would be feasible. The following points are some ideas on what to look for

- check whatever documentary evidence is available. For example: letters exchanged before the contract is signed, job advertisements, bank accounts etc

- have there been circumstances in which you would expect a substitute to be provided such as a domestic emergency, illness and holidays?

- has a substitute ever been provided? If not, why not? - if a substitute is used, who paid (or would pay)?

- is there any evidence that a substitute has been rejected at any time? If so, why?

- would the engager accept any substitute? If not what restrictions are there?

- are similar workers engaged on similar terms? If so, have they ever sent substitutes? If another similarly engaged worker has supplied a substitute, it rather suggests the claimed right is genuine

- is there evidence that any other terms in the agreement between the worker and the engager are a sham? If so, this may cast doubt on the credibility of the agreement as a whole.

You cannot assert that a right of substitution does not exist just because a substitute has never been provided.

(Assistants)

A worker who hires an assistant is unlikely to be an employee. That is especially so where the nature of the work actually requires an assistant (for example, where installing or moving heavy objects is involved) and the worker is required to hire help at his or her own expense. On the other hand, a dairy may turn a blind eye to a milk roundsman deciding to hire a child as an assistant during the school holidays to 'lighten the load'. That would be rather different and would not inevitably mean that the milkman is self-employed.

Where a worker agrees to undertake a specific task it might make sense for the worker to hire an assistant if that is profitable and a claimed right in this regard may be perfectly in order. The same applies to pieceworkers. But you do need to be sure that the work and payment involved make the hiring of an assistant a viable proposition. Where the worker is hourly paid it is unlikely the worker would pay someone else for 'help' as such (the worker would still be working at the same remuneration but would effectively be voluntarily funding a helper out of their own pocket).

In the PCG Judicial Review case, we were reminded:

'One of the questions that is addressed in relation to the ordinary issue of employee or not is whether there is a right of substitution in the contract with the client, or whether the services can only be supplied by the one individual.

Again so far as computer services are concerned, the Claimants are concerned that, in practice, at any rate once a service contractor has commenced work at the client's premises on his equipment, his expertise will become such that no one else in fact would be able to replace him. Given that the issue is not determinative, but only one of the factors, that may indeed be right and may in a particular engagement be a strong counter-indicator against employment.

On the other hand, once again, the terms of the contract, certainly a contract to which the service contractor has not been a party, will not necessarily be conclusive. There appears to be, in this regard also, a too inflexible approach by the Revenue set out in some of the guidance documents and responses. It is worth bearing in mind that in Express and Echo Publications Ltd v Tanton [19991 ICR 693, although there was a right for the delivery driver to arrange

"at his own expense entirely for another suitable person to perform the services",

which was held to be a crucial factor in deciding that the contract was not a contract of service, nevertheless there was a proviso that in such event

"the contractor must satisfy the company that such a relief driver is trained and is suitable to undertake the services",

which was not considered to neutralise the point; so that it would not be right to make an absolute statement, as the Revenue appears to do in another of its guidance documents, that the need to obtain the client's permission necessarily negates the existence of a right to substitution, and/or points to employment.  [6]

In Synaptek it was said:

28. In Express and Echo Publications v Tanton [1999] 1RLR 367, CA, it was held that a clause in a driver's contract providing that "[i]n the event that the contractor is unable or unwilling to perform services personally, he shall arrange at his own expense entirely for another suitable person to perform the services" was incompatible with the contract having been one of employment. The E.A.T. has subsequently help (see MacFarlane v Glasgow City Council [2001] 1RLR 7) that a more limited power of delegation is not necessarily inconsistent with a contract of employment. In the present case the provision in question (Clause 9.1 of the NESCO agreement) does not give Synaptek any right to perform the services by anyone other than Mr Stutchbury. The effect of the contract is that, unless and until agreed otherwise, the services do have to be performed personally by Mr Stutchbury. In addressing the question whether that provision pointed to the contract being one for services rather than of employment, the Commissioners were entitled in my judgment to regard it as simply one fact among others and, in assessing the weight to be given to it, to take into account the extent to which the provision was utilised in practice.

The term in that case was:

9.1 In the interests of continuity the Company shall use its best endeavours to procure that the Services are provided by the Company Employee personally but may with the consent of the Client substitute alternative personnel subject to procuring that such alternative personnel are bound by the terms of this agreement.

Thus a provision that an individual will provide services personally until and unless agreed otherwise may not be sufficient to establish a right to substitution – particularly if not in fact exercised.

Case law appears to suggest:

·         if a genuine right of substitution clause exists, where the contractor retains responsibility for sourcing, for paying, and for the performance of the substitute, then the relationship cannot be employment

·         the same may apply in the case of a right to assign the entire contract

·         the Courts will examine whether or not such an apparent right is in fact genuine

·         an apparent right may be ineffective if the Client has the right to refuse to accept a substitute other than on objectively reasonable grounds

·         lack of a right of substitution does not mean that the relationship is employment, although it may be a pointer towards it

·         however, where an expert is personally chosen to provide services because of his / her particular expertise, or becomes irreplaceable once work has started, the fact that this may be reinforced by a lack of substitution rights is entirely consistent with a contract for services, and may nevertheless be a strong pointer towards a non-employment type relationship.

Conclusion

what would the position be likely to be in relation to this factor for a hypothetical employee?

·         logic and experience (and indeed the law) all suggest that a hypothetical employee would be required to perform the services personally.

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 be free to choose whether to carry out the services personally, or to delegate whilst retaining responsibility for supervising and for the acts of the delegatee, subject to maintaining continuity - unless, of course, the Individual was engaged for the services in question as an expert, and in reliance of the unique skills and expertise (s)he had to offer.

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

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