CONTRACT FOR SERVICE AND CONTRACT OF SERVICE:THE TESTS

What is a contract of employment?

The key question in determining whether or not a person is an employee is the following - what is a contract of employment?

The term "contract of employment" has not been comprehensively defined either in legislation or case law. Over the years, the courts have adopted various tests in order to determine whether or not a certain relationship amounts to a relationship of employment. The modern approach adopted by the courts is to consider all the factors relevant to the issue of employment and to weigh up those factors that point towards the existence of a contract of employment and those that point away from such a contract. 

The presence or absence of any one factor is not conclusive, as the decision depends on the combined effect of all the relevant information. The factors given should not be treated as a checklist to identify those factors that appear to point one way and those which point the other, from which a result can be calculated It is the overall effect of the relationship between the parties involved that will lead a court to decide whether or not a person is employed.

You should be aware that a "contract of employment" is also known as a "contract of service". However, a contract for services is a contract whereby a person is merely under an obligation to perform some work or service for another person, without an employment relationship being created between the two. People working under a "contract for services" are usually contractors or self-employed.

When examining the factors relevant to whether there is a contract of employment, you should be concerned not only with the written terms (if a written contract exists) but also with the practical circumstances of the relationship between the parties. This is because the terms of the contract can be express (e.g. written or orally agreed) or implied (e.g. from actual practice).

Relevant factors in relation to contract of employment

The degree of control exercised over the worker

The relationship of employment was traditionally known as the "master and servant" relationship. This implies a right for the employer to give the orders and the employee to carry them out. An employee is therefore subject to a significantly greater degree of control than an independent contractor/self-employed person.

The following question is therefore important: who is entitled to give the orders as to how the work should be done?  The greater the amount of control exercised over the details of the work to be done, the more likely the relationship is to be one of employment 

Generally, a self-employed person is told what to do, but not how to do it. In one case it was considered important that the `employer determined "the thing to be done, the way in which it is done, the means to be employed in doing it, the time when and the place

Even so, it should be noted that the question of control will carry less weight in relation to professional and skilled employees as such employees often have the discretion to decide how their work should be done.

Whether the worker can properly be regarded as part of the employer's organisation

An employee is normally part and parcel of the employer's organisation and does their work as an integral part of the business whereas an independent contractor is not usually integrated into the organization but is accessory to it. A question to consider is whether the worker is performing services as a person in business on their own account

Also relevant is:

·         whether the person performing the services provide their own equipment;

·         whether they hire their own helpers;

·         what degree of financial risk they take;

·         what degree of responsibility for investment and management they have;

·         whether they have an opportunity of profiting from the management of the task.

·         The question of whether or not a person is in business on their own account is particularly important when you are considering the status of professional and skilled employees.

·         Whether the `employer' has the power to select and appoint the individuals doing the work?

The fact that the `employer' has the power to select and appoint the individuals to do the work is an indication of a contract of employment.

·         Whether the `employer' has the power to dismiss or suspend the worker

The power of dismissal or suspension indicates a relationship of employment. If the `employer' can dispense with the worker's services by giving a certain period of notice, this points to a contract of employment as an independent contractor cannot be "dismissed

·         Whether wages/salary/holiday pay are paid

The way in which a worker is paid is a useful indication of whether that person is employed. Normally an employee is paid a regular, fixed sum although this is not always the case (e.g. where commission is payable). Where a person receives holiday pay and sick pay, it can indicate the likelihood of an employment relationship. On the other hand, payment by the job i.e. in relation to a complete task, may point away from employment, depending on the other factors / tests.

·         Supplier of equipment

If one party to the contract in question supplies the tools, machines or equipment used by the other party, this points to a contract of employment. contractors or self-employed people normally provide such equipment for themselves. 

·         The person who fixes the times and place of work

The power to fix hours and/or times when is a person is to work is suggestive of a contract of employment.  The power to direct where the person is to work can also indicate a contract of employment. 

·         Whether personal service is provided

A person will not normally be an employee if they are entitled to delegate the entire performance of the work to another person.

·         The extent of the obligation to work and mutual obligations

If the contract entitles a person to the full-time services of another, this indicates a contract of employment.  However, if it is left entirely to one party to the contract to choose whether or not to do any work, it is unlikely to be a contract of employment. 

The courts have said that it is possible to have a continuing (`global') contract of employment linking up intermittent periods of employment. This will only apply where there is a degree of continuing mutual obligation on the employer to offer employment and on the employee to accept it. 

The court found such a situation where there was regular course of dealing for years between the parties under which the `employer' supplied work daily to homeworkers, and collected and paid for finished work

The length of the relationship (three years) and the continuity and regularity of the dealings between the parties were important factors in reaching this decision. These principles are particularly relevant in considering whether casual workers are employees (see below).

Payment of income tax and National Insurance contributions

Where the `employer' deducts income tax and social security contributions under the PAYE system, this indicates that the parties themselves view their relationship as one of employment. As with all the factors, this (or the failure to deduct) is not conclusive as to the true nature of the relationship.

An arrangement to pay income tax and social security contributions outside the PAYE system does not, in itself, indicate that the payee is self-employed.

The intention of the parties

The intention of the parties as to the contract that they intend to create is a relevant factor to consider but, as with all other factors, is not conclusive as to the true nature of the contract. 

Safety at Work:

Lane v Shire Roofing Company Oxford Ltd [1995] IRLR 493

A good example of a case relating to health and safety at work is Lane v Shire Roofing Company Oxford Ltd. Mr. Lane was a builder/roofer/carpenter who traded as a one-man firm. He was categorized as self-employed for tax purposes. He initially was contracted directly by clients but this work dried up and he usually worked for other contractors.

Shire Roofing was a new company who hired Mr Lane at a daily rate in relation to a specific roofing job. The new company did not want to take on many long-term employees and therefore mostly hired men for individual jobs. When the roofing work was nearly complete Mr Lane was asked to re-roof a porch at a private house.

Shire Roofing agreed a price of £389 with the householders and then agreed an all-in-fee of £200 with Mr. Lane following a site visit where plant and equipment were discussed. The hire of scaffolding would have made the job unprofitable and Mr Lane was offered a trestle-type platform or tower scaffold to work from. Mr Lane refused, stating that he preferred to work from his own ladder.

Whilst carrying out the work Mr Lane fell from the ladder and sustained serious brain damage. He claimed damages from Shire Roofing on the basis that they failed to comply with their duty of care as his employer.

The key question for the Court of Appeal was whether Mr Lane was an employee of Shire Roofing or whether he was self-employed/an independent contractor. The Court noted that there are perceived advantages for workers and employers in the relationship between them not being one of employment (for the worker tax advantages; for the employer the avoidance of legal duties to employees).

There were therefore good policy reasons in the field of safety at work to ensure that the law properly categorises between employees and independent contractors.

The Court recognised that there are many factors to take into account depending on the facts of each case. The Court identified a number of questions/principles, relevant to this particular case that could be used to determine whether a person was an employee or an independent contractor. These were:

Who had control?

The element of control: who lays down what is to be done, the way in which it is to be done, the means by which it is done and the time when it is done? Who provides (i.e. hires and fires) the team by which it is done, and who provides the material, plant and machinery and tools used?

Whose business was it?

The control test may not be decisive particularly in the case of skilled employees who have the discretion to decide how their work should be done. In such cases the question is broadened to whose business was it? Was the workman carrying on his own business, or was he carrying on that of his employers? This will also involve similar factors to the control test (e.g. who provides the equipment) but may include looking to see where the financial risk lies, and whether and how far the worker has an opportunity of profiting from sound management in the performance of the task;

Who had overall responsibility for safety?

The above questions must be considered in the context of who is responsible for the overall safety of the men doing the work in question.

On this basis the Court of Appeal decided the Mr Lane was an employee of Shire Roofing. The court considered that although the degree of control by the company would depend on the need to supervise and direct Mr Lane, it was quite clear that the job at the house was the business of the company and not Mr Lane's. The Court felt that the factual situation was much closer to the situation where an employer engages men simply to do labouring work than where a specialist sub-contractor is employed to perform some part of a general building contract.

It can be seen from this decision that where a court is considering the issue of whether or not a person is an employee in the context of health and safety at work, they may take a wide view of what constitutes employment. As stated in the Lane v Shire Roofing judgment, "When it comes to the question of safety at work, there is a real public interest in recognising the employer/employee relationship when it exists, because of the responsibilities that the common law and statutes place on the employer".

 Are you a Contractor, or actually an Employee?

Are you a Contractor, or actually an Employee?

When identifying the issues to answer the question it is necessary to determine the correct common law test

Control Test

Under the control test, one is an employee, if that person is subject to the employer's commands, e.g. the employer can designate the actual work, hours, place of work, and how an employee is to perform the work.

While actual control is important, the right to control is critical for professional work. Professionals may exercise their own judgment and discretion on how to perform their tasks. However, if the authority to command remains in incidental or peripheral matters, (such as hours of duty) then one is an employee.

“The real question is one of the degrees of control exercised by the person employing…and this means not only the amount of control but the nature of that control and the direction in which it is exercised”.

Latham CJ stated that the distinction between employee and contractor “is…that in the case of a servant an employee has power, not only to direct what work the servant is to do, but also to direct the manner in which the work is done”

In the case of someone possessing a special skill and expertise, it may be difficult to determine actual control. The case of Zuijs v Wirth Brothers Pty Ltd established that a mere right to control rather than the actual exercise of control could lead to the existence of a contract of employment.

In Stevens' case, although there was a great deal of control exercised over the worker Mason J emphasised that “it is the totality of the relationship between the parties that must be considered”. It is necessary to examine all the terms of the contract to determine if it is a contract for services or a contract of services.

Although in the case of Vabu Pty Ltd v Commissioner of Taxation the court held that, the drivers were contractors primarily because they were required to supply and maintain their own vehicles and the company paid them by the job and not the hour, despite that, the control was considerable, regarding the hours they had to work, company uniform etc. Organisation or Integration Test

Determining whether a person is part of or integrated into the operation of the business for which they are working helps the courts determine whether the authority to command exists. Independent workers can demonstrate that they are really in business for themselves.

Risk Test/business test

The more commercial risk borne by contractors, the more likely they are in business for themselves. This can be measured by looking at the ownership of assets, the method of payment, the responsibility and liability for any injury or defect arising from the work, and so on.

Delegation Test/substitution test

Contractors who are prevented from delegating their work to others (e.g. to sub-contractors) are much more likely to be employees.

Contracts for Tasks versus Contracts for Labour

Businesses complete a specified task e.g., a task won through a tender process, whilst employees are more likely to be engaged on an ongoing basis (even if fixed term) where a variety of tasks is to be completed. Where the contract is only for skilled labour this is an indicator of employment. Contractors would regularly be considered employees if they are only selling their labour, are undertaking only one contract and it is long term and not for a specified task.

In determining whether you are an employee or in business for yourself, the courts consider the totality of the relationship between the parties. This involves the terms of the written contract, but as only one of the criteria.

“The parties cannot create something which has every feature of a rooster but call it a duck and insist that everybody else recognize it as a duck”

Lord Denning MR stated, “…if the true relationship of the parties is that of master and servant under a contract of service, the parties cannot alter the truth of that relationship by putting a different label upon it...”,

Although in the case, the true intention of the agreement was to establish Massey as being self-employed.

Ferguson v John Dawson and Partners (Contractors) Ltd, Megaw and Browne LJJ held that, despite the fact that both parties labelled Ferguson a “…self-employed labour only subcontractor…'', the reality of the relationship between them was that of employer and employee.

In the J Walter Thompson case, the court held that actors in a radio play were employees of the radio station even though they had other employment during the week and were not paid an hourly rate, as they were required to attend rehearsals for which they were not paid, and received payment for the performances that they did. In Morgan’s Case the court noted that a doctrine of joint employment, or of joint employers. In Stevenson Jordan & Harrison Ltd v Macdonald and Evans, Denning LJ stated, “…under a contract of service, a man is employed as part of the business, and his work is done as an integral part of the business; whereas under a contract for services his work, although done for the business is not integrated into it, but is only accessory to it…”.

In PRS v. Palais de Danse the Court held that band members engaged to perform, were employees of the occupier of the dance hall as the agreement “the right of continuous, dominant, and detailed control on every point, including the nature of the music to be played.”

Indicative Criteria	Employee	Contractor
Does one have the right to control the work & the way it is done	No	Yes
Is the worker ‘integrated’ into the organization	Yes	No
Must the worker supply or maintain tools or equipment	No	Yes
Is the worker paid on task completion instead of wages for time worked	Wages	Tasks completed
Does the worker risk loss, or making a profit	No	Yes
Can the worker work for others at the same time	No	Yes
Can the worker subcontract or delegate performance to others	No	Yes
Is taxation deducted from the worker’s pay	Yes	No/yes
Is the worker responsible to insure for work-related injury	No	Yes
Does the worker receive paid holidays or sick leave	Yes	No

Conclusion

“A court determining a particular relationship…of employment or … other kind can resort to the process of balancing all these factors. Although the parties are free to choose the nature of the contract, which they make, their own characterisation of that contract is not conclusive. A court will always look at all of the terms of the contract to determine its true essence and will not be bound by the expressed choice of the parties as to the label to be attached to it.”