Employer of a Court Ruling that a Clause or a Contract Is a Sham - Essay Example

Sham employment Contracts Number Department Introduction Employers have developed a tendency to sneak unfair clauses in employment contracts in order to escape various obligations that arise in typical employment scenarios. Specifically, the self-preservation clauses in such contracts may be introduced to blur the mutuality of obligations and personal service. Generally, a clause that clearly denies any or two of the conditions required in a typical employment contract would, as a matter of principle, cushion the employer from costly but legitimate employee rights such as claims for unfair termination of the contract and or the benefits that come under such engagement. Sham employment Contracts In most cases, sham employment contracts are the result of denial of mutuality by a provision indicating that the organization or employer does not offer any specific tasks and the alleged employee does not assume to do it (Cabrelli, 2014). Similarly, denial of personal service by introducing a contractual clause indicating that the individual employee can substitute his or her absence by sending someone else to undertake the work is another unfair act by the employer. Contractor agreements normally contain such clauses and their existence suggests that the person does not meet the description of “worker” in common law as there is no requirement to execute out the tasks “personally”. Regardless, if neither the person nor the organization ever contemplated the future obligation to bring a substitute in the ‘worker’s’ absence regardless of the lack of common intent to lie to any third party, courts would determine the working arrangement as “sham” (Painter, & Holmes, 2012). In most cases, the ensuing situation technically changes the position of the person from expressly-stated “contractor” to a practical “worker” by virtue of his or her subsequent behaviour. As Cabrelli (2014) noted, when the seemingly harsh and unreasonable outcomes on the “worker” have been delineated, courts have demonstrated their willingness to enforce the contract as it would be employment contract. Regardless, various court interventions have raised serious problems since the known connotation of a sham remains somehow vague in commercial law. This is especially true in situations where both parties to an employment pact are guilty of misrepresentation to deceive third parties, where it is held that such action does not constitute a sham. The clearest proof of confusion in the common sense understanding of a sham provision is that it has never been consensually enforced (Davies, 2009). The controversy normally stems from the fact that such clause does raise issues in its implementations considering that in the law of contract the consequent actions of the employer and employee should not influence the definition of what was offered to and accepted by each party at the time of the initial engagement. A sham partnership Due to the existence of serious issues surrounding sham employment contracts, the recent case of Protectacoat Firthglow Ltd v Szilagyi [2009] IRLR 365 saw the English Appellate Court order the implementation of the contract in question as an employment one despite the existence of clearly explicit terms suggesting otherwise (Sam, 2012). In this case, the plaintiff was dismissed for declining a job offer in a hazardous environment prompting him to seek unfair dismissal claims from the former employer under section the Employment Rights Act 1996, section 111 and as an employee under section 230 of the same legislation (Sam, 2012). In response, the director of the organization, Mr Squires, argued that the plaintiff had no legal rights to be granted unfair dismissal claims because he was a free contractor. Squires tabled an agreement signed by plaintiff Szilagyi as evidence suggesting that his work was akin to an independent contractor and that the working arrangement between himself and the organization was a partnership rather than an employment. As Davies (2009) said, the Court of Appeal (CA) followed its tradition of upholding verdicts of Employment Tribunals in its determination that a formal contract suggesting the existence of a partnership, which Protectacoat was relying upon constituted a sham. The court noted that the primary intention of the employer was to circumvent the otherwise important employment protections for the employee. The court further established that, in practice, there was no partnership between the two parties and that an examination of Szilagyi’s job designations showed that he was basically an employee (Sam, 2012). It was established that under the working arrangement, the employer exercised a high degree of control such as requiring the claimant to report to work each morning and earning a net monthly salary while the employer covered his traveling costs and tools of work. In light of these behaviours, the CA decided that the relationship between the two parties was technically an employment contract even though the paper work attempted to suggest otherwise, hence making the whole arrangement as sham (Bogg, 2012). A self-employment sham Apart from the sham partnership by the employer in Protectacoat, Autoclenz Ltd v Belcher [2011] UKSC 41 is another important English labour law case determined by the Supreme Court concerning the parameters of statutory safeguards for the employment rights of working individuals (Bogg, 2012). The case reaffirmed the verdict taken by the Court of Appeal holding that the existing bargaining power of the employer over the employee may be considered when deciding the details of a contract of employment or partnership. In Autoclenz, the Court noted that regardless of an explicit clause in the agreements suggesting several car valets were under self-employment, they were actually valid employees of the organization. The court argued that Autoclenz Ltd was the valet company that had benefitted from the services rendered by the alleged self-employed contractors (Cabrelli, 2014). According to Bogg (2012), the Supreme Courts verdict was based on the precedent set in Protectacoat and was extended to provide clear direction in circumstances where an Employment Tribunal has to determine the working relationship between employers and employees. As demonstrated in Autoclenz, the Employment Tribunal have since found reason to dig deeper than the clear terms of an agreement if there is evidence to show that these do not mirror the exact nature of the duties of each party under the contract (Sam, 2012). This implies that the contract is just one of numerous issues to be examined by courts in arriving at the actual nature of the behaviour of the parties whenever there is a dispute. In a similar case, Consistent Group Ltd v Kalwak [2008] IRLR 505 saw the plaintiffs having formalized contracts whose express terms suggested that the behaviour of both sides would be handled between the employer and the sub-contracts headed by self-employed individuals. But before an appeal on Kalwak was determined, the EAT gave a ruling on the same issue, which was consistent with the decision in Consistent Group Ltd v Kalwak [2007] IRLR 560, when it held that the Tribunal had the duty to establish the lack of a ‘realistic possibility’ suggesting that the plaintiffs could decline work or to turn to another party given their reliance on the economic might of the respondent. The Tribunal established that where clear contractual terms envisaged unreasonable likelihoods the behaviour of both parties under the contract would remain the same (McClelland, 2012). By contrast, the Court of Appeal punched holes on the tribunal’s approach and said that it was impractical for the employer and the employee to suggest such terms under the contact between the parties and therefore, such terms would contradict the express provisions contained in the formal document signed by the parties. In line with the verdict in Snook v London and West Riding Investment Ltd [1967] 2 QB 786 (CA), the Court said that in establishing evidence of ‘sham’ both sides in the contract should have had the intent to depict an inaccurate picture in respect of the actual contractual obligations (Cabrelli, 2014). In reality, however, the court’s observation is farfetched considering that chances of the employer colluding with the employee in order to deny the latter his or her legitimate employment rights or avoid tax obligations have grown slimmer over the last three decades due to tougher laws and greater enlightenment of workers. Workers An employer’s attempt to alter the behaviour of an employee to reflect that of a worker along the implementation of a contract of employment can be deemed as sham. In Redrow Homes (Yorkshire) Ltd v Buckborough & Anor [2008] UKEAT, the Court of Appeal made a determination that Redrow bricklayers had the right to be receive holiday pay because they were not self-employed as the employer had alleged. According to the Court, the plaintiffs were workers judging by their behaviour and level of control by the employer. The case was phenomenal in the sense that Redrow sneaked in new terms of contracts requiring the men to undertake the work themselves but put in just enough effort to keep an average speed of the work progress. According to Bogg (2012), the court established that new arrangement constituted a sham because the employer was attempting to cart away the fundamental rights of the employees. As such, irrespective of the new lesser duties, the behaviour of the men was considered as still regulated by the original contractual terms allowing them holiday claims. Defenceless employers Employers often remain defenceless against claims of sham contracts by their current or former workers because some of them misrepresent contractual terms in order to exploit their employees (Bogg, 2012). Others attempt to evade claims which may be filed against them for breaching the very contract defining their relationship with their employees. However, most of the parties who employers refer to as their partners or subcontractors have no previous knowledge managing their own business and they are or have been taken through supervised training, constant reporting to work and must have been or are working based on the instructions of the “employer” or their agents. The resulting proximity renders employers vulnerable to any such claims. In addition, most ‘contractors’ issue their perceived subcontractors with most or all of the tools needed for the execution of his or her tasks including an office room, means of transport, working machines and protective gear (Bogg, 2012). Some companies require their alleged subcontractors to put on a company official garb bearing the name and the logo and do pay them on a regular basis, either hourly or monthly but not upon completion of the tasks as it happens with casuals. As McClelland (2012) suggested, most of employers cannot escape court’s assessment of the degree of control that organizations have over their claimed subcontractors or partners. A court’s evaluation of all or most of these factors give most employers away, even if the engagement contract referred to the subjects as a “partner” or gave them the leeway under substitution rules. The Implications Attempts by employers to enforce sham contractual terms have resulted in the imposing of serious penalties against the employer-parties that are found to be at fault depending on their breach of the employment contract law (McClelland, 2012). Unfortunately for organizations and some directors in their personal capacity, such breaches can yield serious implications, especially where the status of employees’ jobs are challenged. If the behaviour of a worker, ‘partner’ or a consultant is in line with the conditions defining an employee, the organization in question will be under the obligation to provide for the rights of the employee including sick pay, and time off for union events, paid paternity or maternity leave or redundancy (Cabrelli, 2014). In light of the duration of these nonattendances at the workplace, organizations can eventually pay quite hefty and unexpected penalties, especially if the employer thought their business partner was self-employed (McClelland, 2012). In addition, employers may have no option but to seek temporary workers to stand in for their legitimate employees’ absences; these arrangements are often costly, especially if courts so ordered. As Painter and Holmes (2012) noted, courts are often obliged to reaffirm the condition of ‘partners’ or ‘subcontractors’ as legitimate employees if their behaviour so suggests, and order adequate compensation for a breach of the rights. For instance, an employer’s failure to acknowledge that a subcontractor is really an employee can lead courts to impose unfair dismissal claims if the employer dismissed such individual as a casual worker. In the United Kingdom, a combination of all reliefs for victims of such contractual misrepresentation and subsequent discrimination could amount to almost £100,000. Prayers for enforcement of redundancy obligations could force employers to pay up to up to £13,920 in compensation for damages caused to the employee. Interestingly, these reliefs are a reserve for valid company employees; workers or individuals whose terms of service point to self-employment exempted from these benefits. Settling of taxes arising from employment contracts could also prompt courts to enforce the employee and government rights. In most cases, employers have a duty to remit pay as you earn (PAYE) for their staffs, but obligations do not exist for individuals who are self-employed. In light of this, Her Majesty Revenue & Customs office takes a careful look at how courts define employees. In Talbot v HMRC [2008] VAT 20665, for instance, the court was expected to provide a clear definition of employee for purposes of enforcing tax obligations upon the employer. The ruling noted that any employer whose actions in respect of the treatment he or she gives their workers or self-employed partners, are found to constitute a sham or just misrepresentation of facts should be slapped with contra proferentem. Under the doctrine, the courts are obligated to construed unreasonable terms against the party seeking to benefit from them. Backdated tax obligations could then be imposed for punitive reasons against employers who are found to be at fault (Cabrelli, 2014). Australia’s Federal Circuit Court, for instance, recently issued a landmark verdict in Fair Work Ombudsman v Jooine (Investment) Pty Ltd & Anor (Jooine) [2013] FCCA in which it ordered compensations for a violation of sham contracting terms of the employment contract. The respondent-company and its directors were found to be in breach of vital clauses of the Fair Work Act 2009 in the treatment of a cleaner. The Court ordered a maximum $57,024 in penalties, with $47,520 to be paid by the organization while $9,504 by a director in his personal capacity. This penalty was deemed as hefty in respect of the worker’s underpaid dues totalling to a paltry $1,858.53. Finally, courts have extended the duty of care by employers under the doctrine of vicarious liability. The principle makes employers liable for the torts committed by their agents provided they happened in the line of duty. Interestingly, ordinary workers or individuals who are self-employed are exempted from these protections (McClelland, 2012). Depending on the seriousness and nature of the offending act, courts have imposed equally punitive alongside compensatory awards for employees who become victims of their employer’s negligence after the signing of the employment contract in an attempt to keep contractual arrangement from becoming a sham in the course of its implementation. In Lister v Hesley Hall Ltd [2001] UKHL 22, for instance, the court imposed sanctions upon the employer for tolerating acts of sexual harassment against the plaintiff within the organization. The court based its decision on the grounds that there was mutuality of obligations between the employer and the employees and he could act on the tort but chose not to (Painter, & Holmes, 2012). Exemptions of employer liability Despite the failure of most employers to win cases involving sham contracts, those who stick to the letter and spirit of the original agreement during their subsequent relationship with the employee are normally safe. For example, OKelly v Trusthouse Forte plc [1983] ICR 728 set the precedent on the “mutuality of obligation” between employees and the employers. In the ruling, the court noted that the contract and the subsequent behaviour of both parties did not qualify the waiters as employees because they were practically exempted from shifts. They also lacked the job security that comes with employees (Cabrelli, 2014). In addition, owing to the employer’s discretion to terminate their service anytime he deemed fit, the court held that the arrangement did not meet the "mutuality" test, which defines employment terms and hence they should forfeit claims for unfair dismissal. In a similar case, Carmichael v National Power plc [1999] UKHL 47 provided direction as to the duties of the employer and the employee under the Employment Rights Act 1996 (Sam, 2012). In this case, tour guides registered complaints that their employer had not furnished them with written copies of the contracts recognizing them as employees as required under section 1 of the Act. The claimants were deployed at Blyth Power Stations in Northumberland to carry out tasks for the Central Electricity Generating Board. According to the terms of their hiring, they had agreed to the terms of casual work as horse guides. As Painter and Holmes (2012) noted, when the case seeking direction on their engagement status and or their legal benefits reached before the court, the House of Lords said the conditions did not qualify the claimants to be employees. Bogg (2012) noted that the judges noted that there were inadequate grounds for mutuality of obligations when they were not really doing the guiding work. Lord Irvine argued that under the conditions of work and the contract for the casual work, the mutuality of obligations was too remote to create an employment contract, judging by their behaviour at work. The court noted that there was no sham on the part of the employer because on a number of occasions, the workers would report to work, but decline to work. Conclusion Generally, courts and employment tribunals have become more vigilant in respect of sham contracts for purposes of protecting unsuspecting employees from unreasonable employers. Most of employers have been giving their workers employment contracts containing clauses which define them as being non-employees but after their enlisting, they are assigned regular tasks and strictly supervised as is typical in an employer-employee relationship. As such, courts have been given reason to assess the nature and conditions of practical work in determining a genuine contract between employers and employees and also between the former and the self-employed, partners or sub-contractors. The rulings in Protectacoat and Autoclenz are some of the recent landmark determinations of the controversial issue where employers were found to be at fault and ordered to be liable. Where companies are found to be at fault in respect of sham contracts, courts and tribunals often enforce liability by ordering penalties against the organization and in some cases against the directors as well. References Bogg, A.L. 2012. Sham Self-Employment in the Supreme Court. Industrial Law Journal, 41(3), pp.328-345. Cabrelli, D., 2014. Employment Law in Context: Text and Materials. Oxford: Oxford University Press. Davies, A.C.L., 2009. Sensible thinking about sham transactions. Industrial Law Journal, 38(3) pp.318-329 McClelland, J., 2012. A Purposive Approach to Employment Protection or a Missed Opportunity? Modern Law Review, 75(3), pp.427-436. Painter, R., & Holmes, A., 2012. Cases and Materials on Employment Law. Oxford University Press. Sam, M. 2012. The legal impact on employers where there is a sham element in contracts with their workers. International Journal of Law and Management, 54(3), pp.209-221. Read More