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Supreme Court finds leaks in Pimlico’s independent contractor model

Supreme Court finds leaks in Pimlico’s independent contractor model

By Lisa Rix and Ben Smith - 28 June 2018

The Supreme Court held this month that Mr Smith, who worked for Pimlico Plumbers and had been called an “independent contractor” was in fact a “worker”.

Background

Mr Smith brought claims against Pimlico Plumbers in the Employment Tribunal (ET) in 2011 including failure to pay holiday pay, unlawful deductions from wages and disability discrimination. In order to bring these claims, he needed to prove that he was a “worker” and “in employment” (within the broader meaning of the Equality Act). This required him Mr Smith to show that:

  1. He was required to perform his work personally; and
  2. Pimlico Plumbers was not a client or customer of his Mr Smith’s own business.

The ET found that Mr Smith was a worker and “in employment”. Pimlico Plumbers appealed to, and lost in, both the Employment Appeal Tribunal (EAT) and the Court of Appeal, who each agreed with the ET’s analysis. Pimlico Plumbers then appealed to the Supreme Court.

Supreme Court Judgment

The Supreme Court agreed with the EAT and the Court of Appeal and confirmed that the Tribunal was right to decide that Mr Smith was a “worker”. The Supreme Court considered the two requirements above.

In relation to 1), Mr Smith’s requirement to perform work personally, the Supreme Court concluded that the “dominant feature” of Mr Smith's contract was that he should perform the work himself as:

a)     the contract was directed at performance by Mr Smith personally – it referred to his skills, included a warranty that he was competent to carry out the work, and required a high standard of conduct and appearance; and

b)     Mr Smith did not have an unfettered right to give away the work – there was no substitution clause in his contract, and although Mr Smith could in practice swap a shift with another Pimlico Plumber, this right to substitute was extremely limited (to only to those also bound by the same onerous rules about their conduct and appearance). This was not the same as a situation in which the employer is uninterested in the identity of the substitute, provided only that the work gets done.

In relation to 2), whether Pimlico Plumber was a client/customer of Mr Smith, the Supreme Court concluded that Mr Smith did not independently market his services to the world in general but, instead, he was an integral part of Pimlico’s business. Despite the fact that Mr Smith was able to reject work, take outside work, was not supervised by Pimlico Plumbers in the manner in which he did his work, that he filed tax returns on the basis that he was self-employed, was VAT registered and that he bore some financial risk in taking on work through Pimlico Plumbers, this did not outweigh the factors pointing against Pimlico Plumbers being his client or customer. These were that Mr Smith had to: (i) wear a branded uniform, (ii) drive a branded van which contained a tracker, (ii) carry an identity card, (iii) closely follow the administrative instructions of Pimlico’s control room, and (iv) be subject to severe terms as to when and how much pay he would receive. Mr Smith’s contract also made references to ‘wages’, ‘gross misconduct’ and ‘dismissal’ (which are terms indicative of worker status) and contained a suite of restrictive covenants regarding his working activities following termination.

Therefore, the Supreme Court concluded that the ET was entitled to conclude that Mr Smith was a worker and that his substantive claims could proceed to be heard in the ET.

Why does this case matter?

This case follows the recent trend of the courts determining that people set up as “independent contractors” are entitled to employment rights as “workers” (see also the Uber, CitySprint and Addison Lee cases). The Supreme Court has reinforced the point that employers cannot simply declare an individual to be an independent contractor to attempt to bypass worker rights.

It is important for employers to get employment/worker status right as this determines individuals’ legal rights: an “employee” is entitled to the full range of rights, including unfair dismissal protection, maternity/paternity leave and sick pay, whereas a “worker” has a more limited set of rights, including the rights to the national minimum wage and holiday pay and genuinely self-employed contractors have fewer legal rights (but enjoy the benefit of different tax treatment and the flexibility of working for themselves).

By Pimlico Plumbers getting this analysis wrong, they will not only face Mr Smith’s claims for backdated holiday pay, unlawful deductions and disability discrimination, but they may also face similar claims from its other plumbers.

Key take-aways for employers

The judgment does not require employers to make any immediate changes to existing practices, but the key things to note for employers are:

  • You can still successfully operate a business model using genuinely self-employed contractors, but it is important to carefully consider the reality of the relationship: you cannot rely on contractual labels or tax structure
  • Make sure you include a contractual right to substitute in independent contractors’ contracts and try to keep the independent contractor’s discretion around substitutes as unfettered as possible, to the extent commercially possible (and do not limit it to your other workers)!. Indeed, lack of control over substitutes was key to the success of Deliveroo in proving independent contractor status in relation to its riders.
  • Avoid as far as possible the appearance that independent contractors are marketing for the company and subordinate to the company (i.e. wearing a uniform, driving branded vehicles etc.
  • Don’t forget that “worker” and “employee” and “employment” don’t always mean the same thing: Mr Smith was found to be a “worker” and not an “employee”, however he was still “in employment” for the purposes of bringing his discrimination claim (the Supreme Court accepted that “in employment” was the same in this context to being a “worker”). As the Supreme Court stated: “It is regrettable that in this branch of the law the same word can have different meanings in different contexts. But it gets worse […] different words can have the same meaning”.
  • You should continue to follow this area closely – it will remain a hot topic, we expect to see many more claims and the government is currently carrying out a number of consultations in the area…