Employment Status: Court of Appeal decision on sham employment contracts

The Court of Appeal has held that a group of 20 car valets employed under terms and conditions that professed them to be self-employed were, in reality, employees.  Although the contracts contained terms inconsistent with status as an employee, the tribunal was entitled to look beyond those and consider whether they reflected the true intentions and expectations of the parties.     

The valets had been recruited through advertisements asking for self-employed people and they signed agreements that described them as 'subcontractors'. The contracts contained clauses allowing them to supply suitably qualified substitutes to carry out the work on their behalf.  The contracts offered no guarantee of work and provided that the valet was under no obligation to provide his or her services on any particular occasion.  The valets lodged claims seeking a declaration that they were workers or employees and claiming unpaid wages and holiday pay.

The employment tribunal found that the substitution and obligation clauses did not reflect the reality of the relationship. It decided that the valets were fully integrated into the business and subject to its control. Consequently, they were employees.  This decision was overturned by the EAT who said that the tribunal had not been entitled to go behind the terms of a written agreement that defined the claimants as self-employed subcontractors.  In the EAT's view, a tribunal could only look behind the express terms of a contract where both parties intend the contract to paint a false picture and be a sham.

The Court of Appeal overturned the EAT's decision and concluded that:

• ·         the practice of requiring car valeters to notify the company if they were not going to turn up for work was capable of being characterised as 'wholly inconsistent' with an express written term that there was no obligation for them to perform any work, such that the written term did not reflect the true agreement between the parties; and

• ·         the Tribunal was "entitled to infer from the evidence recited that the substitution clause did not genuinely reflect the rights and obligations of the valeters", on the basis no real substitution had actually taken place;

• ·         it was not necessary to find that the express written terms were a Snook sham (in other words, that both parties intended to mislead others).

The Court of Appeal has therefore brought the law on sham terms in the employment context into line with the other recent Court of Appeal judgment in Firthglow Ltd (t/a Protectacoat) v Szilagyi which requires a tribunal to consider whether or not the words of the written contract represent the true intentions or expectations of the parties, not only at the inception of the contract but at any later stage where the evidence shows that the parties have expressly or impliedly varied the agreement between them.