Case of the week: beware employment status

Enfield Technical Services Ltd v Payne and BF Components Ltd v Grace

Facts

Mr Payne worked for Enfield Technical Services as, at his request, a self-employed sub-contractor. He worked exclusively for Enfield but received no sick or holiday pay. Following enquiries, HM Revenue & Customs (HMRC) accepted Payne’s self-employed status.

Having responded to an advertisement for self-employed commercial sales people, Mr Grace began work for BF Components. He was paid a gross daily rate for which he invoiced the company and paid his own tax and national insurance contributions. Grace received no sick or holiday pay. After 10 weeks, BF Components offered Grace an employment contract, which he declined, preferring to remain self-employed. A year later, the company told Grace that he was, in their view, an employee and that it was liable for his tax and national insurance. He was asked to sign an employment contract which he did some weeks later.

When Payne and Grace were dismissed by their respective employers, both claimed to be employees and alleged unfair dismissal.

Decision

The employment tribunals decided that both individuals were employees. However, their employers argued that they had participated in the illegal performance of their contracts by representing to HMRC that they were self-employed. If the contracts were illegal, their unfair dismissal claims could not proceed.

In Payne’s case, the tribunal decided that his contract was not illegal and that his unfair dismissal claim could proceed. In Grace’s case, the tribunal decided that his contract was illegal for at least part of the time he worked for BF Components. This broke his continuity of employment and meant that he could not pursue an unfair dismissal claim.

The Employment Appeal Tribunal (EAT) agreed that Payne and Grace were employees, but decided that both had believed themselves to be self-employed in good faith and had not misrepresented the facts of their relationships to HMRC. There had simply been a mis-characterisation of their employment status and neither Payne’s nor Grace’s contract was illegal.

The employers’ subsequent appeals were dismissed by the Court of Appeal, which decided that while a contract of employment could be unlawfully performed if there were misrepresentations as to the facts, an error of categorisation alone, without false representations, would not make a contract illegal. The fact there was a tax advantage in claiming self-employed status did not, of itself, mean that the contract was unlawfully performed. I Payne and Grace had participated in the mis-characterisation of their legal status, but had not made false representations to HMRC about the underlying facts. As such, both could proceed with their unfair dismissal claims.

Implications

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There are tax advantages to an individual who is categorised as self-employed. Conversely, many valuable employment rights, including the right not to be unfairly dismissed, are only available to those who hold employment status. This decision serves as a bleak reminder to employers that simply because a worker is categorised as self-employed for tax purposes does not automatically prevent them from subsequently claiming rights as an employee.

Guy Lamb, partner, DLA Piper