IR35 Factors, IR35 Compliance, are you caught?

In a recent employment law case (October 2009), the Court of Appeal decided that a group of 20 self-employed car valeters who worked for Autoclenz Ltd were actually employees.

This judgement will raise alarm bells for those businesses that use sub-contract labour on a frequent and ongoing basis in the genuine belief that those workers are self-employed. The case further highlights the different approaches used in determining employment status when considering employment rights as opposed to tax.

For a good number of years, Autoclenz Ltd, a car valeting firm based in Measham, Derbyshire, had engaged the services of 20 valeters on a self-employed basis. The valeters, however, claimed that they were employees and, as such, were entitled to, amongst other things, holiday pay.

The Tribunal agreed but the ruling was overturned by the Employment Appeal Tribunal who decided that the valeters were limb (b) workers. Limb (b) workers enjoy some statutory rights such as national minimum wage, holiday pay and rest periods but not the security enjoyed by that of an office holding employee. Autoclenz appealed against this decision also, claiming that the workers were self-employed and, in addition, the valeters cross-appealed claiming that they were employees.

Contractual and working arrangements

The valeters had started to work for Autoclenz at different times, one going back as far as 1991, but all had signed similar written contracts in which they were described as sub-contractors. Clauses deemed to be relevant were:

- The sub-contractor would perform the services within a reasonable time and in a good and workmanlike manner;

- The sub-contractor confirmed they were self-employed and responsible for their own income tax and NICs;

- It was agreed and acknowledged that the sub-contractor was not and should not become an employee of Autoclenz;

In 2004, HMRC carried out a review of the valeters and were satisfied that they were correctly treated as self-employed.

In 2007, all the valeters signed new contracts which were simply intended to clarify matters which had been previously unclear. The contract was comprised of two parts. Part one set out the terms on which the valeter was invited to enter into a contract with Autoclenz, the most salient of which were:

- Valeters were to be engaged from time to time on a sub-contract basis;

- A right of substitution so long as the replacement met Autoclenz's requirements of sub-contractors which were not unreasonable;

- A requirement to wear a protective overall identifying them as a contractor of Autoclenz. Two sets of overalls were initially provided by Autoclenz but after this the valeter had to purchase them;

- Cleaning materials to be provided by the sub-contractor available for purchase from Autoclenz;

- No obligation by either party to provide/undertake work at any time.

Valeters worked in teams of four, one of whom acted as a leader. Each team worked on a batch of 6 vehicles at a time. Autoclenz, in accordance with its sole customer's requirements, British Car Auctions, strictly controlled the methods of cleaning and the materials to be used. For each vehicle cleaned Autoclenz paid £9 and distributed each man his share. Autoclenz generated an invoice on behalf of each worker which showed deductions of 5% to cover cleaning equipment and materials and £9 p.w insurance.

Recruitment of the valeters was either by word of mouth or through advertisements. Advertisements emphasised that the position was permanent, on a self-employed basis and promised good rates of pay.

Court of Appeal decision

The workers were found to be employees for the following reasons:

- Autoclenz imposed all the terms on the valeters and there was no negotiation. One of the managers of Autoclenz gave evidence that if any valeter declined to sign the 2007 contract then they would not be offered any further work. It was therefore concluded that Autoclenz controlled the manner in which the work was done, the rates of pay and the materials to be used.

- Mutual obligations existed between the parties, i.e the provision of work in return for money. The Autoclenz manager had given evidence that there was a requirement for valeters to notify him in advance if they were unavailable for work indicating that there was an obligation to attend work unless a prior arrangement had been made. Furthermore, one of the valeters gave evidence that Autoclenz would not tolerate a valeter simply choosing whether or not to turn up for work.

- Valeters were fully integrated into Autoclenz's business.

- There was a requirement for personal service of the valeters and the substitution clause inserted in the 2007 contract did not reflect the rights and obligations of the valeters. There had been no evidence of any incidents of substitution taking place and one of the valeters of 17 years experience did not even know he had a right of substitution. This fact was held to be evidence that no one intended or realistically expected that the right should ever be exercised.

Even though the valeters knew that when they were taken on Autoclenz regarded them as self-employed, what Autoclenz wished to create was not material. What mattered was what Autoclenz actually created. Lady Justice Smith stated, "It matters not how many times an employer proclaims that he is engaging a man as a self-employed contractor; if he then imposes requirements on that man which are obligations of an employee and the employee goes along with them, the true nature of the contractual relationship is that of employer and employee" and "In short I do not think that an employee should be estopped from contending that he is an employee merely because he has been content to accept self-employed status for some years."

About the Author

Qdos Consulting are well placed to offer businesses both the employment law and tax expertise required to prevent them being cleaned out by would-be employee(s) and/or HMRC.