The Legal 500

There is a vast amount of case law on the question of what test should be applied when determining the employment status of an individual. It has, however, been made clear that there cannot be a contract of employment without ‘mutual obligation', see for example the House of Lords' decision in Carmichael and another v National Power Plc. What does mutuality of obligation mean in practice?

Many companies make use of a wide variety of atypical working arrangements to suit their business needs. A not uncommon arrangement is the use of a contractor who is contractually committed to providing a minimum number of days' services, during a specified period, at a specified rate for each day of services provided. Such agreements may also impose restrictive covenants on the ‘consultant' following the end of the engagement. In ABC News Intercontinental Inc v Gizbert, the EAT recently had to consider the legal status of such a contractual arrangement.

Facts

G was a foreign correspondent covering news stories for ABC. He was originally engaged under a contract of employment, under which he was guaranteed $200,000 per annum plus various benefits. After G refused to go on a number of assignments in war zones, his contractual arrangements were renegotiated. In 2002 G went on to a fixed-term contract on a pay-per-day basis. This contract guaranteed 100 days' work per annum at $1,000 per day, and G was entitled to decline any assignment offered. Each contract was for a duration of one year and the first contract stated at Clause 1: ‘... we hereby employ you to render your services on a freelance basis as a news correspondent'. The contract also contained a restrictive covenant prohibiting G from working for a competitor for 180 days following the contract's termination. Prior to the expiry of each fixed-term contract, G was obliged to negotiate exclusively with ABC in relation to its extension.

G entered into two successive fixed-term contracts on these terms. The second contract was not renewed due to budget cuts at ABC.

Could an unfair dismissal claim proceed?

G brought an unfair dismissal claim. He had to demonstrate that he was engaged under a contract of employment and that he had been continuously employed for a period of one year before his unfair dismissal claim could proceed.

ABC argued that the two fixed-term contracts were simply framework agreements under which contracts of employment could be made in relation to each assignment undertaken by G. ABC argued that the issue was whether the gaps between each period of employment (ie each assignment) could count towards G's period of employment for the purposes of s212 of the Employment Rights Act 1996 (ERA) to preserve continuity during the final year before termination.

Section 212 ERA preserves continuity of employment in respect of any week in which relations are not governed by contracts of employment where the employee is absent from work on account of a temporary cessation of work.

This argument proved to be something of a red-herring, as the EAT instead examined whether the agreements themselves were contracts of employment. The first instance tribunal had concluded that the two contracts were not contracts of employment because the necessary ‘irreducible minimum' of mutual obligation was absent.

In the EAT's opinion, as a matter of construction of the contracts, there was mutuality of obligation: ABC was obliged to provide G with 100 days' work per annum at the rate of $1,000 per day. There was therefore an obligation on the employer to provide 100 days' work or, if not, 100 days' pay at the agreed rate. G could decide whether or not to accept an assignment, but had to do so in good faith. ABC did not therefore have an unfettered right to offer no work or pay, and G did not have an unfettered right to refuse assignments.

On this basis, the EAT was satisfied that the contracts were contracts of service. In reaching this conclusion the EAT also took into account:

• ABC's concession that, when working on an assignment, G worked under a contract of employment,
• the degree of control exercised by ABC over G's work; and
• G's place in the organisation and the restrictions on G working for competitors.

G accordingly had the necessary continuity of service to bring an ordinary unfair dismissal claim.

Tribunals eager to imply mutuality

The EAT, perhaps influenced by the fact that G had been engaged under a contract of employment prior to the change in arrangements, seems to have strained to find an employment relationship by implying into the contract an obligation on G to accept or decline assignments in good faith so that the necessary mutual obligation could be found to exist.

This decision demonstrates that the tribunals are eager to imply mutuality of obligation where the other hallmarks of an employment relationship exist. Consultancy arrangements of a similar nature to those of G and ABC may also be vulnerable to challenge, particularly if the ‘consultant' in question was formerly an employee.

Carmichael and another v National Power Plc [1999] UKHL 47

ABC News Intercontinental Inc v Gizbert EAT 0160/06

Tania Stevenson, professional support lawyer, Clifford Chance LLP

E-mail: Tania.Stevenson@cliffordchance.com