The Supreme Court has dismissed an appeal against an Employment Tribunal decision that plumbers engaged by Pimlico Plumbers were workers under the Employment Rights Act 1996 and the Working Time Regulations 1998 and also employees under the extended definition of employment in the Equality Act 2010.  This means that the plumbers acquire various employment rights such as the right to the national minimum wage, paid holiday, rest breaks and pension contributions, as well as whistleblowing and discrimination protections.

Background law

Worker status

The test for whether someone is a "worker" is set out in section 230(3) of the Employment Rights Act 1996 (ERA 1996) (and, for working time purposes, in regulation 2(1) of the Working Time Regulations 1998 (WTR 1998).  "Worker" is defined to include employees but also a wider category of individuals who pass the statutory test.  There are three parts to that test, all of which must be satisfied to achieve worker status:

• There must be a contract.
• The contract must require the individual to perform work personally for another party.  This will usually involve consideration of whether the employee has a right to send a substitute to perform the work in his or her place.  
• The status of the other party (i.e. the putative employer) is not that of a client or customer of any profession or business undertaking operated by the individual.  This is a factual question and involves looking at a range of factors to determine the true nature of the relationship between the company and the individual.  If the relationship is akin to an employment relationship, for example, with the company exerting control over the individual and the individual being integrated into the company's business, then it is more likely that the individual will be a worker.  

Employment status under the Equality Act 2010

Individuals will also be viewed as employees for the purposes of the Equality Act 2010 (EqA 2010) where they are employed under a contract of employment or a "contract personally to do work".  A "contract personally to do work" includes workers.  This is wider definition of employment than that contained in the ERA 1996 (which confers employment rights such as the right not to be unfairly dismissed).

Facts

The Claimant was a plumber engaged by Pimlico Plumbers (PP).  During his engagement, the Claimant worked solely for PP.  After his engagement was terminated, the Claimant brought various Employment Tribunal claims which depended upon him being an employee for the purposes of the ERA 1996.  At a pre-hearing review the Judge held that the Claimant was not an employee under the ERA 1996 definition and, therefore, the related claims could not proceed.

However, the Claimant brought other claims which depended on him being a worker, rather than an employee (i.e. a claim for unpaid holiday and a claim for unlawful deductions from wages).  In addition, he brought disability discrimination claims which depended on him being an employee under the extended definition of employee contained in the EqA 2010.  

In 2012, the Tribunal held that the Claimant was both a worker under both the ERA 1996 and WTR 1998 and an employee under the EqA 2010.  

On the question of personal service, the Tribunal found that the main purpose of the contract was for the Claimant to provide work personally for PP for a minimum number of hours per week.  Although the contract contained a substitution clause, it was not an unfettered right to substitute at will since the Claimant could only substitute other PP plumbers in his place.

On the question of whether PP was a client or customer of the Claimant's business, the Tribunal weighed up a range of factors.  On one hand, PP set rules around the wearing of a uniform and appearance, booking holidays, standards of behaviour and performance and the Claimant was obliged to rent a PP van for work.  Further, PP imposed onerous post-termination restrictive covenants including one which said he could not work as a plumber in London for a period of 3 months post-termination.  On the other hand, the Claimant provided his own tools and bore a significant proportion of the financial risk (e.g. if a customer didn't pay then the Claimant would not get paid and he had to procure his own liability insurance).  Ultimately, however, the Tribunal concluded that PP could not be considered to be a client or customer of the Claimant. 

The Tribunal's decision was upheld by the EAT and the Court of Appeal.  PP appealed to the Supreme Court.

Decision of the Supreme Court 

The Supreme Court unanimously dismissed PP's appeal.

On the question of personal service, the Court agreed with the Tribunal that the Claimant only had a limited right to substitute another PP plumber in his place, albeit that this right was not limited to days when he was unable to work.  That being the case, it was helpful to assess the significance of that substitution right by reference to whether the dominant feature of the contract was personal performance.  In the Court's view, the way that the contract was drafted clearly showed that the requirements were addressed to the Claimant personally.  The notion that they also applied to a substitute "stretches their natural meaning beyond breaking-point".  The highly limited nature of the substitution right was also pertinent.  This was: "the converse of a situation in which the other party is uninterested in the identity of the substitute, provided only that the work gets done." 

In considering the question of whether PP was a client or customer of the Claimant, the Court noted that two key considerations were whether the Claimant: (i) had been recruited to work as an integral part of PP's operations; and (ii) was in a relationship of subordination with PP.  There was competing evidence.  On one hand the Claimant was free to turn down particular assignments and take private work provided it did not originate from PP's clients.  He also bore a high degree of financial risk.  On the other hand, PP exerted "tight control" over the Claimant, reflected in the requirements to wear a uniform, drive a branded van, carry a PP identity card and follow the administrative instructions of the PP control room.  Importantly, the terms as to when and how PP was obliged to pay the Claimant: "betrayed a grip on his economy inconsistent with his being a truly independent contractor".  Added to which, the contract contained terms such as "wages", "gross misconduct" and "dismissal" and also contained a suite of post-termination restrictions.  The Court held that the Tribunal had, by a reasonable margin, been entitled to conclude that PP was not a client or customer of the Claimant.

What does this decision mean for employers?

This decision is relevant to all employers who engage independent contractors.  It would be wise to take steps to review such relationships to ensure that the contractual documentation and labels used accurately reflect the reality of the relationship on the ground. 

There are two key questions to consider: 

1. Does the contract impose an obligation on the individual to work personally?

If the contract contains an unlimited substitution clause then this should defeat the notion of personal service, assuming it is a genuine term.  However, if it is a "sham" clause i.e. a clause which misrepresents how things work in practice, then the Courts will disregard it.  Therefore, if you wish to use an unlimited substitution clause as a means of defeating personal service, then you have to be comfortable with the possibility that it may be used in practice.  

If the contract contains a limited substitution clause then this may not be enough to defeat personal service.  As in this case, the Court will consider whether the dominant feature of the contract was personal service.  This will involve an assessment of how the obligations under the contract are framed (i.e. do they apply to the individual only or do they extend to a substitute?) and the extent of the limitation of the substitution right.  The more limited the right, the higher the chance that personal service will be a dominant feature of the contract.

2. Are you a client or customer of the individual's profession or business? 

This will involve a factual assessment of how the relationship operates on the ground.  There are various factors to think about here:

• What degree of control do you exert over the individual?  Do you control when, where and how the work is performed? Do you set standards of behaviour and punish for breaches? Do you control when and how the individual is paid?
• Does the individual market to the world at large? Are they actively marketing their services to other clients or customers? Do they work for other people or have they been recruited by you to work within your business? 
• Is the individual integrated into your business? Does the individual wear a uniform?  Do they attend company social events?  Do they have a permanent desk? Do they have a business card and a company email address?    
• Other factors? Other factors may be relevant, in particular the degree of financial risk assumed by the individual: the higher degree of risk assumed, the more likely they are to be in business on their own account.  Another factor is whether the individual is engaged on a per assignment basis or whether there is a continuous "umbrella" contract: worker status is more likely where there is an umbrella contract.  

If you carry out this assessment and reach the conclusion that your contractor is a worker then you should seek legal advice on the best solution.  You may decide to adjust the way in which your contractor is engaged to avoid worker status.  Alternatively, you may be prepared to accept that they have worker status and, if so, you should ensure that you comply with relevant laws such as working time, national minimum wage, pensions auto-enrolment and whistleblowing legislation. 

Pimlico Plumbers Ltd and anor v Smith