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	United Kingdom Employment Appeal Tribunal
You are here: BAILII >> Databases >> United Kingdom Employment Appeal Tribunal >> Firthglow Ltd (t/a Protectacoat) v. Descombes & Anor [2004] UKEAT 0916_03_1901 (19 January 2004) URL: http://www.bailii.org/uk/cases/UKEAT/2004/0916_03_1901.html Cite as: [2004] UKEAT 916_3_1901, [2004] UKEAT 0916_03_1901

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APPEARANCES

 

For the Appellant	MR WILLIAM JOSLING (of Counsel) and MR P HYLAND (Legal Advisor) PJH Law Orion House 14 Barn Hill Stamford Lincolnshire PE9 2AE
For the Respondents	MR ADAM OHRINGER (Legal Representative) Free Representation Unit 4th Floor, Peer House 8-14 Verulam Street London WC1X 8LZ


 


THE HONOURABLE MR JUSTICE RIMER

1. This is an appeal by Firthglow Ltd ("Firthglow") which trades as Protectacoat. It is against a decision by an employment tribunal sitting at London (South) on 9 July and 10 September 2003 and chaired by Mr D N Milton. The tribunal's decision, with extended reasons, was promulgated on 23 September. Firthglow was the respondent to two applications brought by Mr Simon Descombes and Mr Roderick Lamont, which were heard together. Both applications were in virtually identical form and claimed compensation for unfair dismissal, unlawful deduction from wages and compensation for breach of contract.
2. Firthglow's response in its IT3s was that neither applicant was or had been an employee and that the claims were therefore misconceived. When the matter came before the tribunal it was listed for a full hearing but the tribunal proceeded first to the determination of the preliminary question as to whether the applicants had in fact been employees of Firthglow. It ruled that they had been and that it therefore had jurisdiction to entertain their unfair dismissal claims. In the alternative, it found that both applicants were 'workers' within the meaning of section 230 (3) (b) of the Employment Rights Act 1996. Firthglow challenges both decisions on this appeal as being wrong in law.
3. Firthglow specialises in the application of a textured coating to houses and flats. The process is applied by spray. The tribunal found that most of its work consisted in one or two-day jobs. They would be carried out in particular areas serviced by the local Firthglow depot. The work was done by teams of workers whom Firthglow claimed were engaged by them as sub-contractors. The applicants formed a team of two who were so engaged and the issue for the tribunal was whether they were in truth sub-contractors or whether they were employees.
4. There is no doubt that Firthglow was anxious to avoid the creation of an employer/ employee relationship between it and those workers who carried out the daily tasks of providing the services to customers. The scheme it developed for this purpose was to require small teams (usually not more than two), of those who were willing to carry out work for it first to enter into a partnership agreement between themselves and Firthglow would then engage the partnership firm so created to do the work. The tribunal found, however, that Firthglow advertised for 'workers', suggesting that they could earn £500 to £700 a week.
5. The tribunal explained how in due course the applicants became two such partners. Mr Descombes was the first of the applicants to work for Firthglow. In March 2001 he was approached by a Mr Potterton. Mr Potterton had just joined the Firthglow organisation and was undergoing the training Firthglow provided. Before he could obtain work from Firthglow he first needed to form a partnership and he and Mr Descombes agreed to become partners. They agreed to split their earnings as to 40% to Mr Descombes and 60% to Mr Potterton; and they went to Firthglow's Crawley offices where they signed the paperwork. After this Mr Descombes and Mr Potterton worked together as a team of two for Firthglow for a number of months.
6. Mr Lamont arrived on the scene later. He also knew Mr Potterton and he trained for a few weeks with him and with Mr Descombes. After that he worked in a partnership with Mr Houston and Mr Jones. In due course both applicants formed their own partnership by an agreement of 12 August 2002. The partnership name was Rocktext. The documentation for the partnership was produced by Firthglow. We will summarise the main terms of that agreement. It was headed 'Partnership Agreement', was dated 12 August 2002 and was between Mr Lamont, described as "the Installer" and Mr Descombes, described as "the Assistant".
7. Clause 2 provided that it was governed by the Partnership Act 1890. Clauses 3.1 and 3.2 provided that the partnership should continue until terminated in accordance with the agreement, which provided for termination on two weeks' notice. Clauses 3.3 and 3.4 provided that on termination Mr Lamont, as the Installer, should acquire Mr Descombes' interest in the partnership, although Clause 3.5 also entitled him to assign that interest to a third party whereupon the partnership would not be dissolved but would continue between Mr Lamont and that third party. Clauses 4.1 and 4.2 provided that only the Installer was required to make capital contributions to the partnership and that he should be entitled to all such capital. Clause 4.3 provided that profits and losses were to be divided between the partners in equal shares. Clause 4.5 entitled the Installer to have complete control over the ordinary matters of the partnership including purchases, the nature of the partnership and its management. Clause 4.6 required the accounts to be "calculated" on an annual basis and for the profits to be calculated accordingly. Clause 4.7 dealt with the weekly drawings of the partners. Clause 5.1 required the Assistant to devote his whole time and attention to the partnership business. Clause 6 imposed certain restrictions on the partners. Both partners executed the agreement as a deed.
8. On the same day, 12 August 2002, Firthglow entered into an agreement with Rocktext, being the agreement by which Firthglow retained it in the provision of the services of the application of exterior textured coating to buildings. We shall call this agreement the "engagement agreement". Clause 2 provided that Firthglow would notify the partnership from time to time of the places at which the services may be carried out. The partnership was to be responsible for travel arrangements to such places of work. Clause 4 provided for the termination of the agreement. It was to be terminable by either side on one week's notice but Firthglow was also to be entitled to terminate it if the partnership repudiated it or behaved negligently or incompetently. Clause 5 excluded any obligation on the part of Firthglow to provide the partnership with work. Clause 6 provided that the fee payable by Firthglow to the partnership "will be agreed between the Partnership and [Firthglow] in advance of work for that customer commencing". It also provided that any rectification work would be at the cost of the partnership without recourse to Firthglow. It provided that the fee was to be paid gross to the partnership on receipt of an invoice from it in the week following the provision of its services and that the partnership was liable to account to the Inland Revenue and the Contributions Agency for tax and NI contributions due on the payments. Clause 7 provided that the partnership was required to provide its own equipment to enable it to perform the services. Clause 9 provided that the partnership was to ensure that such hours were worked as were necessary to carry out the service but that there were otherwise no specific hours applicable to the arrangement. The partnership was entitled to choose the hours of work and provide the service at a time convenient to the partnership, provided that such times were also convenient to the client. Clause 10 provided that the partnership was at liberty to apply its services to others during the currency of the agreement; and clause 11 provided that the partnership could not assign or transfer the agreement, nor the performance of the works sub-contracted, save with Firthglow's prior written consent.
9. The applicants' case was that the reality of the commercial arrangements was that each was an employee of Firthglow. Firthglow's case was that the agreements meant what they said; that the partnership agreement constituted a genuine partnership agreement between the two applicants; and that the work which the applicants carried out was exclusively done under the engagement agreement between Firthglow and Rocktext. Its case was that a firm cannot be an employee and that Rocktext was a firm.
10. The tribunal identified various factors which it considered it had to take into account in deciding whether or not in truth each applicant was an employee. It found, first, that Firthglow sometimes advertised for staff in the local job centre. It said that this feature, linked with the fact that Firthglow then provided the workers with training and the sort of paperwork we have just described, was more consistent with an employer looking for new staff than a head contractor looking for sub-contractors. It found that, with a minor exception, both applicants effectively worked for Firthglow every day of the working week during their period of contact with Firthglow.
11. The tribunal found – and, we would add, presumably despite clause 9 of the engagement agreement – that the applicants had no real choice as to the starting time for the hours worked. They had to go to Firthglow's yard in the morning and would be provided with work on that day, including the material and instructions necessary for the day's work. The tribunal therefore found that Firthglow exercised a considerable degree of control in the days and hours actually worked. Having so found, it acknowledged that it did not regard this as a strong pointer in either direction. It said in paragraph 13 that:

"13 …a patently self-employed plumber working on a particular housing contract may well be required to report every morning to a particular place to receive instructions about which house or floor or part of the contract has to be carried out next. There is, however, in our judgement a weighting towards a more controlled employment relationship under this part of our enquiry."

12. The tribunal also found that there was a good deal of control exercised over the method and detail of the work itself. The applicants and other workers did not play any part in the quotation for the jobs or carry out any survey or assessment of the work to be done. They received detailed instructions from Firthglow's depot as to the amount of preparation work to be done and the number of coats to apply and so on. The tribunal regarded this as more consistent "with an employer exercising a strong degree of control over the working process." This finding was, the tribunal considered, supported by the fact that all workers were trained by Firthglow in its particular procedures and processes. It was not open to the workers to decide that an undercoat in any particular case was unnecessary. Against this, the tribunal recognised that the requirement of clause 6 of the engagement agreement, under which the applicants had to bear the cost of rectification work, was more consistent with a freelance relationship. It also found that the applicants were on occasions called upon to carry out rectification for jobs done by other workers.
13. The tribunal found that the applicants were provided with a company van bearing the Firthglow logo and details. Firthglow also provided the main tools required, such as scaffolding, spray applicators, hard hats and so on. It found that neither the applicants nor their colleagues were expected to make any investment in equipment; a feature it found to be a strong pointer towards an employment relationship. It found, in particular, that the van was provided upon a tacit assumption that it would be used on a more or less regular basis. When Firthglow wished to terminate its relationship with any of its "workers" because, for example, of some dissatisfaction with them, it would express its views by saying "come back to the yard and park your van".
14. The tribunal found that the financial arrangements were that the partnerships would submit invoices on a weekly basis for work done, and that of course was what was provided for by clause 6 of the engagement agreement. It found, importantly, that:

"24 …The Applicants and all their colleagues clearly operated from the fiscal point of view as "partners" within their two-man partnership agreements and we had unequivocal documentation from the Inland Revenue approving that type of arrangement. We stress that it is not a case where we are suggesting by our final decision that there was anything illegal or improper in what was being done. Our role is simply as an Employment Tribunal to reach a conclusion as to whether for our purposes there was an employment relationship. Strictly speaking, the consequences for the tax arrangements are not our principal concern. We would respectfully point out to both parties that our final conclusion is not necessarily a conclusion which is entirely financially to the Applicants' advantage depending on how much tax has been paid and/or deducted in the past."

15. The tribunal went on to find that the price of every job was fixed by Firthglow's surveyor and that the applicants and their colleagues had no real choice about the pay they were to receive, but it also said that:

"25 …Theoretically, if they genuinely believed that a particular price was not commercially viable, they had the right to refuse to accept a particular job. We do not accept that that freedom was a wide freedom at all and, when we come to the question of obligation, we find that there was a high, tacit obligation on each side, both to provide and to carry out work allocated on a daily basis."

16. The tribunal went on to say that the fact that a fee for a job was non-negotiable did not necessarily point in one direction or the other. But it found that:

"27 …as a matter of the overall picture, the Applicants received a very regular quantum of pay in a broadly similar bracket over their entire working relationship with [Firthglow]. It plainly varied from week to week but each Applicant clearly received in the vast majority of weeks several hundreds of pounds. It is clearly employment based on a piecework rate of pay…None of that, in our judgment, is either more or less consistent with an employment or freelance arrangement. The overall picture, however, is marginally more consistent with an employment relationship and the actual pattern of payments is reflective of an ongoing business relationship at the very least and marginally reflective of a closer employment relationship. The question is perhaps more aptly addressed under the heading of mutuality of obligation.

28 As between the partners, the evidence before us was that a number of partnerships adopted a 60:40 split on the basis that the driver was entitled to a higher percentage because of the responsibility of driving. We do not find that the modest differential between the sharing out of the fee was a significant factor in this case. Each "partner" received a substantial share of the overall payments."

17. Under the heading "Financial Risk" the tribunal found that there was no evidence of the kind it would expect to see in a typical freelance arrangement. There was no investment by the applicants in their business, no building up of it and no capital needed to be provided. Firthglow provided the tools and negotiated the terms of the customers:

"29 …The applicants were on no sort of percentage arrangement. They simply had to carry out their work job by job, price by price, as the months went by."

18. The tribunal then considered the terms of the agreement and the intention of the parties. It found that Firthglow did not intend there to be an employer/employee relationship. They had taken advice as to the basis on which, to achieve this end, they could construct their relationship with those working for them. They were not prepared to enter into any sort of relationship with such workers except on the basis that they first formed partnerships and the engagement agreement was then with the partnership so formed. The tribunal said there was nothing wrong with this but that:

"31 …we are entitled in appropriate cases to look at the reality of the relationship rather than look at the ostensible label attached, in this case plainly by [Firthglow], to the working relationship.

32 Plainly on the face of it, a partnership firm is a two-man outfit which cannot be an "employee". We accept that that is the obvious starting point for an analysis and we assume that, in the only other directly comparable authority to which we have been referred (namely our colleagues in the Brighton Tribunal), there was not the full and detailed evidence which we have had placed before us. There are a number of clauses in both agreements which have been perfectly correctly and properly relied upon by [Firthglow's] counsel, which are plainly inconsistent with an employment relationship."

19. The tribunal then rejected an argument from the applicants that they did not really want to enter into the partnership agreements or did not understand them. The tribunal found that the applicants must have realised the general and obvious nature of the documents. They then said:

"34 It is obvious and we simply incorporate for the purpose of our reasons the various submissions on [Firthglow's] side on this issue, that the partnership agreement and the main agreement between the partnership and [Firthglow] are inconsistent with an employment relationship. Furthermore, the fact that all staff, including the Applicants, under that relationship were responsible for their own tax and national insurance and [Firthglow] did not operate a PAYE system are all again inconsistent with an employment relationship. Furthermore, the non-provision of sick pay, holiday pay, notice pay and the other absences of typical employment terms and conditions are all again, we accept, ostensibly inconsistent with an employment relationship.

35 We recognised and took into account that in a free country people are entitled within the law to enter into commercial arrangements of every description as they see fit. We also bore in mind that, under the Massey decision, where there is a "borderline situation" and it is difficult for a Tribunal to reach any clear-cut view one way or the other, if two parties voluntarily enter into clear and unequivocal commercial agreements which change their relationship, they are plainly, on the face of it, bound by express reflection of their relationship.

36 As to the Applicants' intentions, they have clearly expressly signed the paperwork. Indeed, they each started under different partnership agreements and in due course were sufficiently familiar with the procedures, and aware of their own position, to operate that system as they saw personally beneficial by entering into an agreement between themselves and the company and indeed changing the "inter-partner" share-out of the monies. That is again all consistent with [Firthglow's] case and were those the only factors it would clearly support [Firthglow's] position.

37 We do note, however, that in this particular arrangement there is a provision for "termination". At paragraph 4 of the main agreement there is provision for termination of the relationship "without notice" in certain situations of breach and the imposition of "one week's notice" on each side where either the company or the partnership is minded to terminate the relationship. In our judgment, the incorporation of a notice provision is more consistent with an employment relationship and an ongoing relationship than a freelance type of relationship, although on its own it is not a major factor."

20. The tribunal then turned to consider the question of "mutuality of obligation". It referred to clause 5 of the engagement agreement, which we interpret as nullifying any obligation on the part of Firthglow to provide work, but nevertheless found in paragraph 38 that there was:

"38 …a high degree of mutuality of obligation in this case. We find that, as a matter of fact, both Applicants worked virtually full-time hours and days throughout the entire period of their connection with [Firthglow] (save, as we repeat, in the case of Mr Descombes towards the end of 2002). We find that, on indeed his own evidence, Mr Gibbs would not have either himself or via his depot manager expected any installer not to turn up on a regular basis."

21. The tribunal went on to find that if any installer did fail to turn up for a few days running he would be expected to return the van and tools and the relationship would be terminated. It also found that there was plainly a reasonable amount of work available throughout the period. Its conclusions were expressed in paragraphs 46 to 48 as follows:

"46 We find that, putting all the foregoing factors together, there is no doubt in our minds at all that the Applicants at any rate were working as employees under a contract of employment. Many of the terms of the contract of employment are in fact contained in documents which are described as partnership documentation. Insofar as those clauses are referable to a contract of employment, we find and declare that they are deemed to be clauses referable to a contract of employment. The clauses which we find are mere devices to avoid the employment relationship, namely those clauses dealing with partnership and related issues, we ignore and find and declare to be non-effective for the purposes of our proceedings.

47 Further and in any event, we find that, simply looking at the questions of control and mutuality of obligation, both of which have been held in a number of legal authorities to be the strongest indicators of the relationship, in each case the Applicants' case is very strong under those headings. Even more so, looking at the overall totality kind of test, it is our conclusion that there is an employment relationship.

48 If we are wrong in our conclusion on the foregoing issues, we nevertheless find that, for all the same foregoing reasons, at the very least the Applicants were "workers" within the meaning of section 230 and are entitled to the appropriate rights under that definition. Many of these kinds of enquiry are "questions of degree". If it were to be held that we have over-estimated or over-valued the degree of importance under certain of the headings, we nevertheless would find that the Applicants have passed the lower threshold which the tests in the authorities suggest are applicable for a "worker" definition."

22. On this appeal Firthglow, which has appeared by Mr William Josling, has argued that the tribunal's decision involved an erroneous process of reasoning and was wrong. On the other side, the applicants, who have appeared by Mr Adam Ohringer, have argued that the tribunal was entitled to look at the realities of the relationship and, having done so, to conclude that the documentation was not conclusive as to the nature of that relationship.
23. As regards the tribunal's decision that the applicants were employees of Firthglow, we have come to the conclusion that the tribunal did misdirect itself. We regard it as clear from its findings that, whilst it recognised that the partnership agreements came into being in rather artificial circumstances, it nevertheless regarded them as creating genuine partnerships between the parties to them. In particular it did not regard them as mere shams in the sense in which the concept of a sham was described by Diplock LJ in Snook v London and West Riding Investments Ltd [1967] 2 QB 786, at 802. This conclusion was consistent with the fact that, as the tribunal found, the parties to them appear to have regarded them as creating genuine partnerships; and the tribunal explained how the partners' tax affairs were based on the foundation that they were indeed partners. If (which is not clear from the tribunal's reasons) it was any part of the applicants' argument that the partnership agreements were shams, the tribunal appears to have rejected that argument.
24. That being so, the tribunal was faced with a situation in which the engagement agreement was between Firthglow on the one hand and a partnership firm on the other. The tribunal itself acknowledged, in paragraph 32, that a two-man partnership cannot be an employee and Mr Ohringer for the applicants does not dispute the correctness of that statement. Once the tribunal recognised, as it did, that the partnership agreement, albeit a somewhat ad hoc and unusual one, was a genuine agreement, it was not, in our view, open to it to find that each applicant was nevertheless separately employed by Firthglow under a contract of employment. The tribunal could only find, and we understand that it did find, that the relevant work was being done under the engagement agreement by which Firthglow retained the services of the partnership firm.
25. In particular, the tribunal was, we consider, also in error in finding that there was any relevant mutuality of obligation. Clause 5 of the engagement agreement made clear, as we interpret it, that Firthglow was under no obligation to provide the partnership firm with any work and the tribunal found in paragraph 25 that, if it did not like the fee, the firm was not obliged to do any particular job that it was offered. The tribunal presumably had in mind, in the latter respect, the provisions of clause 6 of the engagement agreement under which the fee for the work had to be agreed with the partnership firm, and, of course, the firm could not be compelled to agree to any particular fee if it did not wish to agree it. In paragraph 38 the tribunal appears, in our view erroneously, to have moved from its findings that there was an abundance of work for the firm to do – and an expectation on the part of Firthglow that the firm would do it – to the conclusion that there was a relevant mutuality of obligation. But both clauses 5 and 6 of the engagement agreement pointed away from there being any such mutuality. In effect, the tribunal appears to have found that, even though there was no obligation on the side of Firthglow to provide the partnership with any work and no obligation on the partnership to agree the price at which any work was offered – or therefore to do the particular job – there was nevertheless a mutuality of obligation on both sides respectively to provide and to do the work. That conclusion appears to us to involve an internal inconsistency in the tribunal's reasoning. The tribunal does not in terms say that it found that these obligations arose as a matter of implication from the way the parties conducted themselves under the engagement agreement; but if this was the process of its reasoning then we consider that it would have fallen into the like error as that into which the employment tribunal fell in Stevedoring & Haulage Services Ltd v Fuller [2002] IRLR 627: see, in particular, paragraph 10 of the judgment of the Court of Appeal.
26. In his sustained argument for the applicants, Mr Ohringer urged that the tribunal was entitled, indeed bound, to look at all the circumstances, that it was not bound by the documents themselves and that it had made a finding of fact with which this appeal tribunal should not interfere. He referred us to several authorities but, without any disrespect to his careful argument, we do not propose to refer to them. They all turned on somewhat different facts and circumstances and provide in our view no direct guidance to the correct disposition of the rather unusual circumstances of the present case. Mr Ohringer accepted that it was necessary for there to be the requisite degree of mutuality of obligation for there to be an employment contract, but he said that it was enough if there was an expectation on both sides that work would respectively be provided and performed. He said that was supported by paragraph 23 of the judgment of Buckley J in the decision of the Court of Appeal in Montgomery v Johnson Underwood Ltd [2001] IRLR 269. Buckley J, at paragraph 18, first cited from McKenna J's judgment in Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497, at 515:

"I must now consider what is meant by a contract of service.

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."

Buckley J then said, in paragraph 23, the paragraph on which Mr Ohringer lies:

"23 …For my part, I regard the quoted passage from Ready Mixed Concrete as still the best guide and as containing the irreducible minimum by way of legal requirement for a contract of employment to exist. It permits tribunals appropriate latitude in considering the nature and extent of "mutual obligations" in respect of the work in question and the "control" an employer has over the individual. It does not permit those concepts to be dispensed with altogether. As several recent cases have illustrated, it directs tribunals to consider the whole picture to see whether a contract of employment emerges. It is though important that "mutual obligation" and "control" to a sufficient extent are first identified before looking at the whole."

27. We do not interpret that passage as supporting Mr Ohringer's submission. In our view the tribunal was in error in this case in finding, inconsistently with the engagement agreement, that there was any sufficient or relevant mutuality of obligation.
28. We consider that it was also in error in its approach in paragraph 46, which we have earlier cited. Having apparently found that the engagement agreement was with a partnership firm which could not (so the tribunal had also found in paragraph 32) be an employee, we do not understand how the tribunal was able to conclude that each applicant was nevertheless an employee of Firthglow. Did this mean that the engagement agreement was not with the firm at all, but was rather to be regarded as a separate contract of employment with each applicant? If so, what wage was Firthglow agreeing to pay each applicant? If the engagement agreement was not such an employment contract, what were the terms and conditions of each applicant's employment? The tribunal does not attempt to answer any of these questions.
29. In our view the tribunal's decision that the applicants were employees of Firthglow was wrong. So also we consider was its decision that they were at lease "workers" within the meaning of section 230 (3) (b) of the Employment Rights Act 1996, which reads:

"(3) In this act "worker" (except in the phrases "shop worker" and "betting worker") means an individual who has entered into or works under (or, where the employment has ceased, worked under) -

(a) a contract of employment, or

(b) any other contract, whether express or implied and (if it is express) whether oral or in writing, whereby the individual undertakes to do or perform personally any work or services for another party to the contract whose status is not by virtue of the contract that of a client or customer of any professional business undertaking carried on by the individual;

and any reference to a worker's contract shall be construed accordingly."

30. As it seems to us, once one accepts, as we understand the tribunal to have accepted, that the partnership was a genuine one, it followed that the partnership business was in the nature of a "business undertaking" carried on by the two applicants in partnership. It follows that, even if the other elements of section 230 (3) (b) are satisfied, the engagement agreement was one under which Firthglow was a customer of that business undertaking and so was not a contract to which section 230 (3) (b) applied. In addition, the absence of any relevant mutuality of obligation between the partnership firm and Firthglow, there could be no relationship under which the individual partners were workers. The need for a mutuality of obligation in the case of someone claiming to be a worker was recognised by the decision of this appeal tribunal in Byrne Brothers (Formwork) Limited v Baird and Others [2002] IRLR 96, at paragraph 25 of the judgment delivered by Mr Recorder Underhill QC, and we did not understand Mr Ohringer to submit that that expression of view was wrong as a matter of law.
31. We accordingly propose to allow the appeal and to set aside each of paragraphs 1 to 4 of the tribunal's decision.