The Irreducible Minimum of Obligation

The Irreducible Minimum of Obligation

March 2001

The phrase 'the irreducible minimum of obligation' seems of late to have supplanted the 'substitution clause' in degrees of importance, not least by its inclusion in the very recent judicial review of IR35 in the High Court. It has, however, been used in numerous cases since its inception in the early 1940's. In terms of importance, this test of employment status has now been approved in the House of Lords in Carmichael v. National Power Plc [1999]. The test has been followed in a high percentage of the recent cases influencing this area of law.

The phrase evolved from a statement made by Stable J in Chadwick v Pioneer Private Telephone Co. Ltd. [1941] 1 All E.R. 522, 523D, concerning the obligation required of an employee: "A contract of service implies an obligation to serve, and it comprises some degree of control by the master." This was then expanded by MacKenna J. in Ready Mixed Concrete (South East) Ltd v. Minister of Pension and National Insurance [1968] where his lordship considered that there were three conditions which must be fulfilled for a contract of service to exist:

"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."

In expanding the point (i) MacKenna J stated "…there must be a wage or other remuneration. Otherwise there will be no consideration, and without consideration no contract of any kind. The servant must be obliged to provide his own work and skill." .In the judgment of Stephenson LJ in Nethermere (St Neots) Ltd v. Gardinier [1984] ICR 612 his lordship expanded the theory of MacKenna J further by stating that:

"There must, in my judgment, be an irreducible minimum of obligation on each side to create a contract of service. I doubt it can be reduced any lower than in the sentences just quoted [referring to those above]."

The test breaks down basically into:

1. mutuality of obligation;
2. a sufficient degree of control ; and
3. consistency of the remaining terms of the contract.

In looking at the test one needs to assess what the criteria is. What the courts appear to be saying in the most recent cases is that the mutuality of obligation between the parties needs to be established first. Based on the fundamental doctrine in contract law that there must be an intention to create legal relations, the intention in this respect is the obligation. If an obligation cannot be established, then there would be no contract of employment.

In looking at the first part of the test, the mutuality of obligation (now commonly known as 'MOO'), it needed to be established whether the absence of a mutuality of obligation was fatal to the existence of a contract of service or whether its absence was merely a powerful pointer? Waite LJ in McMeechan v. Secretary of State for Employment [1997] IRLR 353 considered it was not fatal to the contract of employment. This opinion, however, seems to be in the minority. In cases such as Nethermere, Express & Echo, and in the approach and findings of the House of Lords in Carmichael, the Lord Chancellor and Lord Hoffman both concluded that the lack of mutuality of obligation had the result that there was not a contract of employment.

In Carmichael the primary case advanced on behalf of the applicants was that an exchange of correspondence between the parties in 1989 constituted a contract; and that the contract was to be classified as a contract of employment. The claim was not advanced on the basis that when they actually worked as guides they did so under successive ad hoc contracts of employment. So, in establishing that the absence of mutuality is fatal to the existence of a contract of employment, the courts needed to decide on what basis the existence or absence of the MOO would be established. Was the criteria for obligation based on:

a) when there was no work in between periods of working; or
b) when work was offered and accepted.

These two questions have been asked in various forms in different cases and may account for the apparent diverse nature of the judgments. In asking these two question you may well come up with two different answers for the same case! In order to understand better the position of the MOO it is necessary to look at the Carmichael case.

The Carmichael Case

In this case there were two tour guides who had worked for National Power Plc (formerly Central Electricity Generating Board, CEGB) for some years part-time. They began at 3.75 hours per week in 1989 increasing at times to 25 hours per week by 1995. They were paid a flat hourly rate with no provision for holiday, sickness or pension benefits and no grievance or disciplinary procedures. There was no contract but there was documentation from which the court could take guidance. In the invitation for application for the post of station guide it stated: "Employment will be on a casual as required basis…" and the applicants signed and returned the pre-typed letter which stated: "I am pleased to accept your offer of employment as a station guide on a casual as required basis."

In fact, Mrs Carmichael said in her application form "the part-time casual arrangement would suit my personal circumstances ideally!". The arrangement turned on mutual convenience and goodwill and worked well in practice over the years. The employment tribunal observed that both applicants had a sense of moral obligation to CEGB but, that that moral obligation did not convert into a legal obligation. The tribunal held that the case "…founders on the rock of absence of mutuality."

Lord Irvine in Carmichael stated the following:

"In my judgment, therefore, the industrial tribunal was well entitled to infer from the March 1989, documents, the surrounding circumstances and how the parties conducted themselves subsequently that their intention neither in 1989 nor subsequently was to have their relationship regulated by contract whilst Mrs. Leese and Mrs. Carmichael were not working as guides. The industrial tribunal correctly concluded that their case "founders on the rock of absence of mutuality." I repeat that no issue arises as to their status when actually working as guides".

His lordship goes on to explain that, in overturning the decision of the majority in the Court of Appeal, a term which is implied in order to give business efficacy to a contract may not be implied if there is no contractual relationship which provides the basis for the implication. It must be observed in the Carmichael case that although, there were documents, the parties did not intend these documents to constitute "…an exclusive memorial of their relationship." The Employment Tribunal, with which the House of Lords agreed, made its findings on the basis of (a) the language of the documentation; (b) the way in which it had been operated; and (c) the evidence of the parties as to how it had been understood. In the House of Lords, Lord Irvine stated that the approach taken by the tribunal had been correct. In substance the tribunal held that:

"…the documents did no more than provide a framework for a series of successive ad hoc contracts of service or for services which the parties might subsequently make. The parties incurred no obligation to provide or accept but at best assumed moral obligations of loyalty in a context where both recognised that the best interests of each other lay in being accommodating to the other."

It must be remembered that this case on its facts concerns 'a series of successive ad hoc contracts'. The definition of 'ad hoc' was not advanced in court but, the dictionary definition is - ad hoc: of a particular kind. Whether this case is appropriate to IR35 will remain to be seen. As it has been specifically mentioned in the judicial review of IR35 by Burton J and it is a House of Lords case the precedent is a very strong one.

Caution must be exercised on how a particular case is framed and what the arguments of the Inland Revenue would be, this in order to dispute them. Fortunately, there are other cases which have not been decided specifically on MOO but have been decided on the basis that a serious of contracts cannot constitute a global contract.

'Umbrella' contracts

In some cases the question of umbrella or global contracts has arisen. This is a situation where an individual will do many contracts for the same client over a number of years. The purpose of the question is to establish whether these contracts can be joined together to create one long contract.

In the case of Airfix Footwear Ltd v Cope (1978) ICR 1210 the court considered that the continuing relationship between the parties over seven years had created a contract of employment. In this case, however, the question of mutuality of obligation was not explicitly decided on. The case was decided on the basis of the 'in business on your own account' test. This approach has since been heavily criticised for the reason that there can be no 'fundamental test' and it is wrong to take one definitive approach. This wrong was righted in the case O'Kelly v Trusthouse Forte plc (1983) 1 ICR 728 .

In the case O'Kelly v Trusthouse Forte plc, the court was concerned with about 100 casual catering staff whose names appeared on a list of 'regulars' kept by an hotel. The Industrial Tribunal held that there was no contract of service, only contracts for services when staff were engaged. The Court of Appeal upheld this view and Sir John Donaldson MR said :

"So far as mutuality is concerned, the 'arrangement', to use a neutral term, could have been that the company promised to offer work to the regular casuals and, in exchange, the regular casuals undertook to accept and perform such work as was offered. This would have constituted a contract. But what happened in fact could equally well be attributed to market forces."

Sir John Donaldson continued:

"Although I, like the Appeal Tribunal, am content to accept the Industrial Tribunal's conclusion that there was no overall or umbrella contract, I think that there is a shorter answer. It is that giving the applicant's evidence its fullest possibly weight, all that could emerge was an umbrella or master contract for not of, employment. It would be a contract to offer and accept individual contracts of employment and, as such, outside the scope of the unfair dismissal provisions."

In McLeod v Hellyer Brothers (1987) IRLR 232 the appellants were trawlermen based at Hull who for a long time had worked regularly and exclusively for the respondents pursuant to a series of crew agreements, such agreements being signed on each occasion when they were engaged to work on a vessel. When the respondent's vessels were being taken out of commission the trawlermen claimed that they were employees entitled to redundancy. In the Court of Appeal, Slade L.J. stated:

"One important point which was not explicitly decided in the Airfix case was whether a contract of employment within the definition …of the Act… (whether it be given the extra-statutory name 'global' or 'umbrella' or any other name) can exist in the absence of mutual obligations subsisting over the entire duration of the relevant period. Any doubts as to this point were laid to rest by the decision of this court in Nethermere where there was full analysis and discussion of the Airfix case…all three members of this court were agreed that there must be mutual legally binding obligations on each side to create a contract of service."

Kerr L.J. in Nethermere rejected the idea that a course of dealing might give rise to a contract

"A course of dealing can be used as a basis for implying terms into individual contracts which are concluded pursuant thereto, but I can find no authority for the proposition that even a lengthy course of dealing can somehow convert itself into a contractually binding obligation - subject only to reasonable notice - to continue to enter into individual contracts, or to be subject to some 'umbrella' contract."

So, from the 'ad hoc' contract and the 'umbrella' contract to the 'single stint' agency contract.

Agency Workers

In applying this to agency workers, a recent case Montgomery v. Johnson Underwood Ltd [2001] in the Court of Appeal, decided that the tribunal had erred in following the case of McMeechan and in holding that Mrs Montgomery was an employee of the agency. In the Court of Appeal, a unanimous decision was delivered stating that Mrs Montgomery could not be an employee of the agency Johnson Underwood (JU) because of the absence of a mutuality of obligation.

This case began back in 1997 when Montgomery was dismissed from her position as a telephonist/secretary with a company Orenstein & Kopple Ltd (O&K). Montgomery services had been supplied by JU to O&K. Having been dismissed Montgomery claimed unfair dismissal against firstly JU named as the employer and subsequently adding O&K. Each company denied being the employer of Montgomery. The preliminary issue was whether Montgomery was an employee of either company and thus which company would be the proper Respondent for the purpose of an unfair dismissal hearing.

Employment Tribunal unanimously decided that: "There was no basis upon which we could hold the Applicant Montgomery to have been an employee of the Second Respondent (O&K)." and that: " We are satisfied that the Applicant was an employee of the First Respondent (JU)."

JU and Mrs Montgomery appealed. JU against the Decision that Mrs Montgomery was its employee and Mrs Montgomery against the Decision that she was not employed by O&K. All three parties appeared before the Employment Appeal Tribunal (EAT) on 10th November 1999. Judgment was delivered on 18th April 2000. The EAT decided unanimously that Montgomery's appeal should be dismissed but there was a majority decision that JU's appeal should be dismissed.

Mr Justice Charles, in his minority view, decided that Montgomery was not an employee of JU and that their appeal should have been dismissed. His Lordship wrote a very interesting piece on his minority judgment entitled "Employee or independent contractor: the approach or test to be applied at law." In his view the EAT, in adopting and following the case of McMeechan v. Secretary of State for Employment [1997] IRLR 353, had failed to recognise and therefore to take into account that for there to be a contract of service there must be an irreducible minimum of obligation on each side Stephenson LJ in the Nethermere and more recently in Carmichael in the House of Lords. In addition, in stating that they considered themselves bound by the judgment in the McMeechan case the Employment Tribunal erred in law.

The majority view, however, applies and the case went to the Court of Appeal. This time it was as between Montgomery and JU as her perceived employer. The Court of Appeal, in their infinite wisdom, followed the minority view of Mr Justice Charles in the EAT and held that Montgomery was not an employee of JU.

Conclusion

In reviewing all the cases, there is overwhelming evidence that where there is found to be no obligation on either party to provide or accept work, there is no contract of employment. How this relates to the so-called 'hypothetical' nature of the IR35 contract remains to be seen. The courts will approach the question using existing cases so all the precedent cases in employment law will be of relevance even though they don't directly address the issue of the 'disguised employee'.

It is interesting to note, as Burton J did in the judicial review, the Revenue's view on mutuality as contained in their Employment Status Manual 0514:

"The concept of 'mutuality of obligation' is rarely of practical use when considering employment status for Income Tax purposes and it can easily confuse the issue. Do not consider it unless the engager or worker raises the subject." (ESM 0514).

Trying not to be cynical but, one wonders why the Revenue are at such pains to avoid having to consider MOO.