Employment Update March 2009: Employee status

23 March 2009

Employment Group

Court of Appeal revisits ‘sham’ contracts: how important is the intention of the parties?

The Court of Appeal in Protectacoat Firthglow v Szilagyi has looked again at the question of when contract documentation should be regarded as a 'sham'.

The last time the Court of Appeal considered this issue was only recently in the case of Consistent Group v Kalwak, where the tribunal and the EAT thought the contract documents which were provided to Polish immigrant workers were a 'sham'. The Court of Appeal allowed the employer's appeal and said that the case had to be remitted because it was not enough to say that the documents were a 'sham'. The tribunal had to consider what both parties' intentions were when they signed the documents.
Now, in this case, the claimant, Szilagyi had signed documents saying that he and other individuals were working in partnership together as independent contractors for the employer. The EAT decided that the documents were a 'sham' and declared that the claimant had employee status. The Court of Appeal has now dismissed the employer's appeal and clarified its position by saying that, although a court must always look at what the parties intended when they entered into a contract, judges must also be realistic when they consider the circumstances in which the contract was made, and how it worked in practice. In this case, the so-called ‘partners’ had no common assets and not even a joint bank account. They were paid directly into their individual bank accounts. In all the circumstances, they had to be treated as employees.

Points to note –

  • The Court of Appeal is taking this opportunity to say that it really agrees with the EAT approach to 'sham' contracts - it's just that tribunals must explain WHY they consider any particular contract to be a 'sham'. If the reality is that no-one seriously expects the worker in question to seek to have the right to provide a substitute or refuse work when offered (two of the key indicators of an individual being self-employed), then a written contract that provides for these unrealistic possibilities may not alter the true nature of the relationship and the worker may be an employee.

  • It follows that contract documentation will be put under severe scrutiny and, particularly where the claimant says he would have signed anything to get the work, it may be difficult to avoid such an individual having employee status. As there are significant legal consequences for an employer if a worker is an employee rather than a self-employed contractor, expert advice should be obtained on this issue.