The line between employment law and employment tax continues to be blurred as demonstrated by the outcome of a recent Employment Appeal Tribunal (EAT) decision.

In Redrow Homes (Yorkshire) Ltd v Buckborough and anor, the EAT held that a substitution clause will be deemed a ‘sham’ where it is established that neither party to the contract intended for the clause to apply in reality. In this case, B, a bricklayer, entered into a contract with Redrow, a term of which purported to allow B, if he wishes to find someone else to do the work. B subsequently made a claim for holiday pay under the Working Time Regulations. In order to establish rights under the Regulations, B had to show that he was a 'worker' which, under Reg 2(1), includes employees and anyone under an obligation to provide work or services personally. B asserted that his contract fell within the latter category of contracts for personal service. B argued that the right of substitution was a sham, as neither B nor Redrow intended the right to be exercised.

The tribunal agreed that B was a worker, finding that the term of the contract allowing the work to be carried out by anyone was in fact a sham and B was to carry out the work personally. The tribunal went on to find, in the alternative, that the obligation on B to ensure that there was someone  on site to lay bricks as and when required by Redrow nonetheless amounted to personal service for the  purpose of Reg 2(1).  Redrow appealed to the EAT who concluded that the both the end-user and the contractor agreed that the contractual term may be considered a sham not only where the parties intend to ‘deceive a third party’ i.e. HMRC or the court, but also where the parties simply do not intend for the term to apply. The EAT also held that an obligation to ensure work was carried out meant that the contract was one of personal service for the purposes of the Working Time Regulations 1998.

Readers will be aware, that the recent High Court decision in Dragonfly confirmed the Special Commissioners decision (see SpC 655, December 2007) on the position regarding the use of substitute clauses viz a vis the actual relationship between the parties to the contract. In summary, the outcome in Dragonfly merely confirms the importance of ensuring that attention is paid to the twin roles played by control and substitution in the creation of a contract for the provision of services.

The Dragonfly and Redrow cases both deal with, among others,  the right of substitution, a fundamental (but not exclusive) test in determining the status of a worker, and normal presents itself as an argument which holds that where a contract provides for the right to substitute the workers role with another is  a strong indication that the worker is self-employed.  This has ramifications for both employment law i.e. the potential for establishing am employment relationship between the parties as well tax implications, IR35 as well as the impact of s.12(c) of the Social Security Administration Act 1992 which states that where a company fails to pay National Insurance Contributions in respect of its employees, and the failure is due to the fraud or neglect of a director or other officer, the unpaid NIC may be recovered from that director.

This could mean that HMRC could pursue the individual director(s) of the intermediary company in the event that the company fails to meet its obligation.

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