The UK’s highest court considered the employment status of Mr Smith, who worked as a plumber for Pimlico Plumbers. It found that, despite a contract in which both parties agreed that Mr Smith was self-employed, the reality of their working relationship meant that he was a worker with important employment rights.
We review the case and discuss what lessons other employers can learn.
Background
Mr Smith worked for Pimlico Plumbers for six years. He had a heart attack and sought to reduce his working days from five to three days per week. His request was refused and his engagement brought to an end. His contract expressly stated that he was self-employed and he was treated as such by HMRC. However, in order to bring claims for non-payment of holiday, arrears of pay, and discrimination, he had to establish that, contrary to the terms of the written agreement, he was in fact a worker.
The employment tribunal decided that Mr Smith was a worker, but not an employee. It found that the contract had been “carefully choreographed” to present Pimlico’s plumbers to the public as its workforce, yet render them self-employed at the same time. However, this was foiled by the fact that Pimlico exerted a “substantial measure” of control over its staff and their contracts did not reflect the reality of their working relationship.
Pimlico unsuccessfully challenged this decision and the case eventually came before the Supreme Court.
Supreme Court decision
The Supreme Court rejected Pimlico’s appeal and confirmed that Mr Smith was a worker. To be a worker, Mr Smith had to establish two things:
That he was required to undertake the work personally (rather than sending someone else of his choosing to do so)
Pimlico's relationship with him wasn't one of client or customer.
In relation to the need to undertake work personally, evidence given at the original tribunal found that plumbers working for Pimlico could be accompanied by an apprentice or mate to assist them. Additionally, if they did not have a specialist skill necessary to complete any part of the job, they could engage an external contractor – at their own expense – to do so. The plumbers would continue to do the basic work and neither of these circumstances amounted to substituting the work to someone else.
However, Mr Smith did have a limited right to ask another Pimlico operative to undertake any work he was unable or unwilling to do (for example if he wanted to work on a more lucrative contract).
Pimlico argued that this right was inconsistent with an obligation of personal performance.
The Supreme Court disagreed. The right to substitute someone else was restricted to other Pimlico plumbers and it did not override Mr Smith’s general duty to work personally. This was evidenced by the personalised language contained in his contract, which referred to “your skills, competencies and appearance” and the fact that any substitute was subject to the same “heavy obligations” imposed by Pimlico.
This would have been irrelevant if Pimlico could show it was Mr Smith’s client or customer. The key to this was the extent of Pimlico’s contractual obligation to offer work to Mr Smith, and his obligation to accept it. The contractual terms were inconsistent. His contract included the standard clause that “… the company shall be under no obligation to offer you work and [you] shall be under no obligation to accept such work” but the manual stated that working hours were a minimum of 40 hours over five days a week. This arrangement amounted to an “umbrella contract” and Pimlico was under an obligation to offer work to Mr Smith where it was available.
In addition, despite contractual obligations that put some financial risk squarely at the door of Mr Smith where a client did not pay Pimlico’s invoice within a month, it exerted significant control over him. Pimlico was promoting a brand and its operatives had to wear its uniform, drive its branded van (to which Pimlico applied a tracker), carry an identity card, and closely follow the administrative instructions of its control room. Mr Smith’s contract also referred to “wages,” “gross misconduct,” “dismissal,” and also contained restrictions preventing him from competing against it following termination. These were all factors that were inconsistent with him being a truly independent contractor.
Tips for employers
Although the Supreme Court did not set down any new principles or take the opportunity to determine whether – and to what extent – mutuality of obligation between assignments is relevant to an individual’s status during assignments, it does provide some useful learning points for other employers engaging self-employed contractors.
1. Personal service
Do you require personal service? As long as the dominant feature of the contract is one where the individual does the work themselves, they will be a worker.
Including a substitution clause is not sufficient, of itself, to negate this assumption. If your contractor has absolute discretion about who to appoint, this will suggest that he or she is self-employed (although if, in practice, no one else is ever substituted, this assumption will be weakened). If the right to substitute someone else is only available if the contractor is unable to work and/or the employer has the right to reject a substitute, this will suggest that the contractor is a worker.
2. Control
How much control do you want to exert? The more you control how and when someone works, the more likely they are to be a worker.
Here, the Supreme Court was able to point to the fact that all plumbers had to promote the Pimlico brand and these features all “militated against recognition of Pimlico as a client or customer.” Businesses that offer seamless customer service will therefore be more vulnerable to status challenges.
3. The contract
Be careful about the contractual language you use. We’ve seen many contracts like Mr Smith’s which adopt the language of employment contracts to control what the contractor can/can’t do.
Mr Smith’s first contract originally described him as a “contracted employee,” although this was later amended by hand to read sub-contracted employee. The subsequent agreement provided that Pimlico could terminate the agreement immediately if he committed an act of “gross misconduct.” He was also required to “comply with all reasonable rules and policies” of the company and was subject to a three month restrictive covenant preventing him from competing with the business or soliciting work from any of its customers. All of this strongly pointed to an employment relationship.
Whilst any contract that you enter into with a contractor must reflect the reality of your working relationship, you will undermine your position if you use the same terminology and restrictions you impose on your employees.
4. Indemnity clauses
It is fairly common to see clauses included in the contract where the worker agrees that they:
Are self-employed
Will not bring any employment related claim
Will indemnify their employer for the costs it incurs defending the claim if they challenge their status.
These clauses are clearly designed to put people off challenging their employment status, and including one points to the unequal bargaining power between you and your contractors – factors they may use to discredit the agreement.
In addition, you will not be able to rely on the clause if the tribunal considers it amounts to a penalty as penalty clauses are invalid.
5. Risk
In principle, the more financial risk the contractor assumes, the more likely he or she will be self-employed.
However, even where the contractor assumes a large amount of financial risk, it will not be sufficient if other factors point towards employment status. Take Mr Smith, for example. He agreed that his fees would be reduced by 50% if the client did not pay their invoice within one month – and he would not be paid at all if it remained unpaid for more than six months. This could leave him substantially out of pocket, particularly as he purchased his own materials. Despite this arrangement, he was still held to be a worker because of other factors.
6. Marketing/working for other organisations
Does your contractor work for anyone else? Do they market themselves as an independent contractor in an attempt to obtain work? These factors suggest that the contractor is looking for clients or customers, but – as with all of the other factors already outlined – this will not be sufficient of itself to counter an argument that the contractor is a worker if that reflects the reality of the relationship.
7. Tax
Even if HMRC agree that a contractor you engage is self-employed for tax purposes (and he or she has been responsible for their own income tax and national insurance contributions liabilities), an employment tribunal or court can reach a different decision for employment status purposes. This is because HMRC only recognise two categories of worker for tax purposes: employees and self-employed (without the category of workers). The distinction between tax and employment status can lead to genuine confusion about the legal status of an individual.
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