Launahurst Ltd v Arner

Mr Nigel Larner’s complaint is that on 19 September 2008 Launahurst Limited unfairly dismissed him from his employment as a window installer. Launahurst, which trades as Launa Windows in a double glazing business in Newton Abbot, denies that it ever employed Mr Larner. It says that, along with about 30 others whose services are available to Launahurst, he was a self-employed sub-contractor. He supplied sub-contracting services from 6 September 1995 to 19 September 2008, when his contract was terminated. As he was not an employee within the meaning of the Employment Rights Act 1996, the employment tribunal (ET) had no jurisdiction to hear and determine the claim.

The issue on this appeal is whether the employment judge, sitting alone in the ET in Exeter on a pre-hearing review, erred in law in holding that Mr Larner was an employee of Launahurst. In reaching that conclusion he held that clause 11 of a Contract Supply Agreement dated 5 December 2004 (the Contract), which was relied on by Launahurst as a ground for contending that it did not employ Mr Larner, was a sham. Mr Larner signed the Contract over 9 years after he first began to install Launahurst windows. The employment judge said that the Contract signified a regime change “as a result of the attitude taken by the Revenue in relation to the tax and self employment status” (paragraph 12).

Clause 11 of the Contract stated as follows:-

“11.

Entire Contract

11.1

The terms herein and the terms and conditions set out in the Assignment Schedule constitute a contract between the Company and the Contractor under which the Contractor shall provide services to the Company.

11.2

The Agreement constitutes the entire contract between the Company and the Contractor and no variation or alteration to these terms shall be valid unless approved by a Director of the Company in writing.

11.3

The Company shall endeavour to obtain suitable assignments for the Contractor with its customers but shall be under no obligation to do so.

11.4

Neither the Contractor nor any of its Personnel is an employee of the Company.”

The employment judge, without differentiating between the effect of the four sub-clauses, said that such a clause in a contract may be disregarded, if it is a sham, which it may be if it does not

“...reflect the reality of the situation as it was operated between the parties and in those circumstances, I think that particular clause in the contract is a sham on that basis. In my view it bears no reality to the way the parties conducted themselves throughout the working arrangement both before and after the signing of the Contract.” (paragraph 16)

Having rejected clause 11 as without legal effect, the employment judge then looked at all the other circumstances of the case in order to decide whether the picture painted was one of employment or self-employment. He concluded that, while there were factors pointing in different directions, Mr Larner was, on balance, an employee of Launahurst with continuous service from September 1995 up to the date of termination.

The judgment, which the ET sent to the parties on 16 March 2009, was upheld by the Employment Appeal Tribunal (EAT). In his judgment of 18 August 2009 HHJ Reid QC (also sitting alone) dismissed Launahurst’s appeal saying that the ET was

“….entitled to hold that the ‘entire agreement’ clause was a sham since the operation of the relationship demonstrated that the parties did not realistically intend or envisage that the terms would be carried out as written. His view formed a proper foundation for finding that the written words do not truly reflect the intentions of the parties: see Protectacoat at para 57. He was entitled to hold that the contract did not describe or represent the true intentions and expectations of the parties and so that it was not definitive.”

On 19 October 2009 Elias LJ granted Launahurst permission to appeal.

Mr Larner did not turn up to the hearing of this appeal, or notify the court of any reason for not turning up, or send in any written submissions opposing the appeal. Nor was he represented at the hearing. It was the same in the EAT. This is unfortunate as, in the course of the hearing, it became clear that a procedural irregularity had occurred in the ET. Launahurst was not forewarned by the employment judge (or by Mr Larner) that sham was an issue. However, that procedural point was never taken by Launahurst, although it could have been by means of a request to the ET to grant a review of its decision, or by way of appeal in the EAT, or in the grounds of appeal to this court.

The non-appearance of Mr Larner, or of any representative, means that the court has not received any submissions from him, or for him, on this point, or on any other point. In disposing of this appeal in a way that is proper and is just to both parties, the court has to do the best that it can with what is available. We are grateful to Mr Allan Roberts, who appears for Launahurst, for his assistance.

In the ET Launahurst was represented by its solicitor, who instructed counsel in the EAT and on this appeal. Mr Larner appeared in person in the ET. Although, for understandable reasons (no money, no public funding, no trade union membership and so on), lack of legal representation is common in the ET, it is not good for the process of adjudication. An adversarial system does not function as well as it should do, either at trial or on appeal, if the parties are not professionally represented. The risk of injustice is increased by the unrepresented litigant’s failure to appreciate the need for relevant evidence and the inability of most litigants in person, through no fault of their own, to present structured legal arguments. The integrity of the judicial process itself can be compromised by the efforts of the tribunal to do what it can to make sure that the disadvantaged party is not actually prejudiced.

All this is well known. It is repeated here to explain the difficult situation in which the employment judge in this case was placed. Mr Larner’s status was critical to the jurisdiction of the ET, yet Mr Larner was not as well equipped as Launahurst to put his evidence or his legal submissions to the ET, or to challenge Launahurst’s response to his claim. The employment judge could not, consistently with his judicial role, do much to help Mr Larner. He obviously could not do his case for him, or give legal advice to him about how to do it, or assist him beyond providing him, in a neutral way, with basic information about the issues, the procedure and the relevant law.

It is right that, in a case where the complainant is acting in person, the employment judge should have been alert to the possibility that the Contract relied on by Launahurst and signed by Mr Larner over 9 years after he started installing windows for Launahurst, might not be an accurate reflection of the reality of their legal relationship. A person in Mr Larner’s position might be asked to sign a document that is not an accurate picture of the true relationship and could have the effect of eliminating statutory employment protection.

I should also mention Launahurst’s legitimate concerns about the effect of the rulings in the ET and the EAT on it. The legal status of the 30 or so other window installers operating under similar arrangements has been thrown into doubt. We are told by Mr Roberts that there are others operating under similar arrangements who do not wish to be treated as employees. They are content, at present, with the advantages of being treated as self-employed sub-contractors.

Mr Roberts points the court to the ambiguities in Mr Larner’s own perception of his legal relationship with Launahurst. This is revealed in his ET1 dated 27 October 2008, which he completed personally and in which he said this:-

“Having worked for 13 years for the respondents and never had a verbal or written warning yet just a phone call saying my services are no longer required seem somewhat unfair even if I had worked for them as a self employed contractor for that whole 13 years and no-one else. I have looked at HM Revenue & Customs employment status and having read and answered the questions as whether I’m an employee or self employed my situation seemed to point to employed have put a summary in….”

The ET1 contained some details of the alleged employment from September 1995 to September 2008: 40 hours each week and pay before tax of £610 weekly, normal take home pay £488.

In its response in the ET3 dated 3 December 2008 Launahurst stated that it engaged the services of some 30 self-employed installers and that Mr Larner provided services to it “as a self-employed installer as a labour only subcontractor under the terms of a Contract Supply Agreement” dated 5 December 2004 and signed by Mr Larner, and that it had terminated the Contract in accordance with clause 7.2.2 on the basis that he was unable to perform the services to the satisfaction of the customer. It pointed out that the Contract expressly provided that Launahurst was under no obligation to offer work to Mr Larner. As it contended that the ET did not have jurisdiction to hear the complaint, it sought a pre-hearing review limited to the issue of Mr Larner’s status.

The pre-hearing review was held on 19 February 2008. As is the normal procedure, the review was held by the employment judge without lay members. Mr Larner made a witness statement, gave oral evidence and was cross examined by Launahurst’s solicitor. Mr Tim Weeks of Launahurst made a witness statement and was asked questions by the employment judge. However, Mr Roberts informs us that the first that Launahurst or its solicitor knew anything of the sham point on clause 11 of the Contract was when it received the ET judgment in mid-March 2009. The issue of sham was not raised by Mr Larner in his ET1, or in his evidence to the ET, or by the employment judge, who did not invite submissions on that point from Launahurst’s solicitor either at the hearing or before sending his decision.

However, as noted above, Launahurst did not request the ET to grant a review of its decision nor did it raise this particular procedural point as a ground of appeal. The main substantive grounds of appeal are that the ET erred in law in construing the word “employee” in Part X of the Employment Rights Act 1996 and in its construction of the authority of Redrow Homes (Yorkshire) Limited v. Buckborough & Anor [2009] IRLR 34, which was cited in the ET judgment, for the conclusion that a contractual term is a sham and/or in failing to give any adequate reasons for its finding that the entire agreement clause was a sham.

In view of what this court has been told about the ET hearing, there was plainly a procedural error in finding that “the entire contract agreement clause” was a sham, without notice of the point to Launahurst either from Mr Larner or from the employment judge before or at the hearing. The point was not explored in evidence, in argument or in law. The upshot is that Launahurst has not had a hearing on a relevant issue decided against it. It would not be right for this court to decide the sham point on the appeal. The relevant facts about the Contract, its genesis and operation, would have to be established by evidence in the ET. Mr Roberts makes submissions on sham contracts and criticises the way in which the employment judge reached his conclusion. He points to the absence of any finding of fact about the intentions of the parties in relation to the Contract. There was, he says, no evidence that the terms of the relationship were any different from the terms of the Contract, which reflected the reality that there was no mutuality of obligation: Launahurst was under no obligation to give Mr Larner work, Mr Larner was under no obligation to do it and could take off as much time as he liked. It is submitted that the irreducible minimum of mutuality of obligation essential to the existence of an employment relationship is missing both from the Contract and from the findings of fact by the ET.

As Launahurst had no opportunity to adduce evidence relevant to the sham point, it would be unwise for this court to express any view about it factually or about the current state of the law. The topic of sham will probably receive extensive treatment in the employment context when the Supreme Court decide the appeal in the case of Autoclenz Ltd v. Belcher [2009] EWCA Civ 1046; [2010] IRLR 70 in which permission to appeal has been granted.

The question for this court is how, in view of the procedural error and in the interests of justice, it should dispose of this appeal. There are 3 possible options.

The first option which would normally apply in the case of a serious procedural error that may have resulted in injustice to the appellant is to allow the appeal and remit the case to the ET for re-hearing.

The other options involve this court putting the sham clause 11 issue and the rest of the Contract to one side and deciding the case on the basis of relevant facts found by the ET about the legal relationship between the parties both before and after the Contract was signed.

The second option would be to allow the appeal on the ground of serious procedural error, but to proceed to decide the appeal in favour of Launahurst. That could be done if this court is satisfied that, on the basis that the facts found in the ET about the relationship between the parties before, after and apart from the Contract, Mr Larner had not established that he was an employee of Launahurst. The ET made findings of fact about that relationship, having heard evidence from Mr Larner and from Launahurst. In view of Mr Larner’s total non-participation in the appeals to the EAT and this court it is possible that, on remission of the case to the same ET or a differently constituted ET, the hearing would be a pointless exercise.

Mr Roberts’ primary submission is that the court should take the second option of allowing the appeal and dismissing the claim: alternatively, the first option of allowing the appeal and remitting to the ET for re-hearing. He is opposed to the third option, which would be to dismiss the appeal on the ground that the procedural error was not serious, caused no injustice to Launahurst and did not affect the correctness of the ET judgment. I am prepared to assume in Mr Larner’s favour that, if he were here or represented, he would ask the court to take that course. What should this court do? On balance, I favour allowing the appeal and dismissing the claim for the following reasons.

First, the ET erred in law. As the sham point was not raised by Mr Larner and Launahurst had no warning that the employment judge was considering that possibility, there was a serious error in the ET’s procedure. It follows that Launahurst has not had a proper hearing on that point and that the decisions of the ET and of the EAT should be set aside.

Secondly, the interests of justice do not require the court to follow the usual course of remitting the matter to the ET for re-hearing. This case has now been heard 3 times at 3 different levels. Mr Larner has not attended the hearings in the EAT or this court, nor has he opposed Launahurst’s appeals in any way by sending in written representations, or putting in a personal appearance, or even explaining his non-participation in the appeals. In my view, Mr Larner could not reasonably object to the court exercising its discretion to decide the case on the basis of the facts found on the evidence given at the original hearing about his working relationship with Launahurst.

Thirdly, the totality of the facts found by the ET about the relationship between Launahurst and Mr Larner is, in my view, more consistent with the picture of him as a self-employed sub-contractor for Launahurst than as an employee. The ET found that the pattern of work did not change to any material extent following the signing of the Contract. Mr Larner was responsible to Her Majesty’s Revenue and Customs for his own tax and national insurance, though he was registered under the CIS scheme under which 20% tax was deducted; he was required to have and did have a policy of Public Liability insurance with AXA Insurance UK plc to cover liability for work done by him, the policy giving his home address and describing the business as double glazing installing; he did not submit invoices for what he had done; he worked for five days a week on jobs scheduled by Launahurst, but not for set hours; he was supplied with the windows and doors manufactured by Launahurst; he was provided with a number of assignments or jobs at the beginning of each week and would be paid per assignment rather than by reference to a basic wage for labour or time, the amount initially being 10% commission of the value of the installation contract, but later becoming a fixed amount; there was no sick pay, no holiday pay, no holiday arrangements and no pension scheme; there was no disciplinary procedure; he was provided with assignments that gave details of the specifications for the windows requiring installation, but was free to carry out the work in his own way and at his own pace using his own tools (drills, saws, screwdrivers and the like); he had no choice about which job he was given; he was sometimes helped by a colleague engaged by Launahurst; he was free to go home as soon as he had finished the particular installation; he worked for five days a week; there were 5 occasions in the year prior to the termination of his contract when Launahurst agreed to supply him with windows so that he could work for his own private customers installing the same; he was provided with a van insured by Launahurst; he initially paid for his own fuel, but was later issued with a fuel card.

As indications that Mr Larner was an employee, the ET pointed to remuneration on a regular basis, albeit by some form of commission, to his lack of direct control over particular jobs that he undertook and the fact that, to outside observers, he would have appeared to be an employee. I would not regard the first and second factors as particularly strong indications of employment in this case and, in my view, the appearance to outside observers carries very little if any weight.

I have reached the conclusion that no useful purpose would be served by yet another hearing of this case. The ET has found the facts relevant to the relationship between the parties before and after the Contract was signed. I am unable to agree with the ET that they establish an employment relationship. Looking at the matter in the round the pattern of self-employment prevails over contrary indications of employment. The relationship falls outside a reasonable expectation of statutory protection against unfair dismissal.

For the above reasons I would allow the appeal and dismiss the claim for unfair dismissal.

I agree with Mummery LJ that the appeal should be allowed and the claim for unfair dismissal should be dismissed. I also agree that that conclusion can be reached simply by reference to the evidence concerning the factual relationship between the parties. For my part, however, I would also take into account the terms of the Contract as strongly supporting the conclusion.

In my view the ET’s finding that the Contract was a sham goes beyond a procedural error. There was no substantive basis on which that finding could properly be made. Neither in Mr Larner’s ET1 nor in his evidence was there any suggestion that the Contract did not reflect the true intentions of the parties (or that it did not represent what they had actually agreed) as to the nature of the relationship between them, nor of course was any such suggestion made in Launahurst’s response or evidence. Whilst I recognise the wisdom of avoiding any detailed examination of the law on sham pending the decision of the Supreme Court in Autoclenz Ltd v Belcher (see para [20] above), I cannot see any realistic prospect of the law being recast in such a way as to create the possibility of a finding of sham in the absence of any suggestion or evidence from either party that the written agreement between them did not reflect their true intentions or represent what they had actually agreed.

If account is taken of the Contract, clauses 8 and 11 are of particular importance. Clause 8 provides:

“8.1

The Company shall be under no obligation to offer any particular assignment or project to the Contractor however similar that assignment or project may be to assignments or projects previously offered by the Company to the Contractor.

8.2

The Contractor shall be under no obligation to accept any particular assignment or project offered by the Company however similar that assignment or project may be to assignments or projects previously accepted by the Contractor from the Company.”

That clause seems to me to be decisive in Launahurst’s favour. As the EAT put it, “[t]here was, on the face of the document, no mutuality of obligation, no obligation to offer work and no obligation to accept it” (para [29]). Such mutuality is an essential feature of a relationship of employment: Clark v Oxfordshire Health Authority [1998] IRLR 125, para 22.

Clause 11, which Mummery LJ has quoted at para [3] above, reinforces the point, in particular by providing in 11.3 that the Company is under no obligation to obtain suitable assignments for the Contractor, and in 11.4 that the Contractor is not an employee of the Company.

Other clauses are also relevant: for example, the requirement in clause 4.5 that the Contractor take out employer’s liability and public liability insurance cover.

It is difficult to see how, in the absence of a properly based finding of sham, factual evidence as to the conduct of the parties could counteract the effect of those contractual provisions. But one does not need to concern oneself with that in this case since the actual conduct of the parties, as summarised by Mummery LJ at paras [28]-[29], was consistent with the Contract.

Since in my view the ET fell into clear legal error in finding that the Contract was a sham and in disregarding its provisions, and since on the evidence before the ET the only reasonable conclusion was that Mr Larner was a sub-contractor, not an employee, it seems to me that the disposal put forward by Mummery LJ is the only option sensibly open to this court.

I agree with both judgments.