Appeal No.EAT/1314/01 ST

EMPLOYMENT APPEAL TRIBUNAL
58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

	At the Tribunal
	On 11 November 2002

Before
THE HONOURABLE MR JUSTICE ELIAS
MR H SINGH
MR D SMITH

MR A W STEPHENSON	APPELLANT

DELPHI DIESEL SYSTEMS LTD	RESPONDENT

Transcript of Proceedings

JUDGMENT

Revised 7 February 2003

	APPEARANCES

For the Appellant	MISS COOK
(of Counsel)
Instructed by:
Messrs Bates Wells & Braithwaite Solicitors
29 Lower Brook Street
Ipswich
Suffolk IP4 1AQ	
For the Respondent	MR G MANSFIELD
(of Counsel)
Instructed by:
EEF
Broadway House
Tothill Street
London SW1H 9NQ	

THE HONOURABLE MR JUSTICE ELIAS

1	In this appeal the Appellant challenges the decision of an Industrial Tribunal that he did not have sufficient continuity of employment to be able to take a claim for unfair dismissal against his employers, Delphi Diesel Systems Ltd.

The Background

2	In November 1999 Mr Stephenson (“the Appellant”) applied to an Employment Agency (“Select”) to seek to obtain work.  He was informed of a requirement for machine operators at a client company, Delphi Diesel Systems Ltd (“Delphi”).  He had an interview with a Manager at Delphi and was subsequently offered employment.  The start date was 1 December 1999.

3	The Appellant was assigned to a particular supervisor and a work station and the supervisor told him what was required of him on a day to day basis.  He had a responsibility to clock in at the beginning and end of every shift.  He was supplied with company safety clothes and of course he worked on company machines.  His wages, however, were not paid by Delphi but were paid by Select directly into his bank account following the submission by him of signed timesheets.

4	On 24 August 2000 Mr Stephenson was given a permanent contract with Delphi.  From then onwards it is not disputed that he plainly had a contractual relationship with Delphi which amounted to a contract of employment in law.  His salary was then paid directly by the company and not via the agency.  The essential work that he carried out, however, remained substantially the same.  He was under the same supervisor and at the same work stations doing much the same sort of work.
5	He was subsequently dismissed on 15 January 2001.  He wanted to claim for unfair dismissal but he could not do so without establishing one year’s continuous employment: see section 230 of the Employment Rights Act 1996.  Accordingly, in order to comply with this requirement, it was necessary for him to establish that he had been employed by Delphi, under a contract of service, for the period during which he was a party to the agency relationship with Select.

The Contractual Arrangements

6	We will briefly refer to certain provisions in the contracts that are relevant in this case.  First, there was a contract between Delphi and Select, under which they were provided with labour.  We will refer simply to two paragraphs of that agreement:

3	“The persons employed will be subject to all relevant statutory requirements and current legislation together with compliance with all Delphi rules and procedures.
4	Temporary employees will be vetted by Select Technical Services prior to engagement, they will be expected to carry out the assignments designated by Delphi and should they prove unacceptable then they will be removed immediately at the request of Delphi Human Resources Department.”

And then there are other provisions stipulating that Delphi can set the working hours and shift patterns and rates of pay and allowances and so forth.

7	The other relevant formal agreement is that that was entered into by the Appellant with the agency Select.  We have not been given the original contract but we have, what we are told, is a standard contract which would have been applicable in his case.  Clause 4.1 provides that it is the agency which will pay the remuneration to the Appellant.  Clause 4.2 states this:

4.2	“Subject to any statutory entitlement under the relevant legislation, the Temporary Worker is not entitled to receive payment from the Employment Business or Clients for time not spent on Assignment, whether in respect of holidays, illness or absence for any other reasons unless otherwise agreed.”
8	Then, under Clause 8, which is headed “Conduct of Assignments”, it is provided, amongst other matters:

8.1	“The Temporary Worker is not obliged to accept any assignment offered by the Employment Business but if he does so, during every Assignment and afterwards where appropriate, he will:

a)	co-operate with the Client’s Staff and accept the direction, supervision and control of any responsible person in the Client’s organisation;
b)	observe any relevant rules and regulations of the Client’s establishment to which attention has been drawn or which the Temporary Worker might reasonably be expected to ascertain;
c)	unless arrangements have been made to the contrary, conform to the normal hours of work in force at the Client’s establishment.”

And then there are other matters dealing with health and safety and not acting contrary to the Client’s interests.

9	Clause 9, which deals with termination, provides as follows:

9.1	“The Employment Business or the Client may, without prior notice or liability, instruct the Temporary Worker to end an Assignment at any time.
9.2	The Temporary Worker may terminate at any time immediately by informing the Employment Business.”

The Relevant Law

10	For the purpose of analysing this decision it is not necessary to set out an exegesis of the law in this area.  It is perhaps sufficient to start with an observation of Longmore LJJ in the case of Montgomery v Johnson Underwood Ltd & Another [2001] EWCA Civil 318, [2001] ICR 819, at paragraph 46 he said this:

46	“Whatever other developments this branch of the law may have seen over the years, mutuality of obligation and the requirement of control on the part of the potential employer are the irreducible minimum for the existence of a contract employment: see Nethermere (St Neots) Ltd v Gardener [1984] ICR 612, 623 per Stevenson LJ approved in Carmichael v National Power Plc [1999] ICR 1226, 1230 per Lord Irvine of Lairg LC.”
11	The significance of mutuality is that it determines whether there is a contract in existence at all.  The significance of control is that it determines whether, if there is a contract in place, it can properly be classified as a contract of service, rather than some other kind of contract.

12	The issue of whether there is a contract at all arises most frequently in situations where a person works for an employer, but only on a casual basis from time to time.  It is often necessary then to show that the contract continues to exist in the gaps between the periods of employment.  Cases frequently have had to decide whether there is an over-arching contract or what is sometimes called an “umbrella contract” which remains in existence even when the individual concerned is not working.  It is in that context in particular that courts have emphasised the need to demonstrate some mutuality of obligation between the parties but, as I have indicated, all that is being done is to say that there must be something from which a contract can properly be inferred.  Without some mutuality, amounting to what is sometimes called the “irreducible minimum of obligation”, no contract exists.

13	The question of mutuality of obligation, however, poses no difficulties during the period when the individual is actually working.  For the period of such employment a contract must, in our view, clearly exist.  For that duration the individual clearly undertakes to work and the employer in turn undertakes to pay for the work done.  This is so, even if the contract is terminable on either side at will.  Unless and until the power to terminate is exercised, these mutual obligations (to work on the one hand and to be paid on the other) will continue to exist and will provide the fundamental mutual obligations.

14	The issue whether the employed person is required to accept work if offered, or whether the employer is obliged to offer work as available is irrelevant to the question whether a contract exists at all during the period when the work is actually being performed.  The only question then is whether there is sufficient control to give rise to a conclusion that the contractual relationship which does exist is one of a contract of service or not.

15	We note that in the case of Montgomery v Johnson Underwood at paragraph 40 Buckley J, in an obiter statement said this:

40	“For my part I would accept that an offer of work by an agency, even at another’s workplace, accepted by the individual for remuneration to be paid by the agency, could satisfy the requirement of mutual obligation.  I put it no higher because it would be necessary to look at the circumstances carefully and realistically.  It may, for example, be more difficult to find that necessary mutuality in a very short assignment as opposed to one which was or had become more permanent.”

16	With due respect to those observations, it seems to us that in fact however short the assignment there will be the necessary mutuality of obligation so as to establish the existence of a contract with someone, when work is accepted and the obligation to pay arises.  But in any event we are satisfied that in this case, where the relationship between Delphi and the Appellant continued for many months, there would in principle be a mutuality of obligation, at least between Select and the employee, during the period when he was actually working, for the benefit of Delphi.

The Decision of the Industrial Tribunal

17	The Tribunal properly analysed the case by reference to the two issues of mutual obligation and control.  The conclusion was that there was insufficient mutuality of obligation and also insufficient control to result in any finding that there was a contract of employment with Delphi.
18	It has to be said, however, that it is not altogether clear what the Tribunal did find.  It does appear from its decision – notably at paragraph 6 and again at paragraph 9 – that the finding may have been that there was a contract for services with Delphi, notwithstanding the lack of any mutual obligations.

19	As to the question of mutual obligations, the conclusion of the Tribunal was expressed in paragraphs 7 & 8 as follows:

7	“It is at the heart of the contract between the Applicant and Select that he was under no obligation to accept any assignment offered and that is a ruling obligation.  It is not existing merely at the beginning, it is at each and every assignment and that means each and every day, each and every pay period.  Each time he went to work, he went not under any obligation to accept it but freely and voluntarily accepting it, obviously to obtain income.
8	It seems to me therefore at the heart of this arrangement, it is not the arrangement that is canvassed in Motorola Ltd, so far as one can read of it in the decision, but a different arrangement which had at its heart an absence of mutuality of obligation between the Applicant and the Respondent.  He could have walked off the job at any time, indeed this is the evidence I have from the Respondent and there would have been no recriminations, just no pay.”

Accordingly, it was the Appellant’s right to walk off the job which was found to preclude any mutuality of obligation.

20	Then in relation to the question of control the conclusion of the Tribunal was given at paragraph 9 as follows:

9	“Secondly, I do also find that there did not exist that degree of exclusive control over the Applicant’s conduct of his affairs as seems to have been reflected in Motorola.  It was at the point of control that the Motorola case turned and I find that Mr McKenna and discreet obligations towards the agency staff which he performed and they knew about so that Select, in the person of Mr McKenna had a presence at the Respondent’s premises and effective control of the running of the contract.  It was not a contract of employment, but it was obviously a contract for services.  The effective control of that was ultimately with Mr McKenna to whom the Applicant could go over Samantha’s head if he had problems or disputes, which he could not settle.”

The reference to “Samantha” there is to the individual who was given supervisory function over the Appellant at the work place.
The Grounds of Appeal

21	It is common ground that in order to interfere with a decision of the Industrial Tribunal it is necessary that this Court should establish either an error of law or must be able to reach the conclusion that the Tribunal had reached a perverse decision in the sense that it is a decision which no reasonable Tribunal properly directing itself on the relevant law could have reached.

22	Miss Cook for the Appellant has submitted that there has been an error here by the Tribunal in respect of both aspects of this decision.  I will deal with the questions of mutuality of obligation and control separately.

23	The argument about the error on mutuality of obligation has been put in three distinct ways.  First, it is said the Tribunal ought to have concluded that there was a contract in existence between the Appellant and Delphi because the Appellant had been interviewed by Mr McKenna, who was at that time an employee of Delphi (although he subsequently became an employee of Select, prior to the change in status of the Appellant).

24	In essence, Miss Cook submits here that Select was not really acting as an Employment Agency, in the sense of providing employees but retaining certain control over pay and other related matters, but was in truth merely acting as an introductory agency making labour available to Delphi so that Delphi could then enter into their own contracts with those persons.

25	The second argument was based on what she termed the reality of the situation.  She submitted that if one looks at this relationship between these three parties it is plain that in substance what is happening is that the employee is, to all practical intents and purposes, being employed by Delphi and doing the same sorts of things that other employees would do, and that the relationship with Select is simply a complex and potentially obfuscatory method of paying the wages.  Although the submission was not quite put in these terms, the logic of this argument, we think, it that it is being said that Select must here be treated as the agents of Delphi in paying the wages.

26	The third way in which this point was put was to suggest that there was plainly extensive control over the day to day activities and that in these circumstances the Appellant must have impliedly agreed to be bound by the terms which conferred control upon the employers.  We were shown the various disciplinary and other rules applicable at the work place which, of course, one finds in most, if not all, businesses.

27	Miss Cook also emphasised that, following the Court of Appeal decision in McMeechan v Secretary of State for Employment [1997] ICR 549, it is plain that there can be a contract of employment for particular contractual stints, even or though there may be no continuing obligation on the employee to accept any particular offer of employment that may be made in the future.  As we have already indicated, we accept that that is an accurate statement of the law.

28	It was put in the following way by Waite LJ in that decision at page 563:

(1)	“In a case like the present where the money claimed is related to a single stint served for one individual client, it is logical to relate the claim to employment status to the particular job of work in which respect of which payment is being sought.  I note that the editors of Harvey on Industrial Relations and Employment Law appear to take a similar view, where they suggest, at paragraph A53:
“the better view is not where the casual worker is obliged to turn up for, or do, the work but rather if he turns up for, and does the work, he or she does so under a contract of service or for services”.”

We should point out that in that case the issue was whether there was a contract with the agent and not with the client.

29	Mr Mansfield for the Respondent Company submits that the decision of the Tribunal on this point was correct.  His primary argument was that the Tribunal had not erred in law and that it was entitled to conclude in the circumstances that the fact that the employee could walk off the job at any time demonstrated a lack of mutuality of obligation.

30	For reasons which we have already given, we reject that analysis.  The Tribunal concluded that there was no mutuality of obligation because the Appellant could at any time walk off the job.  However, there is no reason why there cannot be the mutuality of obligation for the duration of the working relationship merely because in the future there may be no obligation to accept further work, or because of a right to terminate the current work at will: see the McMeechan case.  But he submits that, in any event, even if the Tribunal’s reasoning on this point was wrong, it is plain both on principle and from the authorities that in a case of this kind there simply is not a contractual relationship that exists between the employee and the client.

31	He dealt with each of the three ways in which Miss Cook had either expressly or impliedly put her cases as follows.  Firstly, as to the contention that there was a direct contract between the Appellant and the company Delphi, he submits that the case was never put like that in the Tribunal below and that in any event it was simply not compatible with the documents to make such a suggestion.  We think that must be right.  If the parties had understood that they were entering into, what I might term, a “normal” contractual obligation then plainly they would have conducted their affairs on that basis, and the Appellant would have been paid by Delphi in the normal way.

32	I simply note here in passing that in determining whether a contract of that nature has been brought into existence it is legitimate to have regard to how the parties actually carried out what they perceived to be their obligations: see the decision of the House of Lords in Carmichael v National Power Plc [1999] ICR 1226.

33	As to the argument based on agency, or what may be termed is the “reality” argument, he submits again that there is no basis for treating Select as in any way acting simply as Delphi’s agent in making the payment.

34	He points out, and this is not being disputed, that it has not been suggested that the arrangements here were a sham in the sense that they were made in bad faith simply to conceal the true legal relationship between the parties.  It is plain that the agency relationship was established because the employers thought that it gave them a more beneficial way of regulating the ebb and flow in the requirements for the workforce; and the arrangements were made, indeed, with the approval, it seems, of the Trade Unions.

35	Accordingly, Mr Mansfield submits that it would be quite wrong not to take these arrangements at face value.  They demonstrate that Select was acting as an independent party, that it had certain obligations towards the employee and that there is no material from which an agency relationship could properly be inferred.  In truth, he suggests that Miss Cook’s submission really amounts to saying that the law ought to recognise this kind of relationship as an agency relationship because of the potential adverse consequences to the employee if the law fails to do that.

36	Finally, in relation to the question of implied contracts, Mr Mansfield submits that the fact that Delphi may exercise extensive control on a day to day basis in relation to the contract does not demonstrate that there is a contractual relationship between the parties.  Even if that control extends to disciplinary matters – and that was a matter of dispute between the parties – he submits that the agreement by the Appellant with Select, to be bound by the rules and requirements imposed by Delphi, itself explains why the Appellant is complying with those rules.  There is no reason, in those circumstances, to suggest that the source of that obligation to obey the rules is anything other than the agreement made with Select.  It is neither necessary nor appropriate to infer that there must be some other separate, independent contractual obligation between the Appellant and Delphi.

Conclusion

37	In our view we are satisfied that Mr Mansfield’s arguments are correct on this point.  As we have indicated, we do not think that the approach of the Industrial Tribunal Chairman to the question of mutuality was a proper one, but we are satisfied that had he properly directed himself he could only have reached the conclusion that he did in fact reach for other reasons, namely that there is no contractual relationship between the parties.  More accurately, he found there was no mutuality of obligations but it seems to us that it must follow that there is no contractual relationship.

38	We are satisfied that there is no ground for suggesting that Delphi could ever have intended to enter into any direct contractual relationship with Mr Stephenson or vice versa.  

39	Equally, we think there is no basis here either for implying some kind of agency nor is it appropriate to imply any term to explain the fact of control being exercised by Delphi.  On the contrary, we accept that that is wholly explicable by virtue of the contractual obligation that exists between the Appellant and Select.

40	We are confirmed in this decision by a number of cases in this Court, where the provision of agency workers of this kind has been considered.  There are three decisions to which our attention was drawn, in each of which the Employment Tribunal had concluded that an agency worker was employed by the client and in each of which the Employment Appeal Tribunal held that they had erred in law in reaching that conclusion.

41	In Hewitt-Packard Limited v O’Murphy [2002] IRLR 4 the question arose whether a computer specialist whose services were provided to a client by an Employment Agency was to be treated as the employee of that client.  There was an additional complication in that case which is not present here, which is that the contractual relationship between the agency was not directly with the individual computer specialist but rather with a private limited company which he set up for the purposes of administering his services.  It is perhaps not necessary to go into the details.  

42	It is clear from the decision of the Employment Appeal Tribunal that they considered that the contractual relationships in that case – which were not in our view materially different from those here – did not create any kind of employment relationship between the individual or his company and the client.

43	At paragraph 46 Mr Justice Douglas Brown, giving the judgment of the Tribunal, said this:

“If the Tribunal had asked itself that question and answered it in accordance with the evidence it would, we think, be bound to have come to the conclusion that there was no contractual relationship between Mr O’Murphy and Hewlett-Packard.  No suggestion was made that these were not genuine contracts entered into contemporaneously.  In those circumstances they could not be dismissed as the Tribunal dismissed them of no materiality.”

44	In substance, the argument advanced by Miss Cook in this case, it seems to us, is asking us to dismiss these contracts as being of no materiality and to look at what she describes as the “reality” or substance of the matter.

45	A similar approach was adopted by another division of this Tribunal in Costain Building & Civil Engineering Ltd v Smith [2000] ICR 215.  That case concerned the provision of labour to building contractors.  Again, we do not go into the details but we consider that there is no material basis for distinguishing the facts in that case from those in this case.  In the course of his decision Mr Justice Morison said this at paragraphs 15-16:

“There were two relevant contracts which governed the responsibility of the parties to this case.  There was a contract between the agency and the contractors and a contract between the agency and the Applicant.  There was not, however, any contract of employment between the contractors and the Applicant.
We are of the opinion the essential facts in this case are clear.  The Applicant chose to operate on a self-employed agent basis as he was paid tax-free and had to submit invoices to the agency.  He did not receive holiday or sick pay.  No notice provisions.  It was provided with no other benefits associated with being an employee.
By determining that the Applicant’s position of self-employment was a “device” used by the contractors to avoid the statutory duties, we consider the Tribunal lost sight of the facts that clearly indicated the Applicant could not be an employee of the contractors.”

46	The third decision to which were referred was an unreported decision of this Tribunal, judgment being given by David Pugsley J in Esso Petroleum Company v (1) Andrea Jarvis & Others & (2) Brentvine Ltd, EAT/0831/00.  It is to similar effect.

47	We have borne in mind the decision of the Employment Appeal Tribunal in Motorola v Davidson and Melville Craig Group Ltd [2001] IRLR 4.  That is, so far as we know, the only case where a worker provided by an employment agency of this kind, i.e. one which is not simply effecting an introduction but which undertakes continuing obligations to the employee, has been held to be an employee of the client.  But in that case the Tribunal had found that the individual was employed by the client; and in its appeal to the Employment Appeal Tribunal, the only ground on which the Appellant sought to challenge the decision of the Tribunal was on the question of whether or not the Tribunal was entitled to find that there was sufficient control to make the relationship one of a contract of service.

48	The Employment Appeal Tribunal held on the facts that the Tribunal was entitled to find that there was.  But the appeal did not raise the more fundamental question of whether there was a contractual relationship in being between the client and the worker at all – as the Employment Appeal Tribunal was at pains to make clear in its judgment (see paragraph 16).  Accordingly that decision is in no way binding upon us.

49	It follows that we find that there is no mutuality of obligation in this case such as to create any contractual relationship between the Appellant and Delphi.  It is true that we do so for a different reason to that identified by the Tribunal but we are satisfied on the evidence that this conclusion was the only one which the Tribunal could properly have reached if properly applying the law.  In those circumstances it would be wrong and indeed a cruel deception to the Appellant, simply to remit this matter.

The Issue of Control

50	I deal with this matter briefly.  Strictly it is not necessary to determine the question of control since without the requisite mutual obligations there cannot be a contract at all.

51	As I have indicated, in this case the Chairman concluded that there was no sufficient control, putting it very broadly, because of the role played by Select in certain aspects of the employment relationship.  There can be no doubt, in our view, that if the Appellant had been paid by Delphi in the normal way then there would be no question of him being classified as an independent contractor rather than employee.  He would then bear all the hallmarks of an employee.  Indeed this is confirmed by the fact that when his status changed to that of employee, he continued to do virtually the same things after that change in status in August 2000 as he had done before.
52	But the curiosity in this case is that the party exercising that control over the day to day contract is not ultimately the party who administers and pays the wages.  There is really control being exercised at two different levels, depending on the matters in issue.  Putting it very broadly: problems at work are determined by Delphi; problems over the contract and the administration of the contract are determined and settled by Select.

53	In these circumstances, we are not prepared to say that the finding of insufficient control by Delphi was perverse but in truth it seems to us to be dependent upon the conclusion that there was no contract in any event and that the substance of the legal relationship was with Select.  On any view it would, in our opinion, be unusual to describe an individual as having a contract of employment with a party who has no legal obligation to pay his wages and to whom he has no legal obligation to provide work.  It seems to us that the finding of the Tribunal on this point broadly reflects that analysis.

54	We should add that, like other courts before us we have considerable sympathy for the Appellant caught up in the relationship of this kind and we also agree with other courts who have suggested that the position of these agency workers requires further consideration.  In practice such workers are frequently economically dependent on the client rather than the agency, whatever the formal contractual relationships may provide.  There is a real question as to whether they should be protected from abuse of that economic power in much the same way as traditional employees currently are.

Conclusions

55	For the reasons we have given we consider that any Tribunal properly directing itself would be bound to conclude on the facts of this case that no contractual relationship existed between the Appellant and Delphi, the client of the employment agency.

56	Accordingly, although we accept the Tribunal did err in its approach to the question of whether or not there was mutuality of obligations, we do not remit the matter because we consider that the Tribunal could only come to one conclusion, namely that there was no contract of employment in existence for that period when the Appellant was in a contractual relationship with Select.