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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.
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.
