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What is a substitution clause a sham?

The right of substitution is one of the tests for determining the status of a worker.  If the worker has the right to substitute another in connection with the discharge of his obligation under the contract, it is a strong indication that the worker is self-employed.

In this case, B, a bricklayer, entered into a contract with Redrow, a term of which purported to allow B, if he wishes to find someone else to do the work. B subsequently made a claim for holiday pay under the Working Time Regulations. In order to establish rights under the Regulations, B had to show that he was a ‘worker’ which, under Reg 2(1), includes employees and anyone under an obligation to provide work or services personally. B asserted that his contract fell within the latter category of contracts for personal service. B argued that the right of substitution was a sham, as neither B nor Redrow intended the right to be exercised.  The tribunal agreed that B was a worker, finding that the term of the contract allowing the work to be carried out by anyone was in fact a sham and B was to carry out the work personally. The tribunal went on to find, in the alternative, that the obligation on B to ensure that there was someone on site to lay bricks as and when required by Redrow nonetheless amounted to personal service for the purpose of Reg 2(1). Redrow appealed.

At the EAT, Redrow argued that a sham only occurs where both parties have a common intention that the terms deceive a third party (i.e. HMRC) or the court.  This argument was rejected by the EAT, which held that a contractual term may be considered a sham not only where the parties intend to deceive a third party but also where the parties simply do not intend for the term to apply. The EAT also held that an obligation to ensure work was carried out meant that the contract was one of personal service for the purposes of the Working Time Regulations 1998.

This case reaffirms the need for employer to check that their contract with sub-contractors does in fact create an employment relationship.  We offer a free 30 minutes review of contracts.  Call today to book your free 30 minutes review.