Neutral Citation Number: [2007] EWCA Civ 626
Case No: C3/2006/1897
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
CHANCERY DIVISION
Mr Justice Lewison
CH/2006/APP/169/220
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 27 June 2007
Before :

LORD JUSTICE AULD
LORD JUSTICE MOSES
and
LADY JUSTICE HALLETT
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Between :

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMS	Appellant	
	- and -		
	THORN BAKER LIMITED & ORS	Respondent	

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Ingrid Simler QC (instructed by The Commissioners for Her Majesty’s Revenue & Customs) for the Appellant
Gerard Clarke (instructed by Sharpe Pritchard) for the Respondent

Hearing date : 9th May, 2007
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Judgment

Lord Justice Moses : 
Background
1.	The issue in this appeal is whether an agency worker, supplied to do work in a factory, is entitled to statutory sick pay.  Thorn Baker Limited is an employment business providing workers to others.
2.	Mr Paradise was engaged by Thorn Baker under the terms and conditions of an “Agency Workers’ Agreement”, signed on 25 June 2002.  In the course of his assignment as a factory operative for a client of Thorn Baker, he was advised by his doctor to refrain from work for just under one month due to abdominal strain.  This appeal also concerns another assigned agency worker whose period of incapacity was, however, shorter.
3.	The earnings of both were subject to deduction of Class 1 National Insurance Contributions.  Both asserted that Thorn Baker was liable to pay them statutory sick pay.  Thorn Baker refused, on the grounds that both were excluded from statutory entitlement to such payments because they had entered into contracts of service for a period not exceeding 3 months.  The General Commissioners, and, on appeal, Lewison J (see [2006] EWHC 2190 (Ch)), accepted that neither agency worker was entitled to statutory sick pay. The authority responsible for enforcing liability to make statutory sick payments, the Commissioners for Her Majesty’s Revenue and Customs (“the Revenue”) appealed against the decision.
Statutory Framework
4.	The obligation on an employer to make to an employee a payment known as statutory sick pay is imposed in Part XI of the Social Security Contributions and Benefits Act 1992 (SSCBA 1992) by section 151(1) which provides:-
“Where an employee has a day of incapacity for work in relation to his contract of service with an employer, that employer shall, if the conditions set out in sections 152 to 154 below are satisfied, be liable to make him, in accordance with the following provisions of this Part of this Act, a payment (to be known as ‘statutory sick pay’) in respect of that day.”
5.	The relevant condition for the purposes of the instant appeal is that which is contained in section 153, which provides:-
“The second condition is that the day in question falls within a period which is, as between the employee and his employer, a period of entitlement.”
6.	Schedule 11 (introduced by section 153(3)) specifies circumstances in which a period of entitlement does not arise in relation to a particular period of incapacity for work.  The relevant provisions under Schedule 11 for the purposes of this appeal are:-
“1.	A period of entitlement does not arise in relation to a particular period of incapacity for work in any of the circumstances set out in paragraph 2 below, or in such other circumstances as may be prescribed.
2.	The circumstances are that:-
	…
	(b)	the employee’s contract of service was entered 		into for a specified period of not more than 3 			months;”
Paragraph 2(b) is supplemented by paragraph 4 in the same Schedule enabling contracts of service to be aggregated in specified circumstances for the purposes of calculating the period of an employee’s contract of service.  
7.	As the judge remarked (paragraph 7), but for paragraph 2(b) of Schedule 11, both of the agency workers would have been entitled to statutory sick pay.  For the purposes of the argument advanced in this appeal, it is necessary to follow the statutory route by which both of the two agency workers would have been entitled to statutory sick pay and how their circumstances brought them within paragraph 2(b) of Schedule 11.
The agency worker as employee
8.	It will be apparent that only an employee who suffers incapacity for work in relation to his contract of service with an employer, within the meaning of section 151(1) of the SSCBA 1992, has a right to statutory sick pay.  Since there was no dispute before the General Commissioners as to the entitlement of the two agency workers to such payments but for the provisions of paragraph 2(b) of Schedule 11, the statutory route to their entitlement was not followed.  Nor was it necessary, in the light of the arguments before him, for Lewison J to embark upon that journey.  But in the light of the argument now advanced by Miss Simler QC for the Revenue, it is necessary to follow that winding path.  It starts at the interpretation section of the SSCBA 1992, section 163(1).  This provides that within Part XI:-
“‘Contract of service’ (except in paragraph (a) of the definition below of ‘employee’) includes any arrangement providing for the terms of appointment of an employee;
‘employee’ means a person who is – 
(a)	gainfully employed in Great Britain either under a contract of service or in an office (including elective office) with emoluments chargeable to income tax under Schedule E; and 
(b)	over the age of 16;
But subject to regulations, which may provide for cases where any such person is not to be treated as an employee for the purposes of this Part of this Act and for cases where any person who would not otherwise be an employee for those purposes is to be treated as an employee for those purposes.”
9.	The regulations which provide for persons to be deemed to be employees for the purposes of Part XI of the SSCBA 1992 are the Statutory Sick Pay (General) Regulations 1982.  If a person over the age of 16 is treated as an employed earner by virtue of the Social Security (Categorisation) Regulations 1978, then he is treated as an employee for the purposes of  Part XI of the SSCBA 1992 (see Regulation 16(1)).
Regulation 2 of the 1978 Regulations requires earners within Column A of Schedule 1 who are not specified in Column B to be treated as employed earners. 
Agency workers, such as the two involved in the instant appeal, fall within paragraph 2 of column (A) and are not excluded by column (B):-
“Employment…in which the person employed renders, or is under obligation to render, personal service and is subject to supervision, direction or control or to the right of supervision, direction or control, as to the manner of the rendering of such service and where the person employed is supplied by or through some third person…”
Amendments update these Regulations so that they refer to Part XI of SSCBA 1992.  I should also record, at this stage, that the continued effect of the 1982 and the 1978 Regulations is not only to bring agency workers within the category of those entitled to statutory sick pay but also within the category of those required to make National Insurance Contributions.
10.	Thus, agency workers, such as Mr Paradise and Mr Middleton in this case, are deemed to be employees for the purposes of section 151(1).  It is only by that route that their entitlement to statutory sick pay can be triggered.  Moreover, they were employees working under contracts of service by virtue of the definition of contract of service within section 163(1).  Were that not so, neither would have suffered a day of incapacity for work in relation to his contract of service with an employer within the meaning of section 151(1). Paragraph 2(b) would have had no application because they would have had no entitlement to statutory sick pay in the first place.  Paragraph 2(b) assumes a contract of service, following the statutory requirement in Section 151(1)(b) as extended by the definitions in Section 163(1).
11.	The central issue in this appeal is whether the exclusion from entitlement to statutory sick pay under Schedule 11(2)(b) was repealed by Regulation 11 of the Fixed Term Employees (Prevention of Less Favourable Treatment) Regulations 2002 (the 2002 Regulations).  The Regulations came into operation on 1 October 2002.  Regulation 11 of the Regulations provides:-
“The amendments in Part I of Schedule 2 to these Regulations shall have effect subject to the transitional provisions in Part 2 of the Schedule.”  (Those transitional provisions are irrelevant.)
12.	Paragraph 1 of Part 1 of Schedule 2 provides:-
“1.	In Schedule 11 of the Social Security Contributions and Benefits Act 1992 (circumstances in which periods of entitlement to statutory sick pay do not arise) –

	(a)	In paragraph 2, omit paragraph (b), and
	(b)	omit paragraph 4.”
13.	The Revenue contends that Regulation 11 and paragraph 1 of Part 1 to Schedule 2 remove the condition based on length of contract of service contained in Schedule 11(2)(b).  Both Mr Paradise and Mr Middleton are thus entitled to statutory sick pay.
14.	Regulation 19 of the 2002 Regulations is headed “Agency Workers”.  It provides:-
“(1)	These Regulations shall not have effect in relation to employment under a fixed-term contract where the employee is an agency worker.
(2)	In this regulation “agency worker” means any person who is supplied by an employment business to do work for another person under a contract or other arrangements made between the employment business and the other person.
(3)	In this regulation “employment business” means the business (whether or not carried on with a view to profit and whether or not carried on in conjunction with any other business) of supplying persons in the employment of the person carrying on the business, to act for, and under the control of, other persons in any capacity.”
Lewison J’s Reasoning
15.	The General Commissioners and Lewison J concluded that Regulation 11 fell within the scope of Regulation 19 and that the effect of Regulation 19 was to exclude agency workers from the scope of the repeal of Schedule 11, Paragraph 2(b) of the SSCBA 1992.  Lewison J, in a judgment which loses none of its cogency in the concision with which it was expressed, concluded that the only permissible construction was that Regulation 11 is part of “these Regulations” and does not have effect in relation to employment under a fixed-term contract where the employee is an agency worker (see his judgment at paragraphs 13 and 14).  The clear terms of Regulation 19 provide that “these Regulations” do not affect agency workers as defined.  He noted:
“It is common ground that both Mr Paradise and Mr Middleton fall within this description.”
16.	The judge accepted Mr Clarke’s submission, on behalf of Thorn Baker, that the repeal of the condition under Schedule 11, Paragraph 2(b) of the SSCBA 1992 has the effect of conferring upon those who fall within section 151(1) a right to statutory sick pay notwithstanding that their contract of service was entered into for a specified period of not more than 3 months.  The judge agreed with the proposition that:-
“There is no difference in substance between those rights achieved by express provision and rights to statutory sick pay achieved by the excision of an exclusion.”  (See paragraph 15 of his judgment.)
Conclusion on Judgment
17.	Lewison J rejected the Revenue’s argument that a construction should be avoided which had the effect of maintaining a statutory condition in relation to one category of earner whilst removing it in relation to another.  I agree with the judge.  This novel canon of construction has no place in the law.
18.	Lewison J also rejected the argument that Regulation 11 is not expressed to be subject to Regulation 19.  I agree with him that the words “these Regulations” obviate the need for such underlining.
A Fresh Analysis
19.	Although Miss Simler QC, on behalf of the Revenue, persisted in her original arguments, perhaps in recognition of the fact that they had failed twice, she adopted a new approach to the language of Regulation 19.  I hope I may be forgiven for describing that as a new approach since she advanced an argument which did not seem to me to find any place, or at least any discernible place, within her grounds of appeal or skeleton argument.  But a modern, sympathetic and flexible constitution of this court gave no sign of refusing to listen to the argument.  Since we are told the case is of importance, affecting as it does some 500,000 agency workers, I must deal with it.  
20.	The argument focused on the wording of Regulation 19.  The exclusion from the scope of the 2002 Regulations contained in Regulation 19 is limited by the words:-
“in relation to employment under a fixed-term contract”.
Regulation 11, so she argued, does not have effect in relation to employment under a fixed-term contract at all.  On the contrary, it repeals part of SSCBA 1992, and thus confers an entitlement to statutory sick pay on those who were hitherto excluded from entitlement by virtue of their short-term contracts of service.  
21.	Contrast, she argues, the provisions of Regulation 3, from which, she accepts, agency workers are excluded.  Regulation 3 does have effect in relation to employment under a fixed-term contract.  It provides:-
“a fixed-term employee has the right not to be treated by his employer less favourably than the employer treats a comparable permanent employee;”
A “fixed-term contract” is defined in Regulation 1(2) as:-
“a contract of employment that, under its provisions, determining how it will terminate in the normal course will terminate –
(a)	on the expiry of a specific term,
	     (b)        on the completion of a particular task…”
Regulation 11, she argues, is not concerned with any such employment at all, but rather the repeal of an exclusion to entitlement to sick pay.  
22.	The ingenuity of this argument demands some statutory analysis to expose its fallacy.  Lewison J was not wearied with this analysis since the argument was never deployed before him.
23.	It must be recalled that agency workers are only entitled to statutory sick pay pursuant to Section 151(1) because they are deemed to be employees and because they have suffered days of incapacity in relation to deemed contracts of service with an employer.  If, by virtue of the operation of Section 163, and the 1978 and 1982 Regulations, agency workers had not been brought within a category of earners deemed to be employees under contracts of service, no entitlement to sick pay would have arisen at all.  
24.	The repeal of Schedule 11, paragraph 2(b) confers an entitlement to statutory sick pay but does not alter or in any way trench upon the statutory category which deems an agency worker to be an employee under a contract of service.
25.	Once it is recalled that entitlement to statutory sick pay depends upon a statutory assumption that an agency worker is an employee under a contract of service, it becomes plain that Regulation 11 is within the scope of Regulation 19, notwithstanding the words:-
“in relation to employment under a fixed-term contract”.
Regulation 11 does have effect in relation to employment under a fixed-term contract, because, for the purposes of statutory sick pay, agency workers are employed under fixed-term contracts.  Absent that statutory assumption, the very entitlement to statutory sick pay which the agency worker asserts is destroyed.  
26.	Nothing daunted, Miss Simler QC adopted what she described as her “fall-back” position.  She contended that even if Regulation 11 fell within the scope of Regulation 19, it only did so in cases where an agency worker was in employment under a fixed-term contract as defined by Regulation 1(2), that is, under a contract of employment.  In many cases an agency worker will not enter into any such contract of employment.  Under arrangements with the employment agency, agency workers may enter only into a contract for services.  Although no findings were made by the General Commissioners and despite what appeared to have been common ground before Mr Justice Lewison, she brandished one of the agency worker’s contracts to establish that that worker had only entered into a contract for services and not into a contract of service.  Thus, she contended, whilst Regulation 19 might have the effect of excluding from the scope of repeal some agency workers, in the case of others, amongst whom she alleged was at least one of the interested parties, the repeal would be effective.
27.	It is not unreasonable to assume that this submission will be met with some dismay by those responsible for enforcement of the statutory sick pay scheme.  In the case of those with contracts of less than three months, entitlement to sick pay will depend upon whether they entered into contracts of service or contracts for services.  A distinction between the two, dependent as it is upon fine factual distinctions, is of no little difficulty.  Whilst I suppose the imposition of additional burdens upon those responsible for administering the enforcement of the scheme should be of little concern to this court, I am unable to accept that Regulation 19 has that effect, for the reasons I have already given.  For the purposes of entitlement to statutory sick pay, all agency workers are assumed to be employees serving under contracts of employment.  In so far as the Regulations modify the conditions for entitlement by repeal, they do not affect the statutory assumption contained within the primary legislation, SSCBA 1992.  The exercise which Miss Simler QC invited us to undertake, going beyond any findings of fact by the General Commissioners or the common ground before Lewison J, is unnecessary.  The precise relationship between the agency workers and Thorn Baker, or those to whom they were supplied, matters not.
28.	Miss Simler emphasised that the effect of her construction would be to remove the apparent injustice of requiring agency workers to make National Insurance Contributions whilst excluding them from entitlement to statutory sick pay.  So it would.  But I refuse the invitation to speculate that that was the purpose of the Regulations.  Statutory sick pay is an obligation imposed not on the fisc     which benefits from National Insurance Contributions, but on employers, who do not.   
29.	I conclude that Regulation 11 falls within the scope of Regulation 19.  Agency workers are excluded from the scope of the repeal whatever the terms of their engagement with the employment business or with those to whom they are assigned.
Source of the 2002 Regulations
30.	Mr Clarke contended that if the Revenue’s construction is correct, the repeal of the condition in 2(b) was outwith the purpose for which the power to make the Regulations was conferred.
31.	The purpose of the 2002 Regulations is to remove discrimination between employees in fixed-term employment and those in permanent employment. The 2002 Regulations were made pursuant to Sections 45 and 51(1) of the Employment Act 2002.  By Section 45 “Fixed Term Work”:-
“(1)	The Secretary of State shall make regulations -
	a)	for the purpose of securing that employees in 			fixed-term employment are treated, for such 			purposes and to such extent as the regulations 			may specify, no less favourably than employees 		in permanent employment…”
Section 45(3) confers power to amend the Social Security Contributions and Benefits Act 1992 (Section 45(3)(d)(iii)).  Section 45(6) defines employee as an individual who has entered into a contract of employment and a contract of employment as a contract of service or apprenticeship.  Section 51 empowers the Secretary of State to make such incidental supplementary consequential or transitional provision as the Secretary of State thinks fit (see Section 51(1).
32.	Section 45(4)(a) empowers the Secretary of State to make provision for the purpose of implementing Counsel Directive 99/70/EC on the Framework Agreement on fixed-term work and its application to terms and conditions of employment.  Agency workers are excluded from the Framework Agreement which the Directive was concerned should be implemented.  I need not resolve this question.  As Lewison J remarked, his construction is consistent with the Directive.  But the Regulations leave unaltered the statutory category of employees into which agency workers fall, nothwithstanding Section 45(2)(a) of the 2002 Act.     
33.	In my view, it is unnecessary further to consider the vires of the 2002 Regulations.  Properly construed, the Regulations maintained the restriction on entitlement to statutory sick pay in relation to agency workers on short term assignments.  I would dismiss the appeal.   
Lady Justice Hallett:
34.	I agree.
Lord Justice Auld:
35.	For the reasons given by Moses LJ, I also agree that the appeal should be dismissed.