Contract of service counts when it all goes wrong

With the boundary between employment and self-employment becoming increasingly blurred, consultant editor Darren Newman asks why the fundamental right to claim unfair dismissal continues to depend on the existence of a contract of employment.

The Court of Appeal decision in Enfield Technical Services Ltd v Payne; BF Components Ltd v Grace [2008] EWCA Civ 393 concerned the circumstances in which an employee can be prevented from claiming unfair dismissal rights because his or her contract is tainted with illegality. The Court had to consider two cases in which the employees concerned had been treated as self-employed for tax purposes, with the result that the Inland Revenue (now HM Revenue & Customs) was denied the full tax and national insurance payments due to it.

The principle that "no court will lend its aid to a man who founds his course of action upon an illegal or immoral act" was set out by Lord Mansfield in Holman v Johnson back in 1775, so is well established. However, Holman was a sale of goods case involving tea smuggled from France , and Lord Mansfield would no doubt be surprised to see his maxim being applied more than 230 years later in deciding the statutory rights applicable to employees. Nevertheless, the courts and tribunals have consistently held that rights such as unfair dismissal rely on the existence of a lawful contract of employment.

In Enfield , the Court of Appeal took a pragmatic view of the principle by holding that merely misdescribing the nature of the contract, rather than misrepresenting any of the facts surrounding it, does not taint the contract with illegality. The Court rightly pointed out that placing the correct label on an employment relationship is a nuanced exercise and many relationships could easily be described as being either one of employment or one of self-employment.

Some may see Enfield as being unfair on employers, as the employee in each case was allowed both to have his cake and to eat it. While receiving the tax advantages of self-employment, each was subsequently able to benefit from statutory rights available only to employees. However, I have no problem with this. In the modern employment context, the distinction between a contract for services (self-employed) and a contract of service (employed) seems to me to be increasingly arbitrary. Why should a right as fundamental as unfair dismissal rely on such narrow distinctions? Neither Mr Payne nor Mr Grace was operating his own business - each was performing work for an employer and was dependent on that employer to make a living. What strikes me as unfair is that an employer in such circumstances could draft a contract in such a way that unfair dismissal law would not apply. While both claimants ultimately succeeded in establishing that they were employees, different tribunals could easily have come to a different conclusion. The boundary between being an employee and being self-employed is a blurred one.

That brings me to another case recently reported on XpertHR. In Consistent Group Ltd v Kalwak and others [2008] EWCA Civ 430, the Court of Appeal allowed an appeal brought by an employment agency against a tribunal finding that it was the employer of agency workers brought over from Poland to work in a food processing factory in the UK . The Court of Appeal held that the tribunal had not given adequate reasons for its decision. This is, in itself, unremarkable, but Lord Justice Rimer, giving the leading judgment, took a very technical view of the contractual documentation. The contracts that the workers signed described them as "self-employed sub-contractors", but both the tribunal and the EAT were easily persuaded that this label did not reflect the reality of their position. However, Rimer LJ was unsympathetic to this approach, and held that the documents could be described as a "sham" only if both sides intended to paint a false picture of their obligations.

Cases such as these illustrate for me the need to rethink the circumstances in which statutory employment rights arise. Our law at the moment is simply too technical, with employers able to hide behind contractual formulations that do not reflect the reality of the relationship. The government has regulation-making powers that could extend unfair dismissal law to workers, sub-contractors, agency workers and all others who common sense tells us depend on their relationship with an employer to make a living. We often hear complaints that employment law is too complicated - this is one way in which it could be greatly simplified.