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	United Kingdom Employment Appeal Tribunal
You are here: BAILII >> Databases >> United Kingdom Employment Appeal Tribunal >> National Grid Electricity Transmission Plc v Wood [2007] UKEAT 0432_07_2410 (24 October 2007) URL: http://www.bailii.org/uk/cases/UKEAT/2007/0432_07_2410.html Cite as: [2007] UKEAT 0432_07_2410, [2007] UKEAT 432_7_2410

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APPEARANCES

 

For the Appellant	MS ASSUNTA DEL PRIORE (of Counsel) Instructed by: Messrs Pannone & Partners LLP Solicitors 123 Deansgate MANCHESTER M3 2BU
For the Respondent	MR DUNCAN WOOD (The Respondent in Person).

SUMMARY

Contract of employment: Definition of employee /

The Employment Tribunal found that on the particular facts the Claimant, who had been supplied to the Respondent company through an agency, was employed under a contract of employment with the end user. Accordingly, he was entitled to pursue a claim for unfair dismissal. The end user appealed. The EAT held that the Tribunal had properly directed themselves that it was only appropriate to imply such a contract if it was necessary to do so in order properly to explain the relationship, and that there was a proper evidential basis for the Tribunal's conclusion. Accordingly the appeal failed.


 


THE HONOURABLE MR JUSTICE ELIAS (PRESIDENT)

1. This is an appeal against the decision of the Employment Tribunal sitting in Newcastle-upon-Tyne in which it unanimously held that at all material times the Claimant, who is the Respondent to this appeal, was an employee of National Grid Electricity Transmission PLC. We will continue to call the individual Respondent, the Claimant, as he was below.

The background

2. The Claimant is a chartered accountant. He registered with Michael Page, a recruitment agency, which provides recruitment services in relation to the provision of both permanent and temporary staff.
3. The company operates the National Grid for both the electricity and the gas industries. Mr T Conlon was the head of the gas business. He decided to create an operational section and structure, led by an operations' manager to process payments up to a value of £4b per annum.
4. The post of operations' manager was initially advertised internally, but in the absence of any suitable candidate the company decided to use the services of Hy-phen.com Limited (Hyphen). Hyphen is based at the National Grid headquarters in Warwick. It is responsible for making the arrangements in connection with the hire of various types of temporary contract personnel who work at the National Grid. Hyphen operates by sub-contracting to other employment agencies, including Michael Page.
5. Mr Conlon prepared a job description and personnel specification for the post of operations' manager, together with Mr Ward, another senior employee of the National Grid. Mr Ward was to be the line manager of the new operations' manager.
6. Hyphen proposed to them three suitable candidates, one of whom was the Claimant. Following interviews, the Claimant was offered the post.
7. The Tribunal found that the purpose of the interview was not simply to vet a candidate supplied by the agency and to satisfy themselves that he or she was of sufficient quality. The purpose of the interview was "so that Mr Ward and Mr Conlon could select a suitable candidate to hold the post". Mr Ward emphasised that the company wanted the Claimant to carry out the duties of the post personally and there would be no right here, as there is in most agency contracts, for the agent to provide a substitute.
8. The Claimant was put on the Respondent's head count as an agency worker. He received his pay from Michael Page. They, in fact, received the Claimant's pay plus a mark up of 15%.
9. The operations' manager's role was twofold. First, he was in charge of the payments function. This involved supervision of the payments process by banks through two systems, BACS and CHAPS. There were two part time supervisors and four payment clerks carrying out that function and the Claimant was responsible for them. The second role concerned taking responsibility for a risk management process, including Sarbanes Oxley (SOX) compliance. Very broadly, this involves an obligation to comply with certain US legislation applicable to all companies listed on the New York Stock Exchange. In relation to this role the Claimant supervised a team of individuals, including a number of consultants who were drafted in from large companies of chartered accountants; a controls' officer; and two other assistants.
10. The Claimant was aggrieved that some of the consultants for whom he was responsible were earning more than he was. He raised the matter with Mr Ward and Mr Conlon. They were not prepared to increase his pay, but they did suggest that he should be put on one month's notice period.
11. On 5 May 2005 the Claimant received a letter from Hyphen. It notified the Claimant that there was a standard four-week notice period for all temporary or contract worker positions operating at National Grid Transco. He was asked to acknowledge and agree this term by signing a copy of the letter. He did not do that. As the Tribunal noted, this letter in fact reflected a provision in the agreement between the company and Hyphen that after an initial three-month period an agency worker regarded as professional staff would be required to give twenty-eight days' notice.
12. The Tribunal also noted that the Claimant negotiated a pay increase with Mr Ward after he had completed one calendar year's service. Mr Ward then notified Michael Page of the outcome. Holidays were agreed directly with Mr Ward to ensure they did not conflict with operational requirements. Indeed the Tribunal found that on one occasion at Christmas the Claimant was not allowed to take a holiday because he had to provide cover for other members of the management team who had already booked their holidays.
13. The Tribunal noted the Claimant was paid a daily rate for the days he worked and his salary equated to about £50,000.00 per annum. The Tribunal found that this was roughly in the mid point range for an operational manager. However, the Claimant did not receive other benefits which those who were full time employees were granted, such as a company car, admission to the company's pension scheme and admission to the share bonus scheme. Nor was the Claimant entitled to any holiday pay.
14. The Claimant's initial contract commenced on 14 February 2005. It was to run to 20 November 2005. There were then two further extensions and the termination date was due to be 31 October 2006 but in fact the contract was terminated without notice on 8 June 2006. By then the supervision of the SOX requirement had been taken over by more senior managers at the head office at Warwick.

The contractual arrangements.

15. There was no express contract between the Claimant and the Respondent. Nor indeed between the Claimant and Hyphen. He had a written contract with Michael Page . Michael Page in turn had a written contract with Hyphen, and Hyphen with the company.
16. The Tribunal identified certain features in the agreement between the Claimant and Michael Page. It contained terms characteristically found in agreements of this nature. Michael Page would offer appropriate work but the worker was not obliged to accept any particular offer. They were to pay on an hourly basis and required time sheets signed by the client agreeing the hours worked. They would provide holiday pay in accordance with the Working Time Regulations 1998. The worker undertook not to engage in conduct detrimental to the interests of the client; and to be present during times to be agreed with the client. He had to comply with all reasonable instructions and requests regarding the scope of the agreed services paid by the client.
17. If the temporary worker were offered a full time post by the client then there was an obligation to inform Michael Page. Michael Page could terminate the agreement without notice and instruct the worker to terminate an assignment with a client at any time. The worker could terminate the agreement upon twenty-four hours written notice. If the worker had a grievance arising out of the conduct of those employed by the hirer, he could raise that grievance in writing with a director or senior manager of Michael Page.
18. The agreement between the company and Hyphen provided that Hyphen were to be charged with using all their skill, care and diligence to seek to engage contract personnel at an appropriate standard and in ways which minimised costs. Assignment contracts would be issued by Hyphen in a format agreed with National Grid. If National Grid were unhappy with the quality of a worker then Hyphen were obliged to replace that person with someone of equal or superior ability at no additional cost.
19. Hyphen were to be responsible for all matters concerning income tax, national insurance and social security payments and so forth. They are reminded of their duties under the Working Time Regulations and the National Minimum Wage Act. It was specifically provided that National Grid would have no obligation regarding claims from contract personnel for redundancy payments, unfair dismissal or other claims on termination. The agreement provided that within the first three months National Grid could give Hyphen seven days' notice to terminate an assignment. Thereafter, either party would give at least twenty-eight days' notice to the other.
20. The agreement between Hyphen and Michael Page contained similar provisions to those agreed between Hyphen and the company.

The law.

21. The legal principles themselves are not in dispute. They may for the purpose of the appeal be summarised as follows:

1. Where employees are provided pursuant to an agency contract, a tribunal must not simply focus on the express contractual arrangements but must also have regard to how the work is actually carried out: see Dacas v Brooke Street Bureau (UK) Limited [2004] IRLR 358 per Mummery LJ para. 53. This may provide material from which it is possible to imply a contract between the worker and the end user, notwithstanding the absence of any express contract between them.

2. However, it is not legitimate to imply a contract merely because it is considered desirable to do so, or because it would be so implied in the absence of the express contracts. As Mummery LJ observed in Dacas (paras 49-51), parties are entitled to arrange their relationships so as to exclude the creation of any contracts of employment, and tribunals must resist the temptation of finding a contract of employment merely because the worker is not in reality self employed or in business on his or her own account. The fundamental question is whether it is necessary to imply the contract to give business reality to what is actually happening. Such a necessity arises only if there is conduct which is inconsistent with there not being such a contract: see the observations of Bingham LJ in the Aramis case [1989] 1 Lloyd's Reports 213, 224, an approach approved by the Court both in Dacas and in the later decision of the Court of Appeal which followed Dacas, Cable & Wireless PLC v Muscat [2006] IRLR 354.

3. It will be legitimate to imply a contract where the formal written contracts are a sham, in the sense that they are deliberately intended to mislead third parties or the Court as to the true nature of the relationship. We consider this further below.

4. However, even absent a sham, it will be appropriate to imply a contract if in fact the express contracts no longer adequately reflect what is actually happening, and it is necessary to imply a contract to provide a proper explanation: see the observations of Elias P in James v London Borough of Greenwich [2007] IRLR 168 para 58.

The Tribunal's decision.

22. The Tribunal directed itself in accordance with the Court of Appeal decisions in Dacas and Muscat. The Tribunal referred to these and various other more recent EAT cases, including James v London Borough of Greenwich and summarised the significance of these as follows (para 3.2 and 3.3):

"The effect of Muscat, a Court of Appeal decision binding on the Tribunal, is that in cases involving triangular relationships between a worker; an employment agency and an end user, Employment Tribunals should consider whether they need to imply a contract between the worker and the end user in the light of all of the evidence about the relationships between the parties.

Mr Justice Elias in James emphasises that the key feature of a genuine agency is that the end user cannot insist on the agency providing the particular worker at all. If the express contracts in place both explain and are consistent with the nature of the relationship, no further implied contract is justified. When the arrangements are genuine and when implemented accurately represent the actual relationship between the parties, it would be a rare case where there would be evidence entitling a Tribunal to imply a contract between the worker and the end user. The unreported cases are consistent with the approach in James."

The Appellant has no complaint about this direction.

23. The Tribunal then specifically directed themselves in accordance with an observation of Elias P in the James case, when he said this (para 37):

"It has long been recognised that in this area that the court must look at the reality of the position and if the obligation is a sham it will want to say so: per Peter Gibson LJ in Express & Echo Publications Ltd v Tanton [1999] IRLR 367, 369. That would be the position where the agency arrangements were never intended to reflect reality, but rather to obfuscate the true nature of the relationship."

24. The Tribunal concluded that this was the position in this case. The Tribunal held that the factors here were of such a nature that it was necessary properly to explain them to infer a contract directly between the Claimant and the end user. They gave their reasons as follows (paras 4.4 and 4.5):

"On careful consideration of the facts of this case we are satisfied that neither Hyphen nor Michael Page was appointed as an agent to supply a staffing requirement for the respondent in respect of the work carried out by the Claimant. The respondent undertook the responsibility for selection and appointment of the Claimant itself. The role of the agency in the Claimant's appointment was that of a recruitment agent. Hyphen and Michael Page introduced the Claimant to the respondent as a potentially suitable candidate for appointment. He was appointed by the respondent in a competition and selected by the respondent as the person most suitable for the appointment. It is clear that at the outset of the engagement and for the major part of it, the respondent would not have accepted another person selected by Michael Page or Hyphen to substitute for him. Important variations to the term of his original appointment (including notice and pay) were negotiated directly between the Claimant and the respondent. In these circumstances we are satisfied that the designation of the Claimant as an agency worker at the outset of his appointment was a sham and remained a sham. That he was not given a contract of employment; did not receive the other benefits of employment and was denied the statutory protection afforded to the employees was probably the reason for the sham.

We have no doubt that in the circumstances of this case it is necessary to imply that there was a contract between the Claimant and the respondent to give business effect to the relationship between them. The respondent conceded that if we reached this conclusion then that contract could only be a contract of employment. We are satisfied that it was. The respondent exercised control over the Claimant; the Claimant was integrated into the structure of the respondent's business as a senior manager, albeit on a temporary basis and the respondent paid his wages via Michael Page who acted as an agent for that purpose."

The grounds of appeal.

25. The principal point which arises is whether the Tribunal were entitled to reach that conclusion that the relationship was a sham. Ms Del Priore submits that the Tribunal simply misunderstood what this involves, or alternatively reached a conclusion which was not open to them on the evidence and without giving adequate reasons.
26. Her starting point was the definition of a "sham" as set out by Diplock LJ in Snook v London & West Riding Investments [1967] 2 QB 786 at 801 when His Lordship said this:

"It is, I think, necessary to consider what, if any, legal concept is involved in the use of this popular and pejorative word. I apprehend that, if it has any meaning in law, it means acts done or documents executed by parties to the "sham" which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create."

His Lordship added that:

"…..For acts or documents to be a "sham" with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create legal rights and obligations which they give the appearance of creating."

27. We were referred to a number of subsequent cases to similar effect, the most important of which was the decision of the House of Lords in Antoniades v Villiers [1988] 3 All E R 1058.
28. Ms Del Priore submits that the fact that there may be an ulterior motive for the arrangement does not vitiate it or demonstrate that it is a sham. In this context Ms Del Priore relied upon the observations of Lord Justice Mummery in the Dacas case, which we have mentioned above, when he said this (para 51):

"I should make it clear that there is nothing unlawful or wrongful in what Brooke Street as the employment agency and the council as the end user are evidently seeking to achieve for their own mutual advantage: that, if possible, Mrs Dacas works as a cleaner but not under a contract of service with either of them. They are entitled to arrange their affairs with that lawful aim in mind."

29. She says that the Tribunal has chosen to contend that the arrangement was a sham, but that was an unsustainable conclusion without first analysing the intentions of the parties at all. This, the Tribunal singularly failed to do. Had they done so, they could not have concluded that there was a sham because there was no basis for concluding that the parties did not intend the arrangements to have effect precisely in accordance with the express contractual terms. On the contrary, she says that the company had every reason to intend the arrangements provided by the express contracts, and no reason for wanting the position to be different.
30. Ms Del Priore recognises that a contract can be implied on the necessity principle even where there is no sham. However, she submits that the Tribunal did not seek to rely on that principle here. Had they done so, they would have had to explore in some detail - and certainly in more detail than they did - in what manner the actual operation of the contracts departed from the terms which were prescribed by the written contracts. She further submits that had they done this, they could only have concluded that there was no conflict.
31. Ms Del Priore considered each of the three features from which the Tribunal inferred that there was a sham; first, their finding that the agency was limited to the function of recruitment, that is finding potential candidates for the post rather than providing the specific worker; second, their conclusion that no substitute could be provided and that the work had to be done personally; and third, that negotiations for change to the original contract in respect of rates of pay and notice were made by the company and the Claimant. She says that even if these factors could demonstrate that the parties' relationship was not reflected in the contractual terms, this would not begin to be sufficient to identify the arrangements as a "sham". That required the additional obligation to focus on the intention of the parties in the way that we have outlined.
32. In any event, she submits that the factors do not even establish the more limited proposition that there is a conflict between the written terms and what happened in practice. She took us to the contract between Hyphen and the company which provides in terms that the company could select the appropriate candidate from a list of potentially qualified persons identified by the agency. Since the parties had done precisely what the term stated they should do, there had been no misrepresentation of any kind. Anyone looking at that agreement would have expected the company to make the selection in precisely the way they did.
33. Similarly with the other two features. It was plain that the Claimant would be obliged to perform the services personally, at least whilst both parties were willing to operate the relationship. Nothing in the contracts would have indicated otherwise, and indeed it was implicit in the fact that the company selected the worker. As to the pay negotiations, any change would have had to be processed and handled through the agency in any event.
34. Ms Del Priore also submitted that the Tribunal's conclusion that the Claimant had negotiated a notice period of 28 days was inexplicable in the light of the evidence. Michael Page had written to him and told him that this was the position with certain categories of staff, which included him. Moreover, this was consistent with the contract between Hyphen and the company, which expressly provided for 28 days notice once staff had been working for three months. She further submits that the Tribunal did not give satisfactory reasons why they found that there had been direct negotiations, given indications to the contrary. However, it was accepted that the 28 days did not reflect the contract between Michael Page and the Claimant. Under the original contract, they could terminate the contract at any time and he could do so on twenty four hours notice in writing.
35. In view of these matters, even if the Tribunal had asked themselves, as they should have done, whether it was necessary to imply a contract to give effect to the relationship as it in fact developed, they could not properly have concluded here that the necessity principle applied. The terms were not inconsistent with the express contractual terms, nor were they only consistent with an implied contract.
36. The Claimant represented himself very skilfully. He submitted first that it was not open to the Appellants to run the argument that there was no sham because the issue of a sham was not directly raised below and we should not allow it to be raised here. That argument has no merit and misunderstands the principle being relied upon. Of course the Appellants were not suggesting that the arrangements were a sham; they were contending that they were lawful. However, the Tribunal found that it was a sham, and the Appellants can seek to persuade this Tribunal why that is in law an unsustainable conclusion.
37. The Claimant next submits that in any event there plainly was evidence to justify the Tribunal's conclusion. In particular, it was of considerable significance that there was an obligation personally for the Claimant to do the work. Moreover, Mr Woods asked rhetorically, how is it conceivable that there is no contract with the company when he negotiated directly with the company representatives over pay and holiday arrangements? That, he contends, is only consistent with a direct contractual relationship with the Appellant. Equally, he submits that the Tribunal's finding that he had negotiated the notice period directly with management was highly significant; it showed that the company were seeking to establish a mutuality of obligation between them. Given the other elements of the relationship, the Tribunal's conclusion was wholly sustainable. (Since completing this judgment it has come to our notice that the EAT (HH Judge Clark presiding) has adopted a similar analysis in the case of Harlow District Council v O'Mahony and APS Recruitment Ltd. UKEAT/0144/07).

Conclusions

38. We are satisfied that the Tribunal did err in finding that the relationship was a sham. It will only be in exceptional circumstances that such a conclusion can be reached, when it is plain that there was always recognition that the express terms were not intended to reflect the reality. For a recent example in the context of employment agencies, see Consistent Group Ltd v Kalwak [2007] IRLR 560. The Appellant is correct to say that the Tribunal did not approach that issue in the appropriate way, or ask the relevant questions. It did not consider the intentions of the parties at all. Had it done so, we agree with Ms Del Priore that there was no proper evidential basis for concluding that the formal arrangements were never intended to reflect the reality of the relationship. The observation of the Tribunal that the desire to avoid the imposition of employment rights was probably the reason for the sham does not assist in identifying whether there was a sham. That in itself is not an unlawful objective, as Mummery LJ accepted in Dacas.
39. That does not, however, compel the conclusion that was no contractual relationship between the company and the Claimant in this case. Even if the Tribunal could not properly find that the arrangements were a sham, they still had to consider whether it was necessary to imply a contract to reflect the reality of the relationship. Ms Del Priore suggests that the Tribunal's findings lend no support to any such finding. We do not agree. There were a number of factors here pointing towards the existence of a contract. Most significant is the fact that there were direct negotiations about pay, notice and when holidays may be taken. As to the finding that there were negotiations about notice, there was plainly evidence to support that finding, as Ms Del Priore accepted. The fact that there was an obligation to provide personal services in our view reinforces this conclusion. We do not say that this factor of itself establishes that there must be a contract between the company and the Claimant, and the observations of Elias P in James (para 57) were not intended to suggest that this would necessarily be the case. We accept the submission of Ms Del Priore that the express contracts may specifically provide for this, in which case the principle of necessity does not arise.
40. However, when this fact is combined with the direct face to face negotiations on classic features of the contract, we do not see how it can be said that the actual conduct of the parties reflects the express documents. It seems to us that the company has then altered the original arrangements in a significant way. It has chosen to put itself in a direct relationship with the individual, affecting the future conduct between them. The company was not treating the Claimant as a semi-detached member of staff. They were in practice acting as though he were a wholly integrated member of staff.
41. We have anxiously considered whether in these circumstances we can properly make a finding that there was a contract in existence here, albeit not for the reasons given by the Tribunal. We recognise that we should not do so unless on the facts there is no other proper conclusion: the decision must be "plainly and unarguably right" as Sir John Donaldson MR put it in Dobie v Burns International Security (UK) Ltd [1984] ICR 812 (although some greater leeway may now exist having regard to the overriding objective, and in particular the need to save costs). We believe that is those criteria are satisfied here.
42. It is not suggested that the company was acting on behalf of the agency, and we cannot see how the fact that there were negotiations and subsequent agreement of terms on notice and pay and, to a more limited extent, on when holidays could be taken, can be explained other than by a recognition that whatever the original intention may have been, the parties were no longer acting in accordance with the express terms. They had established a mutual relationship between themselves which can only be explained on the basis that they were acting as parties who had contractual nexus.

Conclusion.

43. We consider that the Tribunal reached the right decision, albeit for the wrong reason. In our judgment their findings of fact are only consistent with there being a contractual relationship between the Claimant and the company. It is conceded that this must be a contract of employment. Accordingly, the appeal fails. The case must be remitted for the merits to be determined.