IR35: The Obligation of Personal Service: what it is and why it matters
Since the IR35 legislation was enacted in 2000, the finer details of employment law have become a subject of keen interest to many contractors. This article is about one particular essential feature of employment contracts known as the ‘Obligation of Personal Service’.
An obligation of personal service means the agreement that a worker will carry out work personally, with his own hands, rather than by engaging someone else to do the work for him. Whether there is personal service is an important question in deciding whether a contract is a contract of service or a contract for services, or, to put it another way, whether a worker is an employee or is self-employed.
In order to determine whether a contract is a contract of employment, a number of factors have to be considered. Some things are essential if a contract is to be one of employment whereas other factors simply make it more or less likely and are considered as part of the overall picture without being, in themselves, decisive.
In order for a contract to be a contract of employment, there must be a basic obligation of personal service. Without such an obligation the contract cannot be one of employment. With such an obligation a contract can (but not must - there are other factors) be a contract of employment.
Yet the principle that an obligation of personal service is essential for a contract of employment, is not always easy to apply in practice. Suppose that a worker is obliged to carry out work personally except for her one day a week off when she has an obligation to arrange for a substitute at her own expense? What if the worker who is obliged to carry out work personally except when unable to do so through, for example, illness? What if the worker always does the work personally even though they have complete freedom to use someone else whenever they choose? What if the worker can use a substitute but only with the agreement of the employer?
In Express and Echo Ltd v Tanton the Court of Appeal held that where a worker was free, under the terms of his contract, to use a substitute whenever he was unable or unwilling to do the work personally, that meant that the contract could not be a contract of employment.
In the case of Pauley v. Kenaldo Ltd however, where a cloakroom attendant had to arrange for a substitute at her own expense on her day off but was otherwise obliged to carry out work personally, it was held that the contract could be one of employment.
It is clear, therefore, that for a contract to be one of employment there must be an obligation to do at least some of the work personally. It is not necessary, however, for the contract to oblige the worker to carry out all work personally though if the worker does not have to do all work personally this makes it less likely that the contract will be one of employment.
In Tanton the Court of Appeal emphasised that it is the terms of contract which are important not what actually happens, so that the fact that the worker is free to use a substitute whenever he wishes means that the contract cannot be one of service even if, in fact, he does do the work himself.
However whilst this principle (that it is the terms of the contract not what happens in practice which is decisive) applies in the case of ‘real’ contracts, it appears that it does not apply, or, at least, not with the same force, in the case of IR35.
Readers will be familiar with the scheme of the IR35 legislation and how, providing certain conditions are met regarding the connection between a worker and his company, whether the legislation applies or not usually depends on whether if there had been a contract between worker and client, that contract would have been a contract of employment. Thus the matter depends on consideration of a hypothetical contract. Of course, following Tanton, it is the terms of that hypothetical contract which matter but, as Mr Justice Burton made clear in the case of R (on the application of Professional Contractors Group Ltd and others) v Inland Revenue Commissioners the terms of the hypothetical contract are to be deduced not only from the terms of the real contract between company and client but also, partly, from the non-contractual interface between worker and client (i.e. what happens in practice).
The practical consequence of this is that whilst a real contract which allows the worker to use substitutes whenever he pleases, cannot be a contract of employment even if the worker chooses to do all the work himself, if the worker uses a company then the fact that the contract between company and client allows the company to use any worker at its discretion may not prevent IR35 applying if the worker in fact does all the work himself. This is because the non-contractual interface is one of personal service. This appears to be the explanation for the decision in the case of Battersby v Campbell (Inspector of Taxes) where a right to use a substitute was disregarded because it had not, in fact, ever been used and thus was not part of the non-contractual interface.
The position can be summarised as follows:
- If a worker has the right to use a substitute whenever he wishes then he cannot be an employee even if, in fact, he always carries out the work personally.
- Where the worker uses a company so that IR35 potentially applies, then a right to use a substitute whenever desired will prevent IR35 applying provided that the right is actually used so that it forms part of the non-contractual interface between worker and client.
- In all other cases, the worker may be an employee (or may come within IR35 if a company is used) and further factors will need to be examined to determine whether in fact he is or not.
Article provided by John Antell, a barrister at Godolphin Chambers who specialises in employment and related tax law. Neither the author nor the publisher can be held responsible for any actions undertaken as a result of the opinions expressed in this article which are necessary of a general nature and cannot be a substitute for individual legal advice on your own particular situation.
Editor's Note: More on IR35 and IR35 insurance.