Employment status case turns on mutuality of obligation

A recent employment tribunal case about employment status also has implications for tax law. The case turned on the test of whether there was sufficient, or any, ‘mutuality of obligation’ to create a contract of employment. 

Mutuality of obligation (MOO) for employment status in terms of both tax law and employment law is a master and servant test of whether there is an obligation on the worker to work and an obligation on the other party to pay him or her and to continue to make work available during the time of the contract. This is sometimes known as ‘specific MOO’ as opposed to MOO in the wider sense, which all contracts need to have in order to enforceable. 

The case of Hafal v Lane-Angell was heard by the Employment Appeal Tribunal (EAT) (reference UKEAT/0107/17/JOJ). Miss Lane-Angell (LA) was a bank worker for Hafal Ltd (H). LA would tell H when she was available for work, whereupon H would put LA on an its on-call shift rota. If work was available, H would telephone those on their rota who could accept or reject the work. H operated a ‘three strikes or you’re out’ policy, so that if a worker on the rota was unavailable on three occasions when H telephoned them, they were not included on future rotas. LA was removed from the rota under this policy and claimed unfair dismissal. 

The EAT, overturning the decision of the Employment Tribunal (ET), found that the working arrangement demonstrated no obligation to provide or accept work and there was no overarching contract of employment. 

The EAT decided the question of whether LA was an employee by reference to MOO, applying MOO case law to both the written evidence and to the facts. The EAT decided that there was no overarching employment contract subsisting throughout the period of the engagement. The terms of the appointment letter were clear; they negated mutuality of obligation in respect of work being offered or performed. These terms were borne out by the facts. The ET’s findings, far from indicating an ongoing overarching contract, supported mutual obligations only during the periods when LA was on the rota. There were no findings or evidence that supported such obligations for the periods between the rotas. 

Accordingly, the EAT allowed H’s appeal and substituted a decision that LA was not an employee of H. 

Given the importance of MOO, as exemplified by this case, we find it strange that HMRC’s check employment status tool (CEST) does not include specific MOO as a determinant of whether or not someone is an employee or within IR35.

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