Piercing the free market veil - Autoclenz Ltd v Belcher & Or

Date online: 27/09/2011

At the heart of the judicial interpretation of a contract of employment lies an uneasy tension. Common law dictates that the contract is one which each side enters freely and should be bound by its literal terms accordingly. Common sense recognises that bargaining power is rarely equal between employee and employer. When weighing these competing considerations in Autoclenz Ltd v Belcher the Supreme Court championed the latter.

The 20 claimants were car valeters who pursued a claim for accrued annual leave and payment under the Working Time Regulations 1998 and the National Minimum Wage Regulations 1999. A prerequisite for any such claim is that the claimants were either employees or workers as defined in reg.2(1) of both sets of regulations. Neither was admitted by the respondent.

On the clear wording of the contract, they were "sub-contractors" rather than employees, solely responsible for payment of tax and national insurance. There was no commitment to provide work. In addition, the contract contained a substitution clause. In a 2004 investigation the Inland Revenue concluded, albeit tentatively, that the valeters were self-employed.

In practice, however, things were a little more complex. There was a relatively low turnover of personnel among the valeters. There was a detailed specification as to how valeting would take place. Autoclenz provided all equipment and materials. The substitution clause was rarely invoked.

The employment tribunal by way of preliminary issue concluded that not only were the claimants workers but that they were employees as well. The EAT held that whilst they were not employees they were workers and thus entitled to pursue the claim. The Court of Appeal, in deciding that both definitions were satisfied, restored the judgment of the tribunal in full. On an appeal from Autoclenz, the Supreme Court endorsed the first instance decision and that of the Court of Appeal.

Lord Clarke, giving the leading judgment, considered the extensive authorities on "sham" contracts at length. His Lordship went on to say that whilst misrepresentation which both parties have sought to create (e.g. for tax or national insurance purposes) may be an instance in which the courts may depart from the express written terms of the contract it is not the only one. In so doing, Lord Clarke adopted the approach of the EAT in Consistent Group Ltd v Kalwak (2007) IRLR 560 in which Elias J, President of the EAT at the time, forewarned that:

"armies of lawyers will simply place substitution clauses, or clauses denying any obligation to accept or provide work in employment contracts, as a matter of form, even where such terms do not begin to reflect the real relationship ... [therefore] tribunals should take a sensible and robust view of these matters in order to prevent form undermining substance."

As Lord Clarke expressly conceded, it follows that the Court of Appeal decision in Kalwak (which had overruled Elias J's decision in the EAT) is no longer good law: "The question in every case is ... what was the true agreement between the parties." Whilst the wording of any contractual documents is powerful evidence of the parties' true intentions, it is the latter which must be ascertained. This will often require an analysis of the factual matrix which would not ordinarily be required in the construction of an arms' length commercial contract:

At para.35, Lord Clarke said:

"The relative bargaining power of the parties must be taken into account in deciding whether the terms of any written agreement in truth represent what was agreed and the true agreement will often have to be gleaned from all the circumstances of the case, of which the written agreement is only a part. This may be described as a purposive approach to the problem. If so, I am content with that description."

The recognition by the Supreme Court of potential inequalities in bargaining power - together with the fact that it is the employer who is typically responsible for drafting the contract in the first place - is to be welcomed.

However, an inconsistency arises. Following Autoclenz, a more interventionist approach is to be expected in the construction of written contracts: an employer cannot avoid employment status by drafting alone. Yet the judicial approach to agency workers exemplified by James v Greenwich London Borough Council (2008) IRLR 302 CA remains good law as a result of which agency workers will not be deemed employees unless it would be "necessary" to construe the relationship accordingly. It is clearly the case that many employees choose the nature of the contractual relationships they enter and advantages may arise from atypical arrangements. It is equally the case, however, that some employers make use of tripartite agency structures in order to avoid employment status being conferred. Having clarified its stance on evasion of employment status by drafting in Autoclenz, it is hoped that the Supreme Court will reassess evasion by way of structural arrangements. Watch this space....

If you are worried how this may impact on you or your business or need to discuss any other employment issue, then please do not hesitate to contact our Employment team here at Molesworths Solicitors on 01706 356666

Media Contact:Kelvin Eatherington.Marketing & Business Development Manager.

Tel: 01706 767407. email: kelvin@molesworths.co.uk


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