Contract Law - Employment Contracts

What this page is about:
Although much of modern employment law is contained in statutes and statutory instruments, the legal basis of employment remains the contract of employment between the employer and the employee.

The contract of employment is important in itself, in that it may give rise to a common law claim for its enforcement or for damages for its breach); but it's equally important in areas of statutory employment law because the expression 'employee' is defined by reference to the contractual relationship at common law.

'Employer', in relation to an employee or worker, means the person by whom the employee or worker is, or, where the employment has ceased, was, employed.

'Employee' means an individual who has entered into or works under, or, where the employment has ceased, worked under, acontract of employment.

'Employment', in relation to an employee, means employment under a contract of employment and, in relation to a worker, means employment under his contract .

'Contract of employment' means a contract of service or apprenticeship, whether express or implied, and, if it's express, whether it's oral or in writing.

Whether a person is or isn't an employee is a question of fact which, in proceedings under the Employment Rights Act 1996, is essentially a matter for the employment tribunal. For the purposes of the Employment Rights Act 1996, it's immaterial whether the law which otherwise governs any person's employment is the law of the United Kingdom or of a part of the United Kingdom, or not.

There's no single test for determining whether a person is an employee. The test that used to be considered sufficient, that is to say the 'control' test, can no longer be considered sufficient, especially in the case of the employment of highly skilled individuals, and is now only one of the particular factors which may assist a court or tribunal in deciding the point.

More recently, the 'integration' or 'organisation' test had been suggested, proposing that the important question was whether the person was integrated into the enterprise or remained apart from, and independent of, it. However, while both of these factors are still pertinent, the modern starting point for deciding whether a contract of service (now generally referred to as a 'contract of employment') exists is to ascertain if:

* (1) 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 ('mutuality of obligation');

* (2) 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 ('control'); and

* (3) the other provisions of thecontract are consistent with its being acontract of service.

The final classification of an individual now depends upon a balance of all relevant factors, fine though that balance sometimes might be, with 'mutuality of obligation' and 'control' being seen as the 'irreducible minimum' legal requirements for the existence of a contract of employment. The factors taken into consideration may include: the method of payment; any obligation to work only for that employer; stipulations regarding hours; overtime, holidays etc; arrangements for payment of income tax and national insurance contributions; how the contract may be terminated; whether the individual may delegate work14; who provides tools and equipment; and who, ultimately, bears the risk of loss and the chance of profit. In some cases the nature of the work itself may be an important consideration. The way in which the parties themselves treat the contract and the way in which they describe and operate it are not decisive; and a court or tribunal must consider the categorisation of the person in question objectively. accordingly a person could have been described as self-employed during the currency of the engagement but, on its termination, claim to have been in fact an employee for the purpose of claiming unfair dismissal, although such a course of action could have unfortunate taxation implications. In many employments, the contract won't be discernible just from one document, but will require consideration of several documents, oral exchanges (for example, at interview) and subsequent conduct. In a case of what is often referred to as 'atypical employment', such as temporary or casual work, sporadic work or homeworking, it could be appropriate, when deciding on the employment status of an individual subject to such a regime, to consider whether there's sufficient mutuality of obligations to justify a finding that there was a contract of employment.

Some employment-related statutes achieve wider application by the use of either the term 'worker' or a deliberately wider definition of 'employment' and 'employee'. The former approach has been used widely in the law relating to industrial relations and trade unions, where 'worker' is defined as an individual who works, or normally works or seeks to work:

* (1) under a contract of employment; or

* (2) under any other contract whereby he undertakes to do or perform personally any work or services for another party to the contract who isn't a professional client of his; or

* (3) in employment under or for the purposes of a government department, otherwise than as a member of the naval, military or air forces of the Crown, in so far as such employment doesn't fall within head (1) or head (2) above.

For the purposes of the Employment Rights Act 1996, 'worker', except in the phrases 'shop worker' and 'betting worker', means an individual who has entered into or works under, or, where the employment has ceased, worked under:

* (a) a contract of employment; or

* (b) any other contract , whether express or implied and, if it's express, whether oral or in writing, whereby the individual undertakes to do or perform personally any work or services for another party to the contract whose status isn't, by virtue of the contract , that of a client or customer of any profession or business undertaking carried on by the individual; and any reference to a worker's contract is to be construed accordingly.

The term 'worker' is used in the statutory provisions relating to deductions from wages, but is given an extended meaning in relation to protected disclosures and in the statutory provisions in relation to the right to be accompanied at a disciplinary or grievance hearing.

The term 'worker' has also been used more recently in the National Minimum Wage Act 1998, the Working Time Regulations 1998 and the Part-time Workers (Prevention of Less Favourable Treatment) Regulations 2000, where it's given the same meaning as in the Employment Rights Act 1996. The second approach, the use of the term 'employee' or 'employment' but with a deliberately wider definition (with similarities to the definition of 'worker') has traditionally been seen in the legislation on sex and race discrimination.

It can, however, also be seen in the Transfer of Undertakings (Protection of Employment) Regulations 1981, and more recently in the Disability Discrimination Act 1995. Although containing some divergences which could be significant in an individual case, these extended definitions are essentially similar in their possible application to various forms of 'atypical' engagement which could fall outside the classic definition of an employee as a person under acontract of employment. The case law on these definitions is relatively sparse, but the leading authority emphasises the importance of personal service as the dominant purpose of the contract , and other case law affirms that the definitions can include some self-employed persons. A power was introduced by the Employment Relations Act 1999 whereby the Secretary of State may by order extend any rights conferred on an individual against an employer, under or by virtue of specified legislation, to persons of a specified description. It is possible that this could be used in the future to extend remaining employment protection laws, in whole or in part, to a wider class of persons than employees under contracts of employment, perhaps by extension of the concept of 'worker' or the wider definition of employment.