Employment: Illegal contracts

29 August 2007

Time spent working as a self-employed consultant may not be treated as time worked under an illegal contract when the worker is later found to be an employee and so not prevent the worker from claiming unfair dismissal on termination.

The EAT has recently considered the status of workers who are treated as self-employed but who are later deemed to be employees by an Employment Tribunal.

Does this mean that the contracts under which they worked as self-employed consultants were illegal so that they cannot count towards the one-year period of ‘continuous employment’ that is required before an employee has the right to bring an unfair dismissal claim?

In Grace v BF Components and Enfield Technical Services v Payne the EAT has decided that such a contract is not necessarily illegal and so the worker, having been ‘rebranded’ as an employee by the Tribunal, may also have the right to bring an unfair dismissal claim.

In the case of Payne, this was so even though the Inland Revenue had approved the worker’s status as being self-employed. Indeed, the fact that the employer and the employee had been open about the arrangement with the Inland Revenue was one of the factors that decided the Tribunal that the contract, even though mistaken, could not be illegal.

In the case of Grace, the parties had known that the worker was not really self-employed and should be treated as an employee but he had only been ‘put on the books’ as an employee four months before his dismissal. Nevertheless, the EAT considered that, as he had not sought to misrepresent the facts of the relationship to the Inland Revenue, his contract could not be said to be illegal and so his earlier employment could be taken into account to give him the necessary one year period of qualifying service to enable him to make a claim.

Points to note:

  • Given the significant differences in legal rights available to employees as opposed to self-employed workers, it is important for employers to appreciate that the fact that the Inland Revenue has sanctioned a worker as being self-employed will not necessarily prevent an Employment Tribunal from reaching a different conclusion.

  • Tribunals will only consider employment contracts as being illegal (and therefore not able to provide the basis upon which an employee can claim certain statutory rights – notably the right not to be unfairly dismissed) if there is some form of misrepresentation or concealment i.e. the arrangement can be shown to be a sham.