Contractors, judges just handed you more right of substitution guidance

Thanks to Stuart Delivery Ltd v Augustine, the Court of Appeal has provided further guidance on the right of substitution and its importance in assessing a contractor’s employment status, writes Hannah Morrison, an associate on the employment team at Brabners.

In the case, the CoA judges determined that a moped courier was, in fact, a ‘worker’ and was not genuinely self-employed, due to the restrictions on his ability to send a substitute to work in his place.

Background: when are you classified as a ‘worker’?

Under the Employment Rights Act 1996 (‘ERA 1996’), an individual is a ‘worker’ if:

(a) they work under a contract of employment (so all employees are workers), or

(b) if they have a contract under which they must personally perform work.

The latter is sometimes referred to as a "limb (b) worker". This particular definition of worker is found in the ERA 1996, the Working Time Regulations 1998 and the National Minimum Wage Act 1998, meaning that someone who is found to be a “limb (b) worker” would be entitled to rights such as protection from unlawful deductions from wages, holiday pay and the right to be paid at least the National Minimum Wage.

Where substitution comes into play

Personal performance of work is also a factor which HMRC is particularly interested in when it comes to assessing whether a contractor is genuinely self-employed, or whether a PSC is outside IR35. Indeed, substitution was among the mix of factors that went against the latest TV presenter to lose to HMRC on IR35, Dave Clark, who was found caught by the Intermediaries legislation for engagements he had with Sky Sports.  

So, when assessing whether an individual has to ‘personally perform’ work, the right of substitution is a very relevant consideration. A contractor who has an unfettered right to send a substitute to work in their place clearly is not obliged to perform work personally. While an unfettered right of substitution does not guarantee that a contractor will be considered to be genuinely self-employed, it goes a long way.

However, even if a contract contains a right of substitution clause, if that right is subject to conditions (whether in the contract or in practice), the contractor’s self-employed status can be called into question. 

The facts of Stuart Delivery Ltd V Augustine

Stuart Delivery Ltd operates a technology platform that allows retailers to connect with local couriers to provide delivery services with real-time tracking.

Mr Augustine was a courier for Stuart Delivery (with a written contract), who was paid for each delivery ‘slot’ which he signed up for. By signing up for a slot, couriers were committing themselves to being in a certain area for a certain period of time and were paid a guaranteed minimum £9 per hour, regardless of whether they actually carried out any deliveries during that slot.

Having accepted a slot on Stuart Delivery’s app, Mr Augustine was allowed to subsequently drop his slot by releasing it via the app to other couriers. However, if no other courier opted to pick up the slot, then Mr Augustine would remain liable to do it or face a penalty.

Refusal, choice (or lack of), plus an incentive

Additionally, if he refused more than one delivery job during his slot, he would not receive the guaranteed minimum hourly payment for that slot. He also had no ability to choose which courier took on the delivery in his place; it depended entirely on whether any of Stuart Delivery’s other couriers on the app chose to accept his slot or not. There were also incentives. For example, if Mr Augustine completed at least two slots in a week and successfully completed a certain number of deliveries, there was a cash reward.

In 2017, Stuart Delivery Ltd terminated their agreement with Mr Augustine. But Mr Augustine brought a claim for notice pay, holiday pay and other payments and alleged that he was not actually self-employed, but was either an employee or a worker. The tribunal didn’t accept that he was an employee, but whether he was a worker was up for debate. Stuart Delivery argued that he was not a worker because he had a contractual right of substitution, and there was no obligation on him to personally perform work for them.

In 2019, the tribunal ruled that Mr Augustine was a worker. Yet Stuart Delivery appealed to the Employment Appeal Tribunal – albeit with no luck, and then, more recently, Stuart Delivery went to the Court of Appeal.

The verdict

At the hearing last month, the CoA agreed with the tribunal, as it also concluded that Mr Augustine was a worker, meaning he was not genuinely self-employed.

The CoA found that the right of substitution in his case was fettered. Significantly, the risk of sanctions or penalties if Mr Augustine gave up his slot, meant that there was a real incentive on him to perform the work personally. Tied to this, the right of substitution was limited to offering his slots to other couriers who had a contract with Stuart Delivery -- and who were signed up to the app. He also had no choice over which substitute courier took his place.

Key takeaways of this courier case for contractors

Importantly for limited company contractors, the Court of Appeal also reiterated the point that what ultimately matters when assessing employment status, is what happens in practice, not what is written in the contract.

That said, contractors still need think carefully about the terms of the contracts which they are offered and accept. Clauses which are too restrictive, particularly in terms of the right of substitution, may adversely affect a contractor’s self-employed status.

For example, requiring any substitute to go through training or a vetting procedure, or to be approved by the client in advance, could potentially lead a court (or HMRC) to conclude that the contractor does not have a genuine, unfettered right of substitution.

Finally, explore what substitution will look like

However, contractors should also be alive to the fact that more and more, the courts and HMRC are interested in the reality of the relationship between contractor and client, rather than the contract. So before accepting an assignment, contractors would be well-advised to explore the client’s expectations, and the client’s requirements, in terms of the contractor’s freedom to send a substitute, as this could materially affect their self-employed status.

Editor’s Note: The author, Brabners LLP, would like to make clear that this article is for general guidance purposes only and should not be used for any other purpose.