ABE Principles of Business Law 2008-1

Employment Law 1: The Contract of Employment 305

Control Test

This has been the test perhaps most frequently relied on by the courts, and is one of the main factors considered.

Control means that the employer has the right to tell the other party to the contract not only "what" to do but "how" to do it. In other words, he/she controls not only the "ends" but the "means".

The general rule is that wherever this type of control exists, the person thus controlled is an employee.

In our present society, however, the control test has been shown to have certain deficiencies, and it is doubtful nowadays whether control or lack of control indicates conclusively whether a contract of employment exists.

Industrial society today is totally different from the society which existed when the control test was first formulated, since nowadays the employer very rarely has the exact skill and knowledge of his/her employees. It is very difficult to say that the hospital authorities may control the actions of a doctor, or a local authority the actions of a surveyor.

This was shown very clearly in Cassidy v. Minister of Health (1951). This case solved many of the problems relating to skilled people. Although the employer could not control the actions of the doctor in the strict sense, the doctors and nurses concerned were permanently employed and salaried members of the staff, and were subject to the standing orders of the employers; also the employers were in a position to make rules concerning the organisation of the doctor's work. For these reasons, he was an employee, despite the lack of control in the old sense.

The problem of control in the case of skilled persons was also illustrated in Mersey Docks and Harbour Board v. Coggins & Griffiths (Liverpool) Ltd (1947) where the crane driver stated "I take no orders from anybody" (see later for further discussion of this case).

Integration Test

This suggests that the individual is "part and parcel" of the employer's organisation. This idea was to some extent suggested in Cassidy v. Minister of Health (1951), where, as has already been said, the medical staff were on the permanent establishment of the hospital and subject to the standing orders of the hospital. As a result, Professor Kahn-Freund, in an article in the Modern Law Review, suggested that the decisive test might be "Did the alleged servant form part of the alleged master's organisation?" In Stevenson Jordan & Harrison v. MacDonald & Evans Ltd (1952), Lord Denning developed this test as follows:

"Under a contract of service, a man is employed as part of the business and his work is done as an integral part of the business; whereas under a contract for services, his work, although done for the business, is not integrated into it, but is only an accessory to it."

In Whittaker v. Minister of Pensions (1967) a trapeze artist (who might normally have been held to be an independent contractor) was held to be an employee, since in addition to performing on the trapeze, she had to act as usherette, sell programmes, put out the seats, and generally help in the running of the circus:

"[She] had to carry out her contractual duties as an integral part of the business of the company."

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Multiple or Mixed Test

Another and perhaps more logical test today is one where the courts consider several factors, and by weighing these various factors, decide whether the person is an employee. In Short v. J W Henderson Ltd (1946), when in general the control test was being used, Lord Thankerton stated that several factors should be taken into consideration:

The employer's power of selection

The payment of wages or other remuneration

The employer's right to control the method of doing the work

The employer's right of suspension and dismissal.

Lord Thankerton also suggested that because of changing industrial circumstances, the factors were not necessarily fixed, but might well change with the times.

So in Maurice Graham Ltd v. Brunswick (1974) the Court of Appeal held that a so-called "self-employed" bricklayer was an employee. The man concerned was highly skilled, and chose his own mate. Nevertheless, taking into account that the appellants provided all materials and equipment except some personal tools, supervised the men on the building site, paid the workmen on a type of piece-work scheme, and were responsible for organising the various trades in the building of each block, it was decided he was not self-employed, but an employee.

In Morren v. Swinton & Pendlebury Borough Council (1965), the other factors were looked at closely. The claimant was appointed by the Council, having actually been selected by the consultants, who were to supervise and control him. Nevertheless, the court stated that:

His appointment (not selection) was made by the Council.

He was paid by the Council and was entitled to holiday with pay from the Council.

Although the consultants had immediate control over Morren, the Council had the power of ultimate control, since it had the right to dismiss him.

Taking all these factors into account, it was held that Morren was an employee of the Council. The court further stated that the control test was an "over-simplification", although the test of ultimate control, i.e. dismissal, is perhaps a useful one.

Other factors may also be looked at, such as the employer's right to the exclusive services of the individual, sickness pay, payment of national insurance contributions and income tax, hours of work, provision of equipment and so on.

It is unlikely that any of these factors in isolation would be conclusive, and the courts tend to look at the whole agreement and all the relevant factors when reaching their decision.

More recently the court has stated that it must look to the realities of the situation, and not the form alone, particularly not the label which the parties put upon a worker – Ferguson v. John Dawson and Partners (Contractors) Ltd (1976).

This case was one of the first to deal with a person on the "lump labour force". Ferguson was treated as self-employed, working "on the lump", and therefore the employer contended that he had no statutory obligation towards him, under the Construction Regulations 1966, as he had towards an employee.

The firm contended that Ferguson was a "self-employed labour-only sub-contractor" and that this was the only contractual term which existed, apart from the usual "lump" term regarding income tax and national insurance contributions. The majority of the court (Lord Justice Lawton dissenting) did not accept that there were no other contractual terms. There must have been many terms necessarily to be implied, such as remuneration, what work

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Ferguson was to do, at what hours, where he was to work, what notice of termination was to be given, what control could be exercised over Ferguson, and so on.

It was found on evidence that the contractor's site-agent was responsible for hiring and firing, and could dismiss workers, including Ferguson; he could move men from site to site; he provided tools where required; he told the men what work to do; the men were paid on an hourly basis and the money paid could correctly be called a wage.

All these factors indicated on the basis of previous authorities that the relationship between the parties was in reality that of employer and employee, and thus there was a contract of service.

In Lorimer v. Hall (1994) the Court of Appeal set out the following factors as being indicative:

Is the person performing services as a person in business on his own account?

Who controls the person, notably who has the right to discipline the worker?

Who provides the equipment?

Who is responsible for tax and national insurance, pension, etc.?

Who hires the employee's assistants or helpers?

Is the contract personal so that performance cannot be delegated?

What role does the person take in the management of the contract?

Is the work repeatedly done for one organisation?

No one factor is decisive but in general there must be mutuality of obligation between the parties for it to be an employment contract. This means that the employee is obliged to carry out work for the employer and the employer is obliged to provide that work and pay for it. This causes problems for such workers as agency workers where such obligations frequently do not exist.

B. OTHER CATEGORIES

In most cases, using one of the tests discussed already, it is possible to see whether an individual is an employee or an independent contractor. Alternatively, one company may use a second company to carry out certain work, e.g. the firm which brings in a building contractor to carry out certain building work, where it is obvious that this second firm is an independent contractor.

Certain problem areas have arisen, however, which we must look at in more detail since the specific details decide what position these people hold.

Loaned Servants

It may be difficult where one employer lends an employee to another employer, to decide who is acting as the employer for certain purposes. It is generally thought that where a person is loaned together with his/her equipment, he/she is more likely to continue as the employee of the original employer, particularly for purposes of vicarious liability. Also, there would have to be extremely strong evidence to show that a loaned employee was for all purposes the employee of the second employer.

Mersey Docks and Harbour Board v. Coggins & Griffiths (Liverpool) Ltd (1947)

This is the main case in this area and you must make sure that you understand and learn it.

Here, a crane-driver was lent, together with his equipment, to Coggins & Griffiths. The driver caused injury to a third party through his negligence, and it had to be decided which

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employer was vicariously liable. Coggins & Griffiths could tell the crane-driver which loads to move, and where to move them, but had no rights over his method of working. As we saw earlier, the crane-driver stated that no one could tell him how to operate his crane. In the contract of hire between the companies, it was stated that the driver should, for all purposes, be the servant of Coggins & Griffiths.

Nevertheless, the court held that he remained the employee of the Board. They retained overall control of the driver. It was also stated that an employee could not be made the servant of another person merely by stating so in a contract (of hire in this case). This was for the courts to decide on the facts of the case.

Actors and Artistes

While the control test was the sole criterion for determining who was an employee, it was difficult to bring people who provide specialised services into the ambit of contracts of employment because no employer can control as such an artiste's performance. Such a person is the possessor of some innate skill, which only he/she can control.

However, in Stagecraft Ltd v. Ministry of National Insurance (1952) this problem was dealt with by the Court of Session. Here, a variety comedian was engaged by the claimants and agreed to take part in their productions for six months. He was to act in certain sketches as the claimants required, attend rehearsals, play all parts assigned to him, obey the directions of the stage manager, and was liable to be transferred to other theatres controlled by the claimants. He was paid a weekly salary. The court stated that this was obviously a contract of employment, because the employer could exercise such strict control over all the incidentals of employment.

On the other hand, leading actors and singers and other "stars", who agree to do a particular performance for a fixed fee, are probably independent contractors.

Doctors and Nurses

As we saw in Cassidy v. Minister of Health (1951) it has been decided by the courts that the medical staff of a hospital have, in general, contracts of employment with the hospital authorities.

However, no case has yet decided the position of the consultant, although Lord Denning suggested in Cassidy's case that they ought to be treated in the same way as the rest of the medical staff. The answer may depend on the type of agreement actually drawn up between the consultants and the hospital. Lord Denning has said that his view is that, servants or not, in a vicarious liability situation the hospital would still be liable for them.

Labouring Gangs

This is a more modern problem, which has arisen in the construction industry. There are several variations in the way in which a gang of labourers may be employed by the employer. Some will very obviously be employees, e.g. where the supervisor, who is an employee, selects a particular group of people to work under him. On the other hand, some will be independent contractors, e.g. the labour-only sub-contractors, where the workers are referred to as self-employed, or where they are employees of a gang leader who acts as an independent contractor to various construction companies.

Agency Workers

As mentioned above, there is a problem with agency workers who frequently do not have the obligation to accept work offered by an agency. There is no doubt that they are not employees of the organisation with which they are placed, because of the rules of privity of contract outlined much earlier. The contract is between the agency and the organisation.

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The contract between the worker and the agency has frequently been seen as one which is not employment, as in Wickens v. Champion Employment (1984), but in two cases this position has been reviewed. In McMeechan v. Secretary of State for Employment (1997), the House of Lords ruled that lack of mutuality is only another factor and thus on the balance of all the factors the worker was an employee; and in Clark v. Oxfordshire Health Authority (1996) nurses retained on a "bank" (i.e. agency workers) were in fact employees according to the Employment Appeal Tribunal.

The issue of control may mean that the agency worker is employed by the client company, and the longer the exclusive relationship between him/her and the client company, the more likely it becomes that an employment relationship exists. See Franks v. Reuters Ltd (2003); Dacas v. Brook Street Bureau (UK) Ltd (2004); and Cable & Wireless plc v. Muscat (2006).

The Conduct of Employment Agencies and Employment Businesses Regulations 2003 now affect the operation of these bodies.

Apprentices and Trainees

The Employment Rights Act 1996 makes specific reference to apprentices and states that they are to be classed as employees (see Flett v. Matheson (2006)). However, other persons employed on a training contract are often considered not to be employees, because the nature of the contract is to learn, not to provide labour. (Wynn v. Wiltshire Police Authority (1978) – a police cadet was not an employee).

C. THE NEED TO DISTINGUISH BETWEEN CATEGORIES

The individual has to be placed in the correct category if we are to ascertain exactly what his/her rights and duties are.

Distinctions

The individual's exact status will be important in all the following areas:

Acts of Parliament may refer to employees, or those working under a contract of employment.

Thus, only an employee is entitled to a written statement of minimum periods of notice and only an employee may claim a redundancy payment or compensation for unfair dismissal, under the Employment Rights Act 1996. These rights are of great importance to the individual who has his/her contract terminated.

Common law duties, e.g. the duty of the employer to take care of the safety of his/her employees is higher than his/her duty towards independent contractors; the duty to pay wages; the duty of the employee to indemnify – Lister v. Romford Ice and Cold Storage Co. Ltd (1957).

In the latter case, P was a driver employed by the Romford Ice and Cold Storage Co. Ltd. His father, a driver's mate, assisted P. Due to P's negligence his father was injured and claimed damages against the company. The company in turn claimed that P should indemnify it against the loss sustained by the company.

HELD: P should indemnify the company for its loss in settling his father's claim due to P's negligence.

The duty of the employer to insure under statute.

The right of the employer over his/her employee's work, inventions (e.g. copyright, patent).

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Termination of contract, notice, right to a hearing, will all be affected, depending on category.

Race relations problems, under the Race Relations Act 1976.

Sex discrimination problems, under the Sex Discrimination Acts 1975 and 1986.

Claiming of national insurance benefits, e.g. only an employed person may claim the various industrial injury benefits.

Statutory protection for health and safety, e.g. in Ferguson v. John Dawson and Partners (Contractors) Ltd (1976), Ferguson was claiming damages for breach of statutory duty under the Construction Regulations. If he had been a self-employed sub-contractor, there would have been no statutory duty towards him to provide guard rails, and he would have obtained no compensation.

Under the Health and Safety at Work Act 1974, the employer has more extensive duties towards employees than towards those who are not employees.

Reasons for Choice of Categories

There are various practical reasons why an employer might choose to use one category as opposed to another, e.g. administrative costs of keeping records, sickness pay, holidays, etc., avoiding liabilities under various Acts of Parliament mentioned above; avoiding negotiations with a particular trade union (it is interesting to note that in the USA, the employer must negotiate with the union before contracting work out to independent contractors).

D. CONTRACT OF EMPLOYMENT

Employment and Self-employment

The legal relationship between employer and employee (or, as it used to be termed, master and servant) is based on the assumption that a contract exists between the two parties. This contract is known as a contract of employment or a contract of service.

In most cases, it will be clear whether a person is an employee or self-employed. Nevertheless, there are grey areas which have occupied the attention of the courts for many years. In 1980, the Court of Appeal held that to determine the terms of a contract is a matter of fact but to determine whether or not these amount to a contract of employment is a matter of law.

Following the extension of employment protection legislation over the past 20 years, the courts are probably less inclined to decide that a person is not an employee. This coincides with the approach of the Inland Revenue, which does not look with favour on the greater opportunities for tax avoidance or evasion open to the self-employed.

For example, in 1981, the Employment Appeal Tribunal (EAT) held that a bar steward was an employee although he was appointed "on a self-employed basis" with responsibility for his own tax and national insurance contributions. He also hired and fired the bar staff and took money from the till to pay himself and the other staff. The EAT's approach is summed up in the following:

"If you had asked Mr Withers while he was running the club bar 'Are you your own boss?', could he honestly have given any other answer than 'No'? In our judgment, clearly not."

The question illustrates the basic test that the courts will often apply in these cases:

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"Is the person concerned performing services as a person in business on his own account?"

Moreover, the courts will look at the actual facts of a situation, not at the label which the parties attach to it.

Relations between Employer and Employee

For many years, the relationship between employer and employee was largely regulated by the general law of contract. This situation was changed by the introduction of a new body of statute law. In this study unit, we shall consider mainly the areas of equal pay and of individual employment rights. These are covered in the following two statutes:

Equal Pay Act 1970

Employment Rights Act 1996

The latter Act amalgamated and consolidated the provisions of earlier Acts on employment rights. It is now the main statute in this sphere. It covers such areas as unfair dismissal, redundancy, maternity rights, and minimum notice, and wages provisions under what was previously the Wages Act 1986.

Identifying the Terms of the Contract

As is the case with contracts generally, a contract of employment does not usually need to be in writing in order to be enforceable. Indeed, it is probably the case that most contracts of employment are not expressed fully in written form. This can lead to difficulties if disputes arise and the terms of the contract need to be identified. In such circumstances, the courts will examine one or more of the following sources.

(a)Sources of Contract Terms

Minimum statutory standards, such as the minimum notice periods laid down in the Employment Rights Act 1996. With few exceptions, it is not possible to contract out of such standards.

Express statements of the parties to the contract contained in, for example, letters of appointment, formal contracts, oral statements on terms and conditions, and the "written particulars" specified in the Employment Rights Act 1996.

Collective agreements between unions and employers which cover the particular circumstances.

Works or company rule books.

Custom in the particular industry or company.

Implied duties of employers and employees.

(b)Written Particulars

In order partially to deal with the difficulty in identifying the terms of an employment contract, Section 1 of the Employment Rights Act 1996 requires an employer to give the employee "written particulars of terms of employment" within two months of starting work. If an employee does not receive such a statement or one that complies with the requirements, he/she can apply to an employment tribunal to determine the particulars which ought to have been included. These include such items as:

names of the parties

date of starting work

start date of period of continuous employment

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rate and frequency of remuneration

hours of work

holidays

sick pay

pension entitlements (if any)

length of notice

title of job

disciplinary rules

grievance procedures (as amended by the Employment Act 2002 (Dispute Resolution) Regulations)

place of work

details of any collective agreement which applies to the contract.

Not all the information needs to be issued to each individual employee; it is permissible to refer the employee to accessible notices or other documents. If there are less than 20 employees, the employer need not give details of disciplinary procedures.

If there is a change in any of the matters particulars of which are required to be included in the written statement of terms of employment, the employer must give the employee a written statement containing details of the change.

Certain employees are excepted from the need to be provided with written particulars of employment. These are mainly those in employment outside Great Britain, and mariners.

An employee also has the right to be given by an employer, at or before the time at which any payment of wages or salary is made, a written itemised pay statement, containing details of:

The gross amount of the wages or salary.

The amount of any deductions from that gross amount and the purposes for which they are made.

The net amount of wages and salary payable.

Where different parts of the net amount are paid in different ways, the amount and method of payment of each part-payment.

Although many workers refer to the above particulars as their "contract of employment", it is important to appreciate that they are not a contract but merely evidence of certain terms of the contract which may, indeed, be contradicted by other evidence.

Implied Terms

Unless the contract expressly provides otherwise, case law implies into every contract of employment the following duties.

(a)Duties of Employees

To be Ready and Willing to Work

An employee must be prepared to work under the direction of the employer in return for the agreed wages. Absence from work without excuse amounts to breach of contract.

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To Exercise Reasonable Skill and Care

An employee who takes on a job professes his ability to do that job and is required to be not unduly negligent in carrying it out. If he fails in these duties, he is again in breach of contract. This duty is similar to the statutory duty of reasonable care under the Health and Safety at Work Act 1974.

To Obey Lawful Orders

An employee must obey the orders of the employer, provided that they are lawful, that they fall within the scope of the contract and that they do not involve exceptional danger.

Orders that are genuinely considered by the employee to be contrary to safety may be refused under the Health and Safety at Work Act 1974 as amended, and under the Employment Rights Act 1996; a dismissal for such a reason is automatically unfair.

To Act in Good Faith

This covers a number of aspects. For example, an employee must be honest in her relationship with her employer. She must disclose any defect in herself which might make her employment more hazardous, and must not make a secret profit from her employment or work for a competitor while working for her main employer. She should not do anything which would harm the reputation of the company.

To Take Care of Employer's Property

If an employee fails to take reasonable care of the employer's property, he is required to indemnify the employer against any loss sustained.

To Maintain Confidentiality during and after Employment

In Faccenda Chicken Co. v. Fowler (1988) the courts ruled that an employee must not only keep his employers' secrets whilst working for them, but also has a duty not to disclose trade secrets or sensitive commercial information after he has left. This is in addition to any clause in restraint of trade (see earlier notes on contract clauses).

He must keep his employers' secrets, and this goes so far as to not reveal information about illegal or unethical practices by the employer (so called "whistle-blowing") unless the revelation is to an enforcement agency such as the Health and Safety Executive in the case of unsafe practices, or the Environment Agency or local environmental health department in the case of pollution issues. Here the employee is protected against dismissal.

You should note, however, that, unless there are express terms to the contrary, the law will not imply a duty on the employee to devote the whole of his/her services to the work of his/her employer (i.e. it will not impose a ban on "moonlighting"), nor will it imply a duty to refrain from political activities (Dell v. London Borough of Tower Hamlets (1994), where an employee was filmed when taking part in a National Front rally and was dismissed; the dismissal was deemed unfair).

(b)Duties of Employers

To Provide Work

This is particularly significant when the employee is paid under some form of payment by results scheme. There is an obligation on the employer to provide sufficient work to enable the employee to earn reasonable or expected wages.

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To Pay Remuneration

The employer is obliged to pay the contractually agreed remuneration and failure to do so constitutes a breach of contract.

To Provide for the Safety of Employees

There is a common law obligation on employers to provide a safe system of work. This obligation has been given statutory form in the Health and Safety at Work Act 1974 which we shall discuss in more detail later.

To Indemnify Employees

The employer must reimburse employees against all expenses, losses and liabilities incurred in the execution of orders, or in the reasonable performance of the employment. However, there is no implied term that the employee must be indemnified against his/her own negligence or when obeying an obviously unlawful order.

To Give True References

An employer is under no obligation to give a character reference for an employee or former employee but is under an implied duty not to make untrue statements or to be malicious if a reference is given (Spring v. Guardian Assurance (1994)).

To Maintain Trust and Confidence

The employer has an implied duty to maintain the trust and confidence of the employee and if they do not then they will be in breach of the contract entitling the employee to resign and claim constructive dismissal (see later). Examples of this include an employer who sought to move an employee from Leeds to Birmingham, with no notice or redeployment allowances (Akhtar v. United Bank (1989)); an employer who undermined the employee by suggesting he was mentally unstable (Bliss v. South East Thames Regional Health Authority (1987)); and not providing training and support to an inexperienced bar manager in a troublesome bar (Smyth v. Croft Inns Ltd (1996)).

E. EQUAL PAY

The Equal Pay Act 1970 covers not only pay in the strict sense but also other terms and conditions of employment which are pay-related or part of a remuneration package, such as pensions and perks. It does not cover discrimination in relation to other non-pay related terms which are covered by the Sex Discrimination Act 1975. These two Acts therefore are seen to be mutually exclusive. The 1970 Act states that:

"if the terms of a contract under which a woman is employed at an establishment in Great Britain do not include (directly or by reference to a collective agreement or otherwise) an equality clause, they shall be deemed to include one".

Note that, although the Act refers to a woman being able to claim equality with a man (and this was its primary purpose), it applies equally in reverse and enables a man to claim equality with a woman. You should bear this in mind when reading the following paragraphs.

As originally enacted, the Equal Pay Act allowed a woman to claim equal pay with a man working for the same employer in one of two ways:

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