Deja Vu - Another shock defeat at the Commissioners.

The case of MKM Computing Limited (MKM) was taken before the Special Commissioners in September 2007. Mr Hellier (the Special Commissioner hearing the case) held in favour of HMRC that the director of MKM should have been treated as though he was an employee.

The director of MKM worked via Proactive Appointments Limited (an agency) as a contract analyst programmer at London General Holdings Limited (LGL).

The judgement of MKM has clear parallels with the obscure decision of Dragonfly v HMRC. All the required elements for a contract of service were missing and this case had a significant number of factors to demonstrate MKM was operating as a business in its own right; despite this the contract was deemed one of service.

Personal Service

The upper contract contained a substitution clause whereby the substitute had to be mutually acceptable. This clause was probably too fettered and the lower contract did not contain a clause relating to substitution.

MKM however prepared a document in 2002 stating that MKM had the right to send a substitute as long as the substitute possessed the necessary skills qualifications and experience; this was subsequently signed by the director at LGL.

When questioned in court the same director of LGL stated that he would expect any substitute to be provided through the agency and a new contract entered into with agency. This is unhelpful but arguably still demonstrates LGL did not require the services to be performed by the director of MKM personally. The Director then said it would be relevant if the substitute was sent by MKM rather than Proactive as MKM may have communicated its knowledge therefore giving the substitute an advantage.

Mr Hellier found the director of LGL “more convincing that the statement quoted above signed by him on 5 June 2002” and that his oral insistence that a substitute would be subject to a new contract indicated he did not regard Proactive as having even a limited right of substitution. This was despite a contractual term to the opposite effect.

The Special Commissioner then went on to make a number of contradictory and somewhat confusing statements. It would appear from a number of statements in the judgement that personal service was not obliged:

“I find that the highest that Mr Ellwood's expectation can be put at the relevant time is that he had a confident expectation that if he was ill and could find a suitable substitute it was very likely that that substitute would be accepted by LGL.”

“…the most that Mr Ellwood had was an expectation that LGL would consider favourably a substitution introduced by him”.

“…although had Mr Ellwood been truly unable to perform the expected duties and an acceptable substitute been offered by Proactive I believe that they would have recognised their obligation under clause 3(d) of the Proactive/LGL contract to accept that substitute in place of Mr Ellwood”.

Despite the above Mr Hellier concluded that LGL's management regarded the arrangement as being for the supply of Mr Ellwood's services only. That was whom they interviewed, and whom later they knew: that was who they thought they would get. Whilst they would consider any proposed substitute they did not regard themselves as being bound to do so, and even if a proposed substitute were interviewed and found acceptable they did not regard themselves as bound to accept him. Personal Service was therefore held to be obliged.

Mutuality of obligation

LGL had a core base of employees and would generally use contract staff as a means of coping with increasing or decreasing levels of demand. MKM were under no obligation to accept work at LGL and LGL were under no obligation to offer MKM any work, both parties could also terminate the contract upon giving four weeks notice.

On the face of this information it does not seem possible to argue there was mutuality of obligation between the parties. Mr Hellier adopted a different approach to mutuality of obligation than can be usually seen in the courts and saw it as an obligation to pay and an obligation to work.

This he believed was satisfied by the provision of a notice period as LGL were required to pay MKM for 4 weeks even if the project had ended early; this was despite the evidence that MKM would have ‘backed off and allowed early termination’ if no work was available. Equally when LGL’s computer system back-ups were running late and MKM invoiced for this time Mr Hellier held this to be evidence of LGL’s obligation to paying for work not done.

When considering the terms of the hypothetical contract Mr Hellier held:

“I believe that each of the fixed term contracts would have contained provision for payment if there had been no work to do. That was how LGL appeared to view the contract – that was why he would have sought another project for a contractor if his assigned project ceased – and that was the importance of the 4 week notice period for him. If a direct contract had been negotiated that is what it would have contained.”

This conclusion is again contradictory to the very reason as to why LGL used contractors as opposed to having all the workers as employees. It enabled LGL to dispense with their services when demand was low, not to continue to pay them when no work was available.

Control

The upper contract contained a provision stating LGL would supervise and control the worker. Although unhelpful this statement only relates to ensuring the work undertaken by the worker and insurance and health and safety issues are observed and does not affect the manner in which the worker would provide the services.

Mr Hellier was again dismissive of control as to the manner in which the services are provided as was evident in Dragonfly v HMRC (2007). This can be seen from the following comment in the judgement ‘MKM were allocated tasks…the allocation of tasks did not include how to perform them.’

It is clear from the judgement LGL did not control MKM in practice. Mr Hellier considered control he made the following observations:

“Once (the director of MKM) had been given a project he would get on and do it. He was not subject to detailed orders as to how to do what and when. But he was part of a team: he reported his progress to …project managers and discussed what he was doing with other members of the team. Although these interchanges did not consist of giving orders it was clear to me that they would have affected what he did, when he did it, and how he did it.”

This is tantamount to saying a duty to report on progress demonstrates (in the eyes of Mr Hellier) the client has sufficient control to make the relationship one of employer/employee.

This conclusion is surprising given both the importance of control throughout case law history and the strong emphasis that has been seen over the years stipulating it must be “sufficient control to make the relationship one of master and servant” (Ready Mixed Concrete 1968).

Business Factors

Once the above principles have been considered it is also important to look at other factors which demonstrate the business is operating on its own account. This case had a vast number of factors which arguably demonstrated this point:

Financial risk/ Opportunity to profit

• If systems crashed or backups were running late he may or may not charge for his time depending on his mood therefore demonstrating financial risk;
• Defective Work would be corrected in the directors own time;
• If the work was not to a sufficient standard MKM would not be offered further work
• No training, he kept abreast of issues on his own time;
• Paid some time after each month.

Other factors

• MKM advertised in the yellow pages, had its own notepaper and website, it prepared its own accounts and provided the director with a laptop;
• Not subject to appraisals like employees;
• Not entitled to use the employee car park
• No right to use social club
• Not automatically invited on Christmas dinner

The conclusion to this case is very unnerving given the number of factors in favour of MKM and the various statements made by Mr Hellier which appear to add support to this position.