Modern business and working models have changed the face of the employment landscape. Half of the new jobs created since the economic down-turn are purportedly 'self-employed', but is that really the case?

The 'worker v independent contractor' debate has been a topic of great debate in recent years with a number of high profile cases against transport and courier companies including Uber, Deliveroo, CitySprint and eCourier. But it's not just drivers and riders. The Supreme Court has now taken a look at this issue in the case of Pimlico Plumbers Ltd v Smith.

The Supreme Court has upheld the decision of an employment tribunal (as did the Employment Appeal Tribunal and Court of Appeal before it) that a plumber who was self-employed for tax purposes was nevertheless a 'worker' under the Employment Rights Act (ERA) 1996 and the Working Time Regulations 1998 (claims for unpaid holiday pay and unlawful deduction of wages) and an 'employee' under the extended definition of the Equality Act 2010 (claim for disability discrimination).

The Supreme Court has provided some much needed guidance on the impact of substitution clauses and when the 'employer' may instead be considered a client or customer.

Why is establishing worker status important?

Employment protection legislation seeks to distinguish between dependent and independent labour. The intention is to exclude from protection self-employed entrepreneurs and professionals whose relationship with the 'employer' is in reality a commercial relationship between two businesses.

At one end of the employment status spectrum are 'employees' who are afforded the greatest level of protection. Rights which apply only to 'employees', include the right to claim unfair dismissal, statutory notice periods, redundancy pay, the rights to maternity/paternity/parental leave and the right to request flexible working.

At the other end of the spectrum are the self-employed who are not entitled to any employment protection rights. This category includes those who are genuinely in business on their own account, sole traders or, if they employ others, small businesses.

Somewhere in the middle are 'workers' who are entitled to some key and very valuable employment rights including:

  • National Minimum wage
  • The right to holiday pay and rest breaks
  • Discrimination protection
  • Protection from detriment for whistleblowing

And don't forget

  • Pension auto-enrolment.

What was in dispute in Pimlico Plumber v Smith?

Mr Smith was a plumber who carried out work solely for Pimlico between August 2005 and April 2011. He had signed an agreement that his work would be governed by terms and conditions set out in Pimlico's Manual, which included stipulations as to working hours, uniform and appearance; obliged him to use a Pimlico's van for his work; required him to closely follow administrative instructions; imposed restrictions as to when and how he would be paid; provided that Mr Smith could only swap jobs with other Pimlico operatives; and included post termination restrictions. During this period, Mr Smith filed tax returns on the basis that he was self-employed. He was registered for VAT and submitted regular VAT invoices to Pimlico.

Mr Smith had a heart attack and Pimlico subsequently terminated its arrangement with him in May 2011 which led to his claims.

It is important to note that in this case, while the Employment Tribunal disagreed with Pimlico that Mr Smith was not an 'independent contractor, it equally agreed that he was not an 'employee' so did not have unfair dismissal protection. Instead, it found he was a 'worker' under the ERA enabling him to pursue his claims for unpaid holiday pay and unlawful deduction from wages, and that he fell within the Equality Act's extended definition of 'employee' enabling him to bring a claim for disability discrimination - both referred to as 'worker' status in the judgment for ease of reference. Both the Employment Appeal Tribunal (EAT) and the Court of Appeal upheld the findings of the tribunal on appeal.

Why did the Supreme Court find in favour of 'worker status'?

To establish whether an individual is a 'worker':

  1. the individual must be working under a contract in which they agree to personally provide work for the 'employer'; and
  2. the 'employer' must not be a client or customer of the profession or business undertaking carried on by the individual.

Personal service and substitution clauses

In relation to the personal service requirement the Supreme Court confirmed that a limited or occasional power of delegation could be consistent with personal performance. But where does the boundary lie?

It was undisputed that Mr Smith could be accompanied by an apprentice or a mate to assist him. The Supreme Court has confirmed that assistance in performance is not the substitution of performance. Equally it was not disputed that where Mr Smith lacked a specialist skill which a job required, he had a right to bring in an external contractor with the requisite specialism. But again, since in those circumstances Mr Smith continued to do the basic work, this did not amount to substitution by the specialist to perform it.

Mr Smith also had a limited facility to swap in another Pimlico plumber to do a job he had previously quoted for but no longer wished to undertake. Despite this, the Supreme Court confirmed that the dominant feature of the contract remained personal performance on the part of Mr Smith. The contract referred to "your skills etc" and was clearly directed to performance by Mr Smith, with the right to substitute significantly limited to be other Pimlico contracted plumbers.

The Supreme Court agreed that the right to substitute another Pimlico contracted plumber did not cancel out Mr Smith's obligation of personal performance. Instead it was merely a means of work distribution between contracted plumbers akin to the swapping of shifts within a workforce.

Client or customer?

On the one hand Mr Smith was free to reject a particular offer of work. He was also free to accept work from outside if no work was offered to him via Pimlico, provided it was not from a Pimlico client (in reality Mr Smith was kept busy by Pimlico clients). He also bore financial risk and the manner in which he undertook the work was not supervised. However, other factors militated against Pimlico being a customer or client:

  • His services were marketed through Pimlico;
  • Pimlico had tight control over Mr Smith's attire and the administrative aspects of any job;
  • severe terms applied as to when and how much it was obliged to pay him; and
  • there were a suite of covenants restricting his working activities following termination.

Additionally, Mr Smith was obliged to keep himself available for work for up to 40 hours a week on assignments was Pimlico might offer him.

In balancing the various factors, the Supreme Court concluded that the tribunal was, by a reasonable margin, entitled to conclude that Pimlico was not a client or customer of Mr Smith.

Where does this leave employment status?

This is not a revolution, but a very significant evolution. As stated in Hall (Inspector of Taxes) v Lorimer back in 1974, when determining employment status, the process involves "paint[ing] a picture from the accumulation of detail". Personal service on the part of the individual, control by the employer, 'mutuality of obligation' between the parties, integration into the business, business dependency and the degree of financial risk borne by the individual and the opportunity to profit have always been key factors, with no single factor being conclusive.

What this judgment does is significantly decrease the importance of the right of substitution. A substitution clause in and of itself does not magically prevent worker status. On the other hand, integration in the business appears to be a factor of increasing importance in the current wave of worker status cases.

Is 'gig economy' the best way to characterise this growing business trend, or is this better described as a 'seamless customer service' business model?

Mr Mullins (the owner of Pimlico Plumbers) criticised Mr Smith for wanting to have his cake and eat it - to take the tax benefits of self-employment but also want the protection of employment law. Setting to one side the general misunderstanding by employers that employment status for tax purposes (with two options: employee or self-employed) equates to employment status for employment law purposes (with three options: employee, worker or self-employed), Pimlico could equally appear to want to have its cake and eat it. Pimlico operates a business model under which operatives are intended to appear to clients of the business as part of the business (and heavily marketed as such), but at the same time the business itself seeks to maintain that, as between itself and its operatives, there is a legal relationship of client or customer and independent contractor, rather than employer and worker.

The Supreme Court has not rewritten the law but it has recognised reality. Brand-based companies who exercise tight control over the people who carry their brand will find it very hard to argue those people are self-employed. This is not a blow to the 'gig economy', but an acknowledgement of how 'seamless customer service' business models actually work in today's economy.

What next?

While Pimlico Plumbers has now exhausted the court appeal process, Uber continues to fight on with its appeal due to be heard by the Court of Appeal on 30 October 2018.

So far in the Uber case, the EAT has upheld the tribunal's decision that drivers engaged by Uber are not self-employed, but instead are 'workers'. To date, Uber's arguments that it was not a transport provider, but merely a technology platform providing an app which self-employed drivers could use have been rejected. As found by the tribunal, the drivers are key to Uber's transport business and indeed marketed as part of the business. The Supreme Court's judgment in Pimlico is unhelpful to Uber in this regard.

But there is a potentially significant unanswered question left by the Supreme Court. In Pimlico, the tribunal found there was an umbrella contract between the parties meaning Mr Smith had a continuing obligation to make himself available for work in between jobs. The Supreme Court accepted this was a legitimate finding in that case. But as it was not challenged on appeal, the Supreme Court declined to determine whether and to what extent 'mutuality of obligation' between assignments was relevant to a person's status during assignments. 'Mutuality of obligation' is a very important factor to establish 'employee' status, but is it required and if so, to what extent, for establishing 'worker' status? As the Supreme Court said there is not an easy answer to this question and it will have to await appraisal on another occasion.

In the Uber case, the EAT upheld the tribunal's finding that the amount of control Uber exercises means any driver who has the app switched on, is within their authorised territory, and is able and willing to accept assignments is working for Working Time and National Minimum Wage purposes. The EAT did however, acknowledge that this was the point that most troubled it. Should the Court of Appeal overturn this aspect of the Uber judgment, perhaps the Uber appeal will be the needed occasion to address this unanswered question?

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