Contract of Service - Assignment Example

Contract of Service Traditional employment arrangements have been changing over the years. Many workers no longer work with their employers on the basis of an employment contract which sets out the obligations and rights of both the parties. Under UK employment laws, employees are entitled to a range of benefits from their employers, including health and safety provisions at work, holiday pay, pension benefits and a range of incentives which often make it expensive for companies to hire workers. Employment protection legislation has provided for a range of protection to be extended to workers, such as for example, the right against unfair dismissal and redundancy payment rights. As a result, there has been an increasing trend towards hiring workers on a service contract basis. Employees enter into agreements with third parties, i.e, employment agencies or recruiters, who in turn supply employment services and collect fees from the employer. As a result, there is no direct contact between the employee and the end user in terms of a reciprocal arrangement on rights and obligations. This produces a situation where it becomes difficult to establish many of the rights that regular employees have and their applicability in the case of those hired under contracts of service. It first becomes necessary to establish that an implied contract exists between the employee and the end user, before any of the employee rights can be established. Companies choose not to hire individual workers but rather enter into agreements with contractors to supply employees on a temporary basis in accordance with their requirements. This gives rise to a distinction in terms of whether an employment arrangement can be categorized as a contract of service or a contract for service. McKenna J in the case of Ready Mixed Concrete (South East) v Ministry of Pensions and National Insurance1 stated that a contract of service exists if three specific conditions are fulfilled: (a) a worker agrees that for a wage or other consideration, he will provide his own work or skill in performing a service (b) s/he agrees either expressly or impliedly to be subject to the employer’s control in the execution of that service (c) other contractual provisions are in line with a contract of service. Based on the above description, it may be seen that one of the essential requirements of an employee is that s/he must perform the service himself/herself. But, while adhering to the requirement of the employment contract to provide a particular service, the employee chooses to send another substitute worker in his or her place to perform all the obligations under the contract, then it changes from a contract of service to a contract for services. A contract of services is one that is entered into between a contractor and an employer, where individual workers are hired through the contractor and supplied to the employer, as and when needed. Under a contract for services therefore, there is no obligation on the contractor to do the work himself, he is only obliged to ensure that the work is done competently. An employee on the other hand is obliged to do the work himself and once hired by an employer, cannot send another person to work in his place. Applying the definition that was laid out by McKenna J as stated above, it may also be noted that an individual worker will not be subject to the employer’s control under a contract for services arrangement. The parties to a contract will therefore specify whether they are entering into an employer/employee arrangement or whether it is a contract for services which is being entered into by an independent contractor. However McKenna J has also stated additionally that such declarations may only establish the kind of relationship the parties intended to create, but the Court will examine the entire matrix of facts and circumstances in order to establish whether they actually succeeded2. For example, the chances of profit and the risk of loss will essentially remain with the employer in a characteristic employer/employee relationship. But if the contractual terms are such that this appears to be placed on the alleged employee, then the chances are that it is not strictly an employment relationship, but is more likely to be a contract for services. In the case of Rees v Crown (South Wales) Estate Agents Ltd3, an employee chose to become a salaried partner, wherein he became eligible for a share in the profits and attained a greater level of control over his own activities. But the loss of his employment status reflected adversely upon him when the business was purchased by a larger concern and the new salaried partner went back to being an employee, who was dismissed three months later. But he was unable to file a claim for unfair dismissal because the industrial tribunal held that while the plaintiff satisfied the first two criteria indicated by McKenna J4, the provision allowing him to share in the profits and losses was inconsistent with employment under a contract of service. In order to for a valid contract of service to exist, one of the essential conditions is the mutuality of obligations, such as the legal obligation of remuneration for the performance of personal services. In several cases, the failure to establish the mutuality of obligations has been the ground for rejecting claims arising in this context5. This was also the case in Stephenson v Delphi Diesel Systems Ltd.6 In the case of Carmichael v National Power plc7 it was held that mutuality of obligation was a necessary condition in order to establish an employment relationship. In the recent case of Brook Street Bureau (UK) Ltd v Dacas8, a similar issue arose as to whether a contract of service existed. In this instance, Mrs. Dacas was a cleaner working on the basis of a written agreement with an employment agency, Brook Street, whereby there was no obligation from either side either for Brook Street to offer employment or Mrs Dacas to accept it. However Brook Street had a contract with Wandsworth Borough Council to provide agency workers and Mrs Dacas worked for WBC for four years, when she was withdrawn from the assignment. Mrs. Dacas filed suit with the employment tribunal, but the Tribunal found that she was not an employee of Brook Street or WBC. The Employment Appeal Tribunal on the other hand found that Mrs Dacas was an employee of Brook Street, but the Court of Appeal clearly held that she was not an employee due to the lack of existence of a valid contract of service denoting mutuality of obligations. In fact, the contract between Mrs. Dacas and Brook Street expressly negated mutual obligations. But the Court also stipulated that if WBC had been a respondent, then a contract of service could possibly have arisen based upon the conduct of the parties and the circumstances and conditions under which work was performed. This case underlined the fact that in a contract of service, express terms will play a significant role in the outcome, since it was the negative express terms in the contract between Mrs Dacas and Brook Street which worked against proving the existence of an implied contract. However, it has also emphasized the fact that an employment tribunal should always consider the possibility of implying the existence of a contract between the temporary worker and the end user. Another significant case in this context, which also involved a service agency agreement is Franks v Reuters Ltd and Another.9 In this case, Franks was supplied by an employment agency and joined first as a temporary worker and later on a full time permanent basis. He worked for six years and was paid wages and holiday pay by the employment agency out of fees it received from Reuters. He was then told by Reuters that his services were no longer required. The Employment Tribunal rejected his argument that he was an employee on the basis of lack of mutuality of obligations. But in this instance, the Court of Appeal held that the Tribunal had not undertaken a proper examination on whether an implied contract existed, which could be determined on the basis of length of service and the nature of Mr. Franks’ work. On this basis, the Court was remanded back to the Tribunal. In the case of Callaghan v Real Time Engineering10 HHJ Clark held that in determining whether a contract of service existed, the question that the Tribunal has to decide is “not how the contract operated in practice, but what was the intention of the parties…….. However, how the contract operates in practice is no basis for simply displacing an express term in the written agreement.”11 The Court held that it would be necessary to look at the overall factual matrix in arriving at a determination of whether a worker is an employee. In the case of Younis v Trans Global Projects Ltd and Charnock12 the Employment Tribunal took the view that there was no mutuality and no minimum level of control; on this basis it rejected the existence of a contract of service. But the Employment Appeal Tribunal took into account the overall factual matrix associated with the case and concluded that the necessary mutual obligations, the minimum requirement to establish a contract of service were indeed present. From a historical perspective, contracts of service have therefore not been very successful in garnering the rights of employees for those workers who work under a temporary or contractor based arrangement. In the case of minors however, there is an underlying presumption that beneficial contracts of service are enforceable enforceable, even if they result in a disadvantage for the defendant. In this context, the law has held that contracts of service in employment may be enforceable but they must not be oppressive. In the case of Defrancesco v Barnum13 a girl of 14 years of age had entered into a contract with the plaintiff as an apprentice dancer for seven years. During this period, the Plaintiff did not guarantee her a continuous supply of work but she could not marry or accept any professional engagements without Plaintiff’s consent. The Court found this to be non beneficial and hence not enforceable, because it gave the plaintiff power without a corresponding obligation.14 In the case of Clements v London and NW Railway15 a motion to declare an employment contract of service disadvantageous as a whole did not succeed. The Court held that while there were some disadvantages caused to Plaintiff by a different insurance scheme; this was counterbalanced by other advantages. Similarly, in Doyle v White City Stadium16 a contract of service in which the rules operated to the plaintiff’s disadvantage was held to be enforceable. As may also be noted from the discussion of other contracts of service cases above, they are often disadvantageous to the worker, largely due to the difficulty in establishing the mutuality of obligations since there is a third party also involve din the relationship between the employee and the end user. Contracts for services differ from a contract of service, in that it is more akin to the provision of services by a contractor. The Supply of Goods and Services Act of 1982 defines a contract for the supply of a service as a contract under which a supplier agrees to carry out a service.17 In a contract for services, unlike a contract of service, the terms and conditions of the contract will be specifically set out and the mutual obligations will be very clear, unlike in a contract of services where they may be implied. As a result, the service providers an be held liable for a failure to provide service sin accordance with the terms of the contract, while the service recipient can also be held liable for not delivering on the payments that have been agreed to. For instance in the case of Greaves and Co (Contractors) Ltd v Baynham Meikle and Partners18 the Plaintiffs were contractors who hired defendants – a firm of structural engineers, to design the structure of a warehouse. The question at issue in this case was the existence of an implied agreement about the need to design the building such that it would be structurally sound. Lord Denning held in this case that “both parties were of one mind on the matter. Their common intention was that the engineer should design a warehouse which would be fit for the purpose for which it was required.”19 On this basis, the defendants were held liable for their failure to produce a structurally sound design. This illustrates the difference between contracts for services and a contract of service. The former clearly sets out the rights and obligations of the parties and therefore can be examined on the basis ordinary contracts are usually examined, because the parties to the contract are directly entering into an agreement with each other. As a result, it becomes much easier to determine the obligations and intentions of the parties. Since there is a direct contractual arrangement between the two parties, the Court is able to easily examine the terms and obligations therein and also assess more easily, what are the implied terms that can be attributed to the contract. This is how the Court in the case of Greaves and CO cited above, were able to determine what the implied terms were. But where a contract of service is concerned, the difficulty arises because ordinary individual workers provide their services as a part of a contractual arrangement executed by a third party. Cases such as the Brook Street case cited earlier, also demonstrate that agreements made between employees and such third parties may also contain express negative clause which in effect eschew any obligations on the part of either party, in order to impute a greater level of freedom for the employee. It also becomes difficult to establish the mutuality of obligations, because workers are not under a definite employment agreement with the end user but can be replaced at any time by other workers, hence their rights may not be adequately protected. However, this case also shows that Courts are becoming increasingly vigilant about the rights of individual employees. In arriving at a determination on whether or not mutuality of obligation can be established, which is an essential condition to establish a contract of service, Courts are now examining the matrix of circumstances associated with the case. It is the intention of the parties that Courts will take into consideration, together with the circumstances under which the work was rendered, as well as the duration of employment. Workers can now consider directly filing suit against end users of their services, as Mrs Ducas should have done in the case of Brook Street because the tenure of employment as well as the circumstances could help to establish employee rights for the worker of long duration who has worked under a contract of service arrangement. ………………………….2490 words Bibliography Beale, H.G., Bishop, W.D. and Furmston, M.P., 2007. “Contract;:Cases and Materials” , Oxford University Press Duggan, Michael, 2006. “Employment Contracts”, Employment Law and Litigation, 11(1): 8 Stone, Richard. “The Modern Law of Contract”, Routledge Cavendish Supply of Goods and Services Act of 1982. Wong. Garrett, 2004. “Whose employee am I anyway?” 154, New Law Journal, 7125:610 Cases Cited: Brook Street Bureau (UK) Ltd v Dacas [2004] EWCA Civ 217 Callaghan v Real Time Civil Engineering Ltd (UKEAT/0516/05/ZT) Carmichael v National Power plc (2000) IRLR 43 HL and (1998) IRLR 301 CA Clements v London and NW Railway (1894) 2 QB 482 Defrancesco v Barnum (1889) 45 Ch D 430 Doyle v White City Stadium (1935) 1 KB 110 Franks v Reuters Ltd and another [2003] ICR 166; [2003] IRLR 423, CA Greaves and Co (Contractors) Ltd v Baynham Meikle and Partners (1975) 3 All ER 99. Court of Appeal Ready Mixed Concrete (South East) v Ministry of Pensions and National Insurance. ([1968] 1 All ER 433 Rees v Crown (South Wales) Estate Agents Ltd, case no 5378/88 Cardiff IT. Stephenson v Delphi Diesel Systems Ltd (2003) ICR 471 Younis v Trans Global Projects Ltd and Charnock (UKEAT/0504/05/SM) Read More