Case update

Employment status – working through a personal service company

In Partnership of East London Co-operatives Ltd v Maclean, the Employment Appeal Tribunal (EAT) held that the Employment Tribunal (ET) had incorrectly determined that a contractor working through a personal service company was a worker and an employee. Rather, the contractor was in fact self-employed. Click here for our key takeaways for employers.

Background

Ms Maclean (the Claimant) was a qualified nurse who worked as a clinical streamer at several community urgent treatment centres (UTCs) run by Partnership of East London Co-operatives Ltd (the Respondent).

The Claimant terminated the arrangement in March 2023. Subsequently, she raised complaints of ordinary unfair constructive dismissal, unfair constructive dismissal and detrimental treatment by reason, or on grounds, of protected disclosures, and claiming contractual and statutory holiday pay.

In order to bring these complaints, she needed to have been, depending on the complaint, an employee or worker of the Respondent, as defined in section 230 Employment Rights Act 1996 and/or the Working Time Regulations 1998. The Respondent contended that she was neither.

Employment Tribunal (ET) decision

The ET held that the Claimant was both a worker and an employee of the Respondent.

The Respondent argued that it used a combination of employed clinical streamers and self-employed contractors at its four UTCs. It stated that the Claimant worked as a self-employed contractor and performed her work through her personal service company, Maclean J Limited. The Respondent submitted that this was consistent with how both parties behaved throughout the contract.

The Claimant argued that she was an employee of the Respondent. She argued that she applied to work as a bank employee and only set up the company at the behest of the Respondent and as a vehicle for payment.

The ET held that there was a contract between the Claimant and the Respondent. There were certain factors that pointed away from employment status:

  • The Claimant submitted monthly invoices from her company and was not paid within the PAYE system.
  • She was able to log on to the Respondent’s system and select shifts at one of four defined clinics (but in this specific case, the ET noted the Claimant was in the same position as the Respondent’s bank employees in this respect).
  • She was described in correspondence as a self-employed contractor and the Claimant agreed to submit the IR35 status determination indicating that she could provide a substitute and provided her own professional indemnity insurance.

However, the ET held that other factors pointed towards employment status:

  • Substitution would have been impracticable and references to substitution in the IR35 status determination and associated documentation were not operative. No substitution was ever requested by the Claimant nor the Respondent and the requirement for stringent background checks meant that there was no realistic prospect of substitution taking place.
  • The agreement to accept payment to Maclean J Limited was expressly stated to be in discharge of any liability to make payment to the Claimant in relation to the service provided by her personally.
  • The emails from the Respondent to the Claimant were directed to her personally and not to her company, explicitly stating “you are the person to be engaged”.

On this basis, the ET held that it would not reflect the reality of the arrangement to describe the Respondent as a client of the Claimant’s. Therefore, the ET held that the Claimant was a worker under limb (b) of section 230 of the ERA each time she accepted work at one of the Respondent’s UTCs.

The Respondent appealed on three grounds:

  • The ET had erred in holding that the Respondent contracted with the Claimant, rather than with her limited company.
  • The ET erred in finding that there was mutuality of obligations such as to establish employment.
  • Finally, the Claimant challenged the ET’s conclusion that substitution would have been “impracticable” and that references to it in the IR35 determination and associated documentation “were not operative”, so that the obligation of personal service was not thereby negated.

Employment Appeal Tribunal (EAT) decision

The EAT held that the ET had incorrectly determined that the Claimant was a worker and an employee.

  • The EAT held that the ET had not erred in concluding that the Respondent’s contract was with the Claimant and not her limited company. It properly relied upon evidence which supported that conclusion and did not fail to consider other evidence pointing against it.
  • However, the ET had erred in its conclusion that the Claimant was a worker and an employee. In support of its conclusion, the ET held that the “natural inference” from the facts was that the Claimant agreed to undertake at least a reasonable amount of work and the Respondent undertook to offer at least a reasonable amount of work or pay (i.e. there was mutuality of obligation throughout the relationship). The ET relied upon the fact that the Claimant worked regularly for the Respondent for a number of years. The EAT held that this conclusion was insufficiently supported or explained, with regards to relevant documentation which expressly stipulated that there was no obligation on the Respondent to offer monthly shifts, and no obligation on the Claimant to accept them.
  • The EAT also held that the ET’s conclusion that the necessary obligation of personal service was not negated by an ostensible right to send a substitute was insufficiently supported. The fact that an ostensible right of substitution has not been used does not mean that the ET should conclude that it does not genuinely reflect what the parties intended.

Key takeaways

This case is an important reminder that employment status will be determined by the nature of the working relationship, on a case-by-case basis.

Employers engaging individuals through personal service companies or on flexible arrangements should ensure that operational practices and contractual documentation reflect the intended employment status, in order to mitigate the risk of disputes regarding employment status.