Supreme Court rules that subcontractors can be employees
Employment Law & HR update 02/09/2011
The highest court in the land – the Supreme Court – has ruled
that subcontractors can be employees of the business that hires
them, even if they have a written contract which expressly states
that they are not employees. The ruling will be of great interest
to businesses that choose, for a variety of reasons, to keep their
workforce "off the books" by treating them as independent
subcontractors rather than as employees.
Why is the ruling significant?
Because this is a ruling of the Supreme Court, it is effectively
the "final say" on the matter. All lower courts, which include
employment tribunals, must follow the same reasoning in cases that
come before them.
What was the case about?
The case concerned car valeters who acted as subcontractors to a
car valeting company – Autoclenz – which prepared cars for
auction.
The subcontractors claimed holiday pay under the Working Time
Regulations and to be paid the National Minimum Wage, both of which
do not apply to subcontractors who are genuinely self-employed, but
which do apply to employees and other "workers".
"Subcontractor"; "worker"; "employee" – what's the
difference?
The difference between "subcontractors", "workers" and
"employees" is important because they each enjoy different
employment rights. An employee enjoys full employment rights, in
particular the right not to be unfairly dismissed, subject in most
cases to one year's service, as well as the right to paid holidays
and to be paid at least the national minimum wage.
A "worker", which may include some agency workers and
labour-only subcontractors in industries such as construction, has
the right to paid holidays and the national minimum wage, but not
to claim unfair dismissal.
A true subcontractor, on the other hand, is in business on his
or her own account and does not enjoy any of these rights.
What does the ruling mean for my business?
The ruling has no impact on ordinary subcontract arrangements
that businesses may have from time to time with other businesses or
with genuine self-employed people.
However, the ruling is very important for businesses which use a
business model similar to Autoclenz. This will include cases where
subcontractors are kept "off the books" by having a contractual
arrangement with the business which uses their services, but where,
in reality, they work for that business on a regular basis.
My business uses a team of self-employed subcontractors
- what can I do to protect my business?
The Supreme Court ruling makes it virtually impossible to
construct a written contract with a subcontractor that is
absolutely watertight against future claims by the subcontractor
for rights including the national minimum wage and holiday pay.
It is clear that, if such a contract is challenged in court by
the subcontractor, the court will look at the reality of the
situation and what actually goes on in practice, as well as the
written wording of the contract.
Clearly, the likelihood of a subcontractor bringing a claim for
employment or "worker" rights will depend upon the relationship a
business has with the subcontractor, and factors such as the
earnings a subcontractor makes.
There are also two important factors that courts will take into
account in determining a person's employment status.
The first is whether the subcontractor has an obligation to
perform the work personally, or whether he or she can delegate it
to another person. Regardless of what the contract says, if the
practice is that the subcontractor does not delegate the work, then
this points to a "worker" contract, or even to an "employee"
contract.
The second factor is whether the subcontractor has, in practice,
any freedom to refuse work that may be offered at any time – again,
the courts will look at the reality of the situation, even where
there is a specific clause in the contract allowing the
subcontractor to refuse any work offered.
How can Mentor help?
We can review your contract arrangements with subcontractors and
advise on any potential problems in the light of the Autoclenz
ruling.
If you would like further information, and already
subscribe to NatWest
Mentor,
please call the Advice
Service. If you would like more information on
how Mentor could help your business in situations like this and
many others, contact
us today for information.
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