Smith v Reliance Water Controls Ltd.

Employment status depends on the true contractual relationship, assessed objectively. Where an arrangement is genuine and not a sham, its terms provide the best material for determining that relationship; the parties’ motive is not decisive. A contract of service requires personal service for remuneration, sufficient control, and terms consistent with employment. No single factor is conclusive, and all relevant factors must be weighed. Commission-based remuneration, responsibility for expenses and tools, absence of paid leave and employee benefits, and freedom to take non-competing agencies may point to self-employment. A commercial agent’s duty of good faith does not bar compensation unless the alleged conduct amounts to a breach.

Julian Smith worked as a sales representative for Reliance Water Controls Limited. After previously working under a contract of employment, he entered into a new agency agreement intended to operate on a self-employed basis. Following his summary dismissal, Judge Cavell found that the agreement had not changed his employment status, although there were no grounds for summary dismissal.

The appeal concerned the true effect of the new agreement, the correct approach to distinguishing a contract of service from a contract for services, and whether alleged failures of good faith under the Commercial Agents (Council Directive) Regulations 1993 deprived the appellant of compensation.

Appeal allowed. Lord Justice Scott Baker gave the substantive judgment, with Lady Justice Arden and Lord Justice Schiemann agreeing. The respondent’s cross-appeal was dismissed.

1. True contractual relationship. The agreement was not a sham. The judge therefore had to examine the terms actually agreed and how the parties intended them to operate. He erred by giving excessive weight to the reason for changing status and insufficient weight to the agreement’s detailed provisions. The agreement itself was the best material for determining the relationship, as explained in Massey v Crown Life Insurance [1978] 2All ER 576, with the earlier authority of Inland Revenue Comrs v Duke of Westminster [1936] A.C.1 noted in that context.
2. Applicable test. The three conditions stated in Ready Mixed Concrete (South East) Limited v Minister of Pensions and National Insurance [1968] 2QB 497 remained applicable: personal work and skill for remuneration, sufficient control, and contractual provisions consistent with employment. The same irreducible minimum was reflected in Montgomery v Underwood Limited [2001] EWCA Civ 318 and Carmichael v National Power plc [1999] 1WLR 2042. No single test or feature is conclusive. The court must weigh all the factors and ask whether the worker is in business on his own account, applying Market Investigations Ltd v Minister of Social Security [1969] 2QB 173.
3. Application. The commission arrangement, responsibility for promotional expenses, car and mobile phone, absence of sick pay, holiday pay, pension and death-in-service benefit, ability to take non-competing agencies, and target-based obligations were inconsistent with a contract of service. Although the respondent exercised considerable supervision, the written terms did not oblige the appellant to accept that degree of control. The appellant became self-employed under the new agreement and the Regulations applied.
4. Good faith. Paragraphs 3(1) and 5(1) of the Regulations were relevant. Even assuming the duty to act dutifully and in good faith had its widest scope, the alleged failures concerning the Child Support Agency assessment and appeal did not amount to a breach. They therefore did not deprive the appellant of compensation.
5. Orders. The issue of damages was transferred to Judge Alton’s list in the Birmingham Mercantile Court. The respondent was ordered to pay the appeal and trial costs, with other costs directions and an interim payment on account.

• Court of Appeal (Civil Division): In [2003] EWCA Civ 1153, allowed the appellant’s appeal, dismissed the respondent’s cross-appeal, held that the appellant became self-employed under the agency agreement, and transferred assessment of damages to the Birmingham Mercantile Court.
• Worcester County Court: Judge Cavell held that the appellant remained an employee under a contract of service, but also found that there were no grounds for summary dismissal.