Tests Identifying A Contract Of Employment

Employment law is heavily influenced by EC law. It is concerned with the relationship between employer and employee. It comprises a common law basis of the contract of employment and a range of statutory provisions. It is therefore often vital to determine the status of employment with a person, in terms of whether they are employees or self employed because certain employment rights derive from the result of the person being an employee. The assessment of what is required in law for a worker to be considered to be an employee and what types of workers are not starts with the several common law tests that have been developed by the courts for the purposes of identifying the existence of a contract of employment.

An employee is employed under a contract of employment, which is a legal form of contract of service. The parties are employer and employee. However, people who are contracted to provide work or service but who are not employees are employed under contract of service. It is vital to make this distinction due to employee’s rights, more generally since, for example, as only an employee may bring claims for unfair dismissal, or be made redundant and claim statutory redundancy payments, they are the only ones that qualify for employment protection rights, protection of wages on their employer’s insolvency, the benefit of their common law duty of care, and protection under the health and safety legislation, The distinction is most important on a day-to-day basis for taxation, since employees are taxed differently from the self-employed.

The aforementioned common law tests were first devised to decide, under common law principle of vicarious liability, when employers may be held liable for the tortious acts of their employees buy may not be held liable for the acts of the self-employed, i.e. independent contractors. There are three tests which have been used to determine the status of employment, which are: the control test; the integration test; and the multiple test. The first test used by courts in the 19th century sees the court examine whether the master controlled or had the right to control not only what the worker did but also the manner in which he did it. This was set out in Yewens v Noake [1] where Bramwell LJ stated: “A Servant is a person subject to the command of his master as to the manner in which he shall do his work." In the past, if an employer was able to tell an employee not only what to do, but stipulate how to do it and when, then this would indicate a contract of employment existed, whereas a smaller degree of control would point towards self-employment. In the past century, as the pace of technological change hastened, it became obviously unrealistic to conceive of the employer having the knowledge to control many of his increasingly high skilled employees. For example, an airline pilot cannot be said to be ‘controlled’ by the airline in any real sense while he or she is carrying out their work. Therefore, the control test became outmoded as the sole criterion. Although it remains important, it is no longer seen necessarily conclusive. It is, however, in regards to questions of employment status this test is often considered crucial.

The second test that was developed for a more realistic approach came in a series of cases in the late 1940s and early 1950s in which hospitals were held vicariously liable for the acts of surgeons, radiographers and other specialists known as the integration test. It was first identified by Somervell and Denning LJJ in Cassidy v Ministry of Health [2] , where I was applied to establish that a doctor working within the NHS was an employee of the Health Authority. Again in 1952 Denning LJ referred to this test in Stevenson, Jordan and Harrison Ltd v Macdonald and Evans [3] where it was considered that the decisive question was whether the person is employed as part of the business, whether his or her work is done as ‘an integral part of the business’ or whether it is merely an accessory to it. Although the test has the advantage of being a fairly straightforward one, the great fall back of this approach lies in its failure to define exactly what is meant by ‘integration’ and ‘organisation’.

Gradually the courts have recognised that no one test or set of criteria can be conclusive when determining employment status, and so the test adopted by courts for deciding whether a contract is of or for service is the ‘multiple test’. This is a three fold test: a contract of service requires duty to give personal service, the existence of a sufficient degree of control and the terms of the contract being consistent with service. The correct approach for identifying the status of a working relationship is to consider a range of factors relevant to the relationship. If the evidence reveals the existence of an employment contract or if such consideration indicates the presence of a determining factor, the worker concerned will be deemed to be an employee. A clear illustration of the test being used is in Ready Mixed Concrete (SE) ltd v Minster of Pensions and National Insurance [4] , the case concerned the appellant company’s liability for social security contributions of their worker which arose only if they had contracts of service. The worker who drove ready mixed concrete lorries, was buying his lorry on hire purchase from the company was found to be employed under a contract for service, not a contract of service. In his judgment, MacKenna J considered what is meant by a contract of service. He said:

“A contract of service exists if these three conditions are fulfilled.

(i) The servant agrees that, in consideration of a wage or other remuneration, he will provide his own work and skill in the performance of some service for his master. (ii) He agrees, expressly or impliedly, that in the performance of that service he will be subject to the other’s control in a sufficient degree to make that other master. (iii) The other provisions of the contract are consistent with its being a contract of service.

As to (i). There must be a wage or other remuneration. Otherwise there will be no consideration, and without consideration no contract of any kind. The servant must be obliged to provide his own work and skill. Freedom to do a job by one’s own hands or by another’s is inconsistent with a contract of service, though a limited or occasional power of delegation may not be…." [5] 

The ‘multiple’ test leaves a lot of room for interpretation, not least the third condition where there is no prescribed list of factors which are consistent and inconsistent, but a matter of common sense in each case.

Market Investigations ltd v Minister of Social Security [6] identified the underlying element of being in business on one’s own account in relation to the ‘multiple’ test as Cooke J stated that the fundamental question was: “is the person who has engaged himself to perform these services performing them as a person in business on his own account?", if the answer was found to be yes then the contract was for services; however in this case the market researcher was found to be employed under a contract of service. The factors relevant in this case The degree of control taken by the employer, The degree of risk taken by the worker, Ownership of tools and equipment, Regularity and method of payment, Regularity of Obligations, Ability to provide a substitute, and the Terms used.

The flexibility of the ‘multiple’ test have proved useful in cases such Lee v Lee Air Farming ltd [7] , where directors are concerned. Mr Lee had formed a company; Lee's Air Farming Limited and held nearly all its shares. He was the managing director, but by profession a pilot. The company was formed to conduct an aerial top-dressing business. He appointed himself the chief pilot for the company. In the Court of Appeal of New Zealand, North J said: "These powers were moreover delegated to him for life and there remained with the company no power of management whatsoever. One of his first acts was to appoint himself the only pilot of the company, for, although article 33 foreshadowed this appointment, yet a contract could only spring into existence after the company had been incorporated. Therefore, he became in effect both employer and worker. True, the contract of employment was between himself and the company, but on him lay the duty both of giving orders and obeying them. There could exist no power of control and therefore the relationship of master-servant was not created. It was then held a limited company is a separate legal entity; that a sole shareholder can be an employee and when Lee died on the aircraft, it was held that the widow could claim under workman’s compensation.

In contrast, Fleming v Secretary of State for Trade and Industry [8] , illustrates how problems may arise where the director is also a controlling shareholder. In this case the court held that the managing director of a company who owned 65% of the company’s shares was not an employee. This conclusion was based on a number of factors: he has not drawn his salary for the last month of the company’s existence; he had personally guaranteed the company’s debts; he had no written contract of employment; and he held the majority shareholding will never be held to be an employee.

In conclusion, it is apparent that the cases provide only guidance and do not identify rigid rules. When questions of employment status arise, the legal principles must be applied to the facts of the case, and all factors must be taken into consideration. Of the three tests, the control test is now subsumed as part of the multiple test, although the degree of control over a worker is often a very important consideration. The integration test has also been absorbed into the multiple test. The multiple test allows the courts the greatest flexibility when considering all relevant factors when deciding whether a person is an employee. However, it would appear that the law in this area is in need of greater clarification, particularly in the agency cases, where application of the relevant principles and the possibility of an implied contract arising has led to some surprising results. Finally, it should be noted that personal service and mutuality of obligations are essential requirements in a contract of employment: it would seem that without these there will be no finding of a contract of service.