Contractors who have an unfettered right to substitution in their contracts cannot be working under an employment contract, so cannot be a ‘worker’ and therefore cannot be inside IR35, even if the substitution right is not exercised. That has been confirmed by the UK Mail Ltd v Creasey Employment Tribunal appeal ruling.
It found that delivery driver Mr J Creasey was not an employee of his client UK Mail Ltd, nor was he a ‘worker’. “This emphasises the importance of substitution in employment status cases and helps our understanding of the meaning of an ‘unfettered right of substitution’,” according to Roger Sinclair, of contractor legal specialist Egos.
Patricia Leighton, Emeritus Professor of Employment Law at the University of Glamorgan and Professor at the École Supérieure de Commerce à Paris et à Nice (Ipag), agrees. adding: “The case confirms that documents remain very important if signed and it matters not that Mr Creasey was not familiar with it and had not used a substitute.”
The UK Mail Ltd v Creasey appeal ruling – key facts
Creasey was a subcontract van driver for UK Mail Ltd, and had a subcontractor’s agreement that included a substitution clause. He had taken UK Mail to an Employment Tribunal to claim unfair dismissal, and the original tribunal found him to be a ‘worker’, and thus able to claim some basic rights.
However, UK Mail appealed the original tribunal’s ruling, claiming that Creasey was a subcontractor and that there was no employment relationship. Tribunal Judge McMullen allowed the appeal, finding that Creasey was a genuine subcontractor because he had an unfettered right of substitution.
The case confirms that documents remain very important if signed and it matters not that Mr Creasey was not familiar with it and had not used a substitute
Professor Patricia Leighton
The key facts were:
- Creasey “was not required to perform work personally since he had an unfettered right to send others, provided they met the employer’s conditions as to suitability”
- Other subcontractors with the same contract as Creasey had exercised the right of substitution and had sent another driver in their place
- Creasey claimed that he was unaware of the existence of the substitution clause in his contract, but “the fact that a few individuals did use a substitute suggests that the terms were not a sham, even if [Creasey] did not appreciate the significance of them.”
Leighton says: “We have a document that he had signed but was not familiar with. This enabled him to substitute, but he had not done so. The document gave him choice and other drivers had made use of it. If he did not work he had to pay a penalty to cover the employer's costs of finding someone else.
In the original ruling, Creasey was classified by the tribunal as a worker, which is why the substitution clause was so important. Leighton explains: “Technically, a worker is just one type of self-employed person, someone who ‘personally executes’ work, and this is where the substitution point came in.
“The right will not be fettered simply because the substitute has to meet basic occupational requirements, such as having a driving license or being eligible to work in the UK. I see the key difference as being that the client did not have to individually agree to the suggested substitute or impose some sort of test.”
An unfettered right of substitution actually provides contractors with the right to choose whether to perform the work themselves or to send a substitute in their place
Roger Sinclair, Egos
So, according to Leighton, the fact that the substitution clause was exercised by other subcontractors suggests that it was genuine and that the contract was not a sham, such as in the Autoclenz ruling. This reinforces the importance of contractors initiating and keeping relevant documentation and confirmations. They are particularly important in employment status cases in which HMRC is creating a notional contract for the purposes of IR35.
Unfettered substitution: not ‘who’, but ‘whether’
In Sinclair’s opinion, the case also highlights a subtlety of substitution clauses often missed in status cases, particularly those created by HMRC. “An unfettered right of substitution actually provides contractors with the right to choose whether to perform the work themselves or to send a substitute in their place.
“This is distinct from restrictions placed by the client on the substitute. Creasey’s unfettered right of substitution in the contract allowed him to choose. If he sent a substitute, the substitute had to meet his client, UK Mail’s, ‘conditions as to suitability’. Such conditions placed on the substitute do not mean the right of substitution is fettered.”
Sinclair adds that the right must be genuine, but never needs to be exercised. In fact, as this case proves, a contractor need not even be aware of their right of substitution. “The fact that other individuals working for the same client under the same contract exercised the right puts beyond doubt the question that the right is genuine,” says Sinclair.
A composite obligation: to do the work, or see that it is done
Another subtlety that is often misinterpreted in contracts is when there is a ‘composite obligation’ on the part of the contractor to personally complete the work or see that the work is done.
As Sinclair explains: “There is a difference between requiring a contractor to ‘personally perform’ the work, and requiring a contractor to ‘personally see that the work is done’. The latter does not require personal service, and is what we see in this case.”
What is absolutely clear from the UK Mail Ltd v Creasey ruling is that if an unfettered right of substitution exists, then there is no obligation to provide personal service, and the individual cannot be either an employee, or a worker, or inside IR35.
UK Mail Ltd v Creasey is useful, but no game changer
Sinclair’s view is that this ruling is useful, but not a game changer in the body of employment status and IR35 case law: “Although Creasey had not exercised his right of substitution, his fellow subcontractors did and their actions contributed in part to the decision on his employment status.”
This ruling suggests that when there are contractors working on similar assignments for the same client and performing similar duties with a contract that allows substitution, a right that some contractors have exercised, then that fact may help establish the genuineness of that right in relation to other contractors who have not substituted. That may play a part in a contractor’s IR35 defence.
“In IR35 cases, HMRC will challenge a contractor’s contracts and try to show that it does not reflect the true nature of the contractor’s relationship with their client. If HMRC casts doubt on one element of the contract, that opens the door to challenge other elements, such as the substitution clause.”
Sinclair concludes: “This case is a helpful reminder of the key points. All too often, the core principles get muddled by HMRC, and this may follow through into the courts.”