Whilst workers may be able to decide easily whether employment or agency suits them best, the English courts and Employment Tribunals have often experienced difficulties in determining which of these two working arrangements applies.

A number of tests have been established over the years, but no particular factor takes precedence and the waters have become somewhat muddied. However, in the recent case Julian Smith v. Reliance Water Controls Limited, the Court of Appeal went some way towards clarifying the position.

The Court of Appeal had to determine whether Mr Smith was an employee or a commercial agent. Mr Smith had been employed by Reliance as a sales representative under an employment contract from September 1996. At the end of 1997, Mr Smith asked the company if he could become self-employed because he was vulnerable to a deduction from earnings order by the Child Support Agency. An agency agreement was entered into in January 1998. Mr Smith was summarily dismissed for gross misconduct in January 1999.

On termination of his employment, an employee is generally only entitled to modest damages for wrongful dismissal (on the basis that his summary dismissal was unjustified and was therefore in breach of contract) , as well as any statutory claims, such as unfair dismissal that he may have. In contrast, on termination of his agency, a commercial agent may have a number of claims under the Commercial Agents (Council Directive) Regulations 1993 (as amended) (“the Regulations”). The value of an agent’s claims on termination are, in most cases, likely to far exceed the value of an employee’s claims on termination. Unsurprisingly, where there is any doubt as to whether a person is an employee or an agent, arguments are often put forward for agency on termination of the relationship.

The County Court judge found that Mr Smith should not have been summarily dismissed and was entitled to damages. However, those damages were to be assessed as wrongful dismissal damages because he remained an employee, notwithstanding the agency agreement, which it considered a sham. Mr Smith appealed.

The Court of Appeal criticised the County Court judge for not having looked objectively at what had been agreed between the parties. The County Court judge paid too much attention to the motive for the new arrangement and too little attention to the actual details. The Court of Appeal disagreed that the agency agreement was a sham. The new agency agreement and the fact that there was no evidence that either party treated the new arrangements between them as a sham was found by the Court of Appeal to be of great significance. Attention was drawn to the statement of Lord Denning in an earlier decision that “the way in which the parties draw up their agreement and express it may be a very important factor in defining what the relationship was between them”.

This may be surprising, given that it is a firmly established principle that it is the substance of a relationship, and not its form, which is decisive in determining the nature of a relationship. However, the Reliance case may be part of a trend towards form winning over substance following on from the Court of Appeal’s decision in Mercantile International. In that case, the issue was commercial agency versus distributorship. As with employment versus agency, an agent generally enjoys greater rights and protections on termination than those enjoyed by a distributor. The Court of Appeal decided that Mercantile was an agent, even though many of the features of the relationship indicated distributorship. This was because it considered that the fact that the agreements between the parties and with customers described the relationship as agency and were not treated as a sham could not be ignored.

Workers as employees

It has long been established by the courts that in order to amount to an employment contract the following conditions must be satisfied:

1. the worker must be paid a wage for agreeing to provide his own work and skill;

2. the worker must agree to be subject to the other’s control in performing that service; and

3. the other provisions of the contract must be consistent with it being an employment contract.

None of the above tests is conclusive on its own. Irrespective of this, the County Court judge failed to consider them all. Instead, he relied solely on what is known as the economic reality test, namely that if a worker cannot be shown to be an independent contractor, then he must be employed under an employment contract. In addition, the County Court judge failed to ask whether Mr Smith was a person in business on his own account.

Workers as agents

Factors considered by the Court of Appeal as indicative that the relationship was one of agency included the facts that Mr Smith was:

(a) permitted to represent non-competing manufacturers,

(b) responsible for his own promotional expenses and tools of the job; and

(c) not paid by Reliance when ill or on holiday.

Interestingly, receipt of remuneration in the form of commission was another factor identified as indicating agency. This is not a requirement of the definition of a commercial agent in the Regulations, which definition was not once referred to in the judgment! Further, the fact that Mercantile was remunerated by way of mark up, rather than by commission, did not avert the Court of Appeal’s finding of commercial agency.

Whilst the Court of Appeal established a number of clear indicators as to when a relationship will be considered one of agency, perhaps one should bear in mind the approaches of both the County Court and Court of Appeal in order to assess a worker’s status. The label chosen by the parties describing a relationship as ‘employment’ or ‘agency’ does not necessarily reflect the commercial reality of the situation. It is necessary to look at both the terms of the written agreement (if applicable) and how the arrangement works in practice in order to make an accurate assessment of a worker’s status.

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