Employees, Contractors and Sham Contracts

The problem of distinguishing between an employee and other workers who are required to provide personal performance is one that most employment lawyers have been aware of, if not since time immemorial at least shortly thereafter.  In New Zealand the approach to this question is now subject to the statutory direction in s 6 of the ER Act that the Authority or Court must determine the “real nature of the relationship” taking into account all relevant matters that indicate the intention of the parties and that any statement of intention is not to be treated as determinative.  This direction and its effect has been considered in a number of cases including the Supreme Court in Bryson v Three Foot Six Ltd [2005] NZSC 34.

The issue of the employee-contractor distinction was, in mid-2011 also considered by the United Kingdom Supreme Court in Autoclenz Limited v Belcher [2011] UKSC 41.  This case, a unanimous decision of the Court, was notable for its very realistic approach to employment contracts and for its willingness to cut through the legal sleight of hand to determine the true nature of the relationship.

The facts of the case were relatively typical and straightforward.  Autoclenz, who provided car-cleaning services to various companies, decided to change the employment status of its valeters to that of contractor.  This was done by means of a contract that placed great emphasis on the workers being “self-employed independent contractors”, that contractors were free to sub-contract to approved persons and that they were free to refuse to provide their services on any particular occasion. These contracts were offered on a take it or leave it basis, the workers having little or no input into the terms. In practice of course little changed and valeters worked much the same as previously although the nature of paying for the work, liability for taxes etc changed as a result of the change in employment status.

It is not necessary here to provide a detailed legal analysis but rather to highlight some of the more interesting points of the Supreme Court’s decision.

The first is that a clear line was drawn between commercial contracts and employment contracts and the Court was very clear in pointing out that “Nothing in this judgment is intended in any way to alter those principles, which apply to ordinary contracts and, in particular, to commercial contracts.”   In the case of employment contracts, said the Court:

“the circumstances in which contracts relating to work or services are concluded are often very different from those in which commercial contracts between parties of equal bargaining power are agreed. I accept that, frequently, organisations which are offering work or requiring services to be provided by individuals are in a position to dictate the written terms which the other party has to accept. In practice, in this area of the law, it may be more common for a court or tribunal to have to investigate allegations that the written contract does not represent the actual terms agreed  and the court or tribunal must be realistic and worldly wise when it does so. ...”

It was accepted that one of the factors that the worldly-wise courts should take into account was

“The concern to which tribunals must be alive is that armies of lawyers will simply place substitution clauses, or clauses denying any obligation to accept or provide work in employment contracts, as a matter of form, even where such terms do not begin to reflect the real relationship.”

Employment Court judges in New Zealand, to whom the statement is equally applicable, might take heart from the Court’s quote from Sedley L J where he stated the following “with characteristic clarity and brevity”: ‘Employment judges have a good knowledge of the world of work and a sense, derived from experience, of what is real there and what is window-dressing’.”

New Zealand readers, alert to TNT Worldwide Express (NZ) Ltd v Cunningham [1993] 3 NZLR 681 (CA), might note that the Supreme Court expressly doubted the view that contractual documents are to be regarded as expressing the true intentions of the parties unless there was a sham intended to deceive third parties.  Statements of intention, and particularly those effectively dictated by the employer, must give way to the reality of the actual working relationship. The impact of Autoclenz in New Zealand is perhaps limited given the presence of the statutory direction but it does serve as a common law reinforcement of that direction and of the need to discern the reality of the “working” rather than the legal intention. 

The importance of this case is twofold.  First it reinforces the view that what is critical in determining the true nature of an employment relationship is the real, on-the ground, operation of the relationship: the real nature of the relationship to use the New Zealand parlance.

And second, that an employer should not be able to draft your way around this reality.

Readers interested in an analysis of the case might refer to Julie McClelland “A Purposive Approach to Employment Protection or a Missed Opportunity?” (2012) 75(3) MLR 387–436.