The conclusion in Autoclenz Ltd v Belcher & Ors
indicates a subtle, albeit potentially significant shift in the approach when deciding Employment Status and Sham Agreements.
Prior to this case, the written terms of a contract prevailed as long as it is not a â€œshamâ€. However the Supreme Court, in this case, has deemed such an approach too literal, thereby ruling that a written employment contract may be disregarded if the reality of the situation detracts largely from the essence of the agreement. As a result, it undermines the absolute mandate of a written contract, ensuring the protection of any oppressed parties. At the same time, it presents an alternate approach to apply for cases of doubt on the genuineness of contract terms where there is substantial dichotomy in bargaining power between the parties, as opposed to usual commercial transactions. Brief facts about the case:
The Claimants are 20 individual valeters who each signed a contract with Autoclenz
to provide car washing services. Under the contract terms, the Claimants are expressly described as self-employed and should be working on a subcontract basis. It is also stated in the agreement that they are responsible for their own Tax, National Insurance Contribution (NIC) and cleaning materials. However, the contract did not explicitly state down any clause permitting the use of substitutes to perform valeting services on the Claimantsâ€™ behalf.
The Claimantsâ€™ self-employment state was also confirmed by the Inland Revenue in 2004 but the decision was regarded as â€œenigmaticalâ€ by the Supreme Court.
In 2007, the Claimants signed another contract to ascertain that any contractual relationship between them and the company is not of employer and employee.
It is also important to note that the 2007 contract contained a clause stating, â€œFor the avoidance of doubt, as an independent contractor, you are entitled to engage one or more individuals to carry out the valeting on your behalf.â€
The contract also stated that the Claimants â€œwill not be obliged to provide your services on any particular occasion nor, in entering such agreement, does Autoclenz undertake any obligation to engage your services on any particular occasion.â€ 
In reality, the working conditions of the Claimants detracted largely from the written terms. While the Claimants were responsible for payment of their own Tax and NIC, the company actually provided cleaning equipments and arranged group insurance cover. The company subtracted a fixed sum, for the insurance and cleaning provisions, from the Claimantsâ€™ weekly payment that was due after they submitted weekly invoices from their work. In addition, the Claimants were required to work on daily basis and must notify the company if they were absent from work. As a result, the Claimants appealed to be recognised as employees or workers of Autoclenz in order to gain access to the rights and benefits of an employee or a worker. They would then be paid in accordance with the Section 54 of the National Minimum Wage Regulations 1999 (NMWR) and receive statutory paid leave under the Regulation 2 of the Working Time Regulations 1998 (WTR). However, Autoclenz argued that the Claimants were not qualified to any statutory rights according to the contract terms as they were self-employed contractors. Key issue: The primary issue faced by the Court in this case was how to draw a clear legal distinction between employees, workers and self-employed. Although this is a significant issue, it is not an easy task as there is very little statutory guidance provided for the Courts by way of the common law. There are three possible rulings for the Claimantsâ€™ status:
- The Claimants are self-employed.
- The Claimants are employees, which is defined in the section 230(1) of the Employment Rights Act 1996(ERA) as â€œan individual who has entered into or works under a contract of employment.â€
- The Claimants are â€œworkersâ€ and often called a â€œlimb (b) workerâ€ under Section 230(3) of the ERA . The worker is define as â€œ an individual who has entered into or works under
An individual can only exercise his employment rights such as unfair dismissal by having a status of â€œemploymentâ€. Compared to employees, workers have fewer rights but they are still entitled to holiday pay. In contrast Self-employed contractor are not given any statutory rights other than certain protection under health and safety legislation. Due to the entitlement to different rights, the status of the Claimants is very important. One way of ascertaining any employment status is to find out whether there is a contract between the parties. Since there is a contract between the Claimants and Autoclenz, the Court has to establish whether it is a contract of employment by applying the three key elements which illustrated in Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance. To summarise, the employee must be under an obligation to perform the work individually. Secondly, there must be mutuality of obligation, in other words, interdependency between the employer and employee. Lastly, the employer must have an adequate power of control over the employee. Background for Relevant Principles: In order to understand the impact of this case on the law, we shall first look at the previous position of the Court on Sham Agreement. In the case of Consistent Group Ltd v Kalwak, the Claimants signed contracts which engaged themselves as self-employed sub-contractors. Before it was appealed to the Court of Appeal , Elias J in the Employment Appeal Tribunal concluded that the reality of the situation should prevail if it is â€œwholly inconsistentâ€ with the nature of the relationship. However in the Court of Appeal, Rimer LJ criticised Elias Jâ€™s approach and held that it was not possible to impose such terms to the contract because it would go against the legality of the written contract terms. He held that to make a finding of â€œshamâ€, both parties must have the intention to trace a false picture as opposed to the actual contractual obligations according to the case Snook v London and West Riding Investment Ltd.  In a later case Protectacoat Firthglow Ltd v Szilagyi, instead of following the Court of Appeal decision in Kalwak, the Employment Tribunal held that the Claimant was an employee due to the dichotomy between the contract terms and the actual relationship between the parties. Therefore, the contract is regarded as a â€œshamâ€. This decision was then upheld by Smith LJ in her leading Court of Appeal Judgment who concurred that the contract terms are shams as â€˜they did not describe or represent the true intentions and expectations of the partiesâ€™. As we can see from the two cases above, the source of conflict in ordinary law is in the terms of the agreement. Despite the great body of case law which has built up over the years, the Court still failed to provide a clear guideline or test that judges can apply in the future when determining oneâ€™s employment status. Freedland has suggested that the Courtsâ€™ task in discerning employment status has become more difficult to accomplish rather than less and that the accumulation of cases contributed only to the â€œweight rather than wisdomâ€™. A case in point is that although the â€œreality testâ€ was rejected by the Court of Appeal in Kalwak, its principle was still referred to during the Szilagyi case, which arguably goes against the doctrine of judicial precedents. Thus it creates ambiguity as to whether or not the reality test is valid and which decision the later Court should follow. This problem again surfaces in the case of Autoclenz, becoming the crux of the debate within each court. Decisions: Employment Tribunal (ET) Employment Judge Foxwell ruled in favour of the Claimants and held that they were both employees and workers since there was significant degree of control exercised by the company to fully integrate the Claimants into its business. While the Claimants are entitled to engage substitute workers and supposedly do not share a relationship of mutual obligations with Autoclenz, the reality was antithetical from what was expected, as mentioned in the case detail above. From the sole perspective of the law, it is impossible for the Claimants to fall under the definition of an employee or even a worker as the two contracts signed are absolute in legal terms. However, the Court considered the fact that if the Claimants had not signed the contracts, they would have lost the job as they had no rights for the negotiation of terms. At the same time, the judge also believed that Autoclenz did not fully explain pertinent clauses of the 2007 contract to the unknowing and ignorant Claimants and thus deprived them of their rights as sub-contractors. Thus by using this purposive approach instead of a literal one, the Court ruled in favour of the Claimants. Employment Appeal Tribunal (EAT) Judge Peter Clark reversed the ETâ€™s decision and held that the Claimants were not employees but workers. Judge Clark pointed out that the ET Judge Foxwell misdirected himself in adopting the incorrect â€œreality testâ€ formulated in Kalwak. According to the doctrine of precedent, Judge Foxwell should have referred to the decision made by the Court of Appeal. In other words, since the â€œreality testâ€ has already been overruled in Kalwak, the approach is no longer relevant in the case of Autoclenz. As a result, Judge Peter Clark felt obliged to follow the precedent case of Kalwak (Court of Appeal)and ruled that the contract terms were not â€œshamâ€ and thus they are not employee but workers. According to the doctrine of Parliament Supremacy, judicial law making is undemocratic and thus should be avoided, as the Parliament is the only one who can amend the law. This literal approach by EAT clearly captured the principle of separation of power between the Parliament and the Courts. In addition, the resulting ruling by the Court also provides certainty and consistency thereby making it easier for the lawyer to advice their clients on employment legality. On the other hand, the approach could also be deemed as rigid as it failed restore justice for the Claimants who clearly had less bargaining power. The Court thus could arguably have neglected the core spirit of the Employment law which is to protect the vulnerable citizens with less bargaining power from those powerful organisations. Court of Appeal (Civil Division) The Court of Appeal (Smith, Sedley and Aikens LJ) restored the judgment of the ET, dismissing Autoclenzâ€™s appeal while accepting the Claimantsâ€™ cross-appeal. Smith LJ held that the car valeters were employees, despite the contract describing them as self-employed. Employers, and their advisers, cannot draft their way out of employment status if that does not accord with the reality of the relationship. This was particularly so in an employment contract where it was not uncommon to find that the â€˜employerâ€™ was in a position to dictate the written terms and the other party was obliged to sign the document in order to get the job. According to the ordinary law of contracts, once a consensus was made for the contract terms, the judges generally avoid implying terms into a contract since it is the partiesâ€™ responsibility to have reached an agreement before signing the contract as illustrated in the case of Chartbrook Ltd v Persimmon Homes Ltd. Freedom of contract usually prevails. Aikens LJ emphasized that it is not in the judgesâ€™ intention to alter the principles behind the ordinary law of contracts. Instead, all three judges believed that a distinction should be drawn between this case and other ordinary commercial dispute because there may be an element of inequality of bargaining power between the parties.[d1] We can see the judges have taken into consideration of the huge impact that employment law has upon society since it concerns the public. Thus, in order to achieve the underlying principle of employment law, the principles of ordinary law should be set aside here. Sedley also highlighted the importance of making decision that is practical rather than â€œ[in] odd [with] themselvesâ€. In this case, notwithstanding the repeated interpolation of the word â€œsub-contractorâ€ , there was ample evidence on which the judge could find the truth of the employment relationship between the parties. The Court also raised several controversies. While Smith LJ focused on the reality test, Aikens LJ believed that it was â€˜not helpfulâ€™ because what is important was the actual agreement. This disparity between the judgments makes it hard to derive the overarching reasoning for this case. It also poses difficulty in developing a coherent approach when juxtaposing the two judgments and reading them together, as suggested by Aikens LJ. Supreme Court: The main point of consideration for the Supreme Court was whether the decision in ET was correct. If so, in what circumstances the ET may disregard the contract terms and look at the actual agreements, intentions or expectations between the parties. In the end, the Supreme Court unanimously dismissed Autoclenzâ€™s appeal and upheld the Court of Appealâ€™s decision by agreeing to the use of purposive approach by the ET. The Supreme Court also agreed with Aikens LJâ€™s comment on that the Court should avoid concentrating too much on the private intentions of each party in the contract such as any selfish profits gained from exploitation. Instead, the Court stressed on the importance to take into account of bargaining power of the parties in contracts relating to employment. All in all, this decision raises pertinent points on the issue of employment status. Businesses often use contracts that exclude one or more elements in an attempt to prevent individuals from having â€œemploymentâ€ status and thus benefits from it. This generates fear amongst the publicâ€”that they are not being protected by the law and receiving rights that they deserved. However this case re-instills confidence into the general public by showing that despite the contract terms being the basis of determining oneâ€™s employment status, a purposive approach can be used by the Tribunal. By going beyond the contract terms, the Court is able to gain a bigger and more realistic picture and ensures that more people are protected by the law. Hence, this could be perceived as a social policy decision by the judge in order to protect the public interest and restore justice. Conclusion: Following the final ruling by the Supreme Court, there are several implications on the law and, by extension, future similar cases that are worth elaborating. Courts will be able to set aside contractual terms which are inconsistent with the reality of the relationship of the parties, which shows the progression and adaptability of the law system. Undoubtedly, the case of Autoclenz provides a very significant employment status judgment. The case serves as a warning to companies as they will no longer have the comfort of hiding behind specifically worded contracts. It also signifies that companies need to review their commercial terms to consider whether the contractual terms reflect the reality of the working relationship at the time the contract was entered into, including any subsequent variation of those terms. Moreover, it ensures the employment law remains relevant to the development in economic where there is a huge increase of sub-contractor working arrangements. However, there seems to be a confliction between the method used in determining oneâ€™s employment status between the Court and the Inland Revenue. We will usually assume the decision by a government department is accurate and reliable but this case seems to suggest it is not the case. This leads to the question as to whether decision should public as guidance. Furthermore there is still ambiguity as to under which circumstances the ET can disregard the expressed contract terms and base its decision on the actual agreement, since there is no concrete conclusion given by the Court. Apart from the conflict between the Court and the Inland Revenue, there is also a great debate about the use of purposive approach between the Courts. The use of purposive approach allows the judge to interpret the likely intention of Parliament and carry out a justified judgment. Judges achieve this by filling in the gaps of employment law and making sense of the enactment rather than by opening it up to destructive analysis. Such a broad approach allows the law to cover more situations in a flexible way. However, this approach has been criticised by Lord Simonds as â€œa naked usurpation of the legislative function under the thin disguise of interpretation.â€ and he also pointed out that if a gap is disclosed the remedy lies in an amending Act which should be done by Parliament. Hence, this calls for more clarification. Also, the Court disregarded all the fiscal and other consequences of its decisions which could open the floodgate to self-employed contractors appealing for rights such as holiday pay retrospectively. Thus, there remains a great uncertainty as to when orthodox contractual rules should be set aside and the reality of a potential employment relationship should be analysed. In my opinion, Parliament should undertake relevant reforms in this area of law to provide further guidance. This is because, as mentioned earlier, not all judges will accept the use of purposive approach and future cases might have a completely different ruling based on the judge philosophy on the role of the Court and interpretation of law. Hence, while justice is done in this case, it may not necessarily means that future cases will be so unless reform is achieved.
- a contract of employment ;or
- any other contract, either expressed or implied and (if it is expressed) whether oral or in writing, whereby the individual do or perform personally any work or services for another party to the contract whose status is not by virtue of the contract that of a client or customer of any profession of business undertaking carried on by the individual.â€
  UKSC 41  C Lake , 'Autoclenz: employment status revisited'  Tax J. 1092, 16-18  David Roderick, 'Employment Law Update' (Farrar's Building 2011)   UKSC 41 Para 4   UKSC 41 Para 5   UKSC 41 Annex Clause 3   UKSC 41 Para 6   UKSC 41 Para 8  UKEAT/0160/08/DA Para 9   EWCA Civ 1046, per Smith LJ 1-2  UKEAT/0160/08/DA paragraph 8  UKEAT/0160/08/DA Paragraph 9  L Bowery, 'It's always a question of status' [Apr 2013 ] Employ. L, 14-15   2QB 497 at page 515C MackKenna Jâ€™s judgment  L Bowery, 'It's always a question of status' [Apr 2013 ] Employ. L, 14-15   IRLR 505   IRLR 560   2 QB 786   IRLR 365 Para 7  2009] EWCA Civ 98 Para 58  M Freedland, The Personal Employment Contract (2009) 21  UKEAT/0160/08/DA Para 14   UKSC 41 Para 10-11   UKSC 41 Para 10  UKEAT/0160/08/DA Para 19   EWCA Civ 1046 Para 49   UKHL 38   UKSC 41 Para 34   EWCA Civ 1046 Para 105   EWCA Civ 1046   UKSC 41 Para 17   UKSC 41 Para 32   UKSC 41 Para 34  E Harvey , 'Case Study:Autoclenz Ltd v Belcher & Ors  UKSC 41' (DWF 2011)
[d1]Isnâ€™t this under the supreme court??? But ok to put here. Iâ€™m just curious Cause it is first said by the CA but it was later affirmed by lord clarke in SC. So i thinj maybe better to said it in CA And the previous part i deleted. Cause i also dont understand..i thought u will understand the judgement.hahahhaha... Is wrote by the judge, i did not change a single work.. But ok la.. Just remove that part,