Massey v Crown Life Insurance Co
[1978] 2 All ER 576(Judgment by: Lord Denning MR)
Between: Massey
And: Crown Life Insurance Co
Judges:
Lord Denning MRLawton LJ
Eveleigh LJ
Subject References:
EMPLOYMENT
UNFAIR DISMISSAL
CONTRACT OF SERVICE
Excluded classes of employment
Employment under contract for services
Employer and manager agreeing for tax purposes that manager to be self-employed in the future
Inland Revenue accepting arrangement
Manager operating under firm name rather than own name
Manager continuing to perform same duties as before
Manager dismissed and bringing claim for unfair dismissal
Whether manager an individual who has entered into or worked under a contract of employment
Whether manager an 'employee'
MASTER AND SERVANT
Distinction between contract of service and contract for services
Declaration of parties
Intention of employer and manager to change manager's status to self-employed for the purposes
Genuine agreement with explicit terms
Whether parties' agreement conclusive in determining status of manager
Legislative References:
Trade Union and Labour Relations Act 1974 - s 30(1) Sch 1, para 4(1)
Case References:
Alexander v Rayson - [1936] 1 KB 169; [1935] All ER Rep 185; 105 LJKB 148; 154 LT 205, CA
Construction Industry Training Board v Labour Force Ltd - [1970] 3 All ER 220; 5 ITR 290, DC; Digest (Cont Vol C) 685, 226a
Davis v New England College of Arundel - [1977] ICR 6, EAT
Ferguson v John Dawson & Partners (Contractors) Ltd - [1976] 3 All ER 817; [1976] 1 WLR 1213; [1976] 2 Lloyd's Rep 669, CA
Global Plant Ltd v Secretary of State for Social Services - [1971] 3 All ER 385; [1972] 1 QB 139; [1971] 3 WLR 269; Digest (Cont Vol D) 707, 6c
Graham (Maurice) Ltd v Brunswick - (1974) 16 KIR 158, DC
Inland Revenue Comrs v Duke of Westminster - [1936] AC 1; [1935] All ER Rep 259; 104 LJKB 383; 153 LT 223; sub nom Westminster (Duke) v Inland Revenue Comrs 19 Tax Cas 490, HL; 28(1) Digest (Reissue) 507, 1845
Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance - [1968] 1 All ER 433; [1968] 2 QB 497; [1968] 2 WLR 775; Digest (Cont Vol C) 722, 6b
Stevenson Jordon and Harrison Ltd v MacDonald and Evans - [1952] 1 TLR 101; 69 RPC 10, CA; 28(2) Digest (Reissue) 1086, 906
Challinor v Taylor - [1972] ICR 129; 116 Sol Jo 141
Comrs of Customs and Excise v Pools Finance (1937) Ltd - [1952] 1 All ER 775, CA
Evenden v Guildford City Association Football Club Ltd - [1975] 3 All ER 269; [1975] QB 917, CA
Hammett v Livingstone Control Ltd - (1970) 5 ITR 136
Market Investigations Ltd v Minister of Social Security - [1968] 3 All ER 732; [1969] 2 QB 173
Morren v Swinton and Pendlebury Borough Council - [1965] 2 All ER 349; [1965] 1 WLR 576, DC
Napier v National Business Agency Ltd - [1951] 2 All ER 264; 44 R & IT 413, CA
Watling v William Bird & Son Contractors Ltd - (1976) 11 ITR 70
Judgment date: 4 November 1977
Judgment by:
Lord Denning MR
LORD DENNING MR. John Massey was the manager of the Ilford branch of the Crown Life Insurance Co of Canada. He was employed there from 1971 until 1975. On 17 November 1975 the company gave him one month's notice to terminate his agreement. He claims that he was unfairly dismissed and is entitled to compensation under the Trade Union and Labour Relations Act 1974.
A man can only claim compensation for unfair dismissal if he is an employee employed under a contract of service. That appears from s 30(1) of the Act. It defines an 'employee' as 'an individual who has entered into or [has worked under] a contract of employment ... '; and it defines 'contract of employment' as 'a contract of service or of apprenticeship ... ' So it is essential that the person concerned should be an 'employee' under 'a contract of service'.
For the last 100 years the law has drawn a distinction between a 'contract of service' on the one hand and a 'contract for services' on the other; or, as it is sometimes put, between a master and servant relationship on the one hand, and between an employer and an independent contractor on the other. The distinction is important in the common law. A master is liable for all the wrongdoings of his servant in the course of his employment; but an employer is not liable for all the wrongdoings of an independent contractor. The distinction has also very important consequences under the statute law. In many trades and occupations, the employer is liable to pay taxes and insurance contributions and so forth in respect of servants who are employed under contracts of service; but not for independent contracts who are employed under contracts for services.
I will not today attempt to formulate the distinction except to repeat what I said in Stevenson Jordan and Harrison Ltd v MacDonald and Evans ((1952) 1 TLR 101 at 111, per Denning LJ):
'It is often easy to recognize a contract of service when you see it, but difficult to say wherein the difference lies. A ship's master, a chauffeur, and a reporter on the staff of a newspaper are all employed under a contract of service; but a ship's pilot, a taxi-man, and a newspaper contributor are employed under a contract for services.'
In recent years the distinction has often come before the courts in one context or another. Modern cases start with Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance and go on to Construction Industry Training Board v Labour Force Ltd; then Global Plant Ltd v Secretary of State for Social Services on to Maurice Graham Ltd v Brunswick; then Ferguson v John Dawson & Partners (Contractors) Ltd, and finally Davis v New England College of Arundel. So there is the distinction running through the common law and running through the statute law, and here we have it again. What was the position of Mr Massey? He was the manager of the Ilford branch of the insurance company. For a couple of years, from 1971 to 1973, the company treated him as though he were a servant. They gave him a memorandum under the Contracts of Employment Act 1963. They paid him wages; and, before paying him, they deducted the tax, they deducted the stamp, and they deducted graduated pension contributions from the amount they paid him. Further, they had a pension scheme of their own and he had to make contributions towards his pension. Being regarded as a servant, he was taxed for his income tax payments under Sch E.
But then in 1973 Mr Massey went to his accountant who advised him to change his relationship with his employers. The accountant said: 'I think you would be much better off it you so arranged your affairs as to be self-employed instead of being a servant. Then you will come under Sch D instead of Sch E.' That is what was proposed. Instead of wages subject to deductions, the company would pay him the full amount each week but they would not deduct tax or national insurance contributions or anything like that. He would get the full amount. It would be for him to account for tax to the Inland Revenue under Sch D.
He went to his employers, the Crown Life Insurance Co, and told them: 'I have been advised by my accountants to change over to Sch D. Will you agree?' They said: 'Oh, yes; we are agreeable.' So it was put through. They did it in this way. Instead of calling him 'Mr John L Massey', he was called 'John L Massey and Associates'. It was really just the same man under another name. He registered that new name under the Registration of Business Names Act 1916. With that new name he entered into a new agreement with the Crown Life. So far as his duties were concerned, it was in almost identical terms to the previous agreement. As a result of that new agreement, he said he was no longer a servant, he was an independent contractor. He was therefore liable to be taxed under Sch D. The position was placed before the Inland Revenue, and the Inland Revenue seem to have thought it was all right.
In order to get it regularised, the company wrote a letter to the inspector of taxes. It said:
'Re: J. L. Massey ... I am enclosing a Form P. 45 [that is the one you have for employees] in respect of the above named who is the Manager of our Ilford Division and who resigned from his Agreement on the 1st September 1973. I would advise you that Mr. Massey has now formed a Company called John L. Massey and Associates, and they have been appointed Manager of our Ilford Division with effect from the 2nd September 1973. All future remuneration will be paid to John L. Massey and Associates, and in view of the fact that they are a Company no tax deductions will be made by us. If there is any further information you require, please do not hesitate to contact me.'
That letter was not accurate. Mr Massey had not formed a company. He was just himself calling himself by a new name. But at any rate the company let the tax people see the two agreements. After seeing them, the tax people were quite content that Mr Massey should change over to a Sch D basis. The insurance company paid him the gross amount without any deductions thereafter. In consequence he himself would be liable under Sch D for tax on the gross amount, and he would have to pay tax under that schedule. So the accounts were conducted from 1973 to 1975.
Then in November 1975 Mr Massey was dismissed. Thereafter he said: 'I want to claim for unfair dismissal.'
A claim for unfair dismissal was quite admissible if he was employed by the company under a contract of service, but not if he was employed under a contract for services. So here he was claiming as a servant whereas, for the last two years, he had been paid on the basis that he was an independent contractor.
The law, as I see it, is this: if the true relationship of the parties is that of master and servant under a contract of service, the parties cannot alter the truth of that relationship by putting a different label on it. If they should put a different label on it, and use it as a dishonest device to deceive the Inland Revenue, I should have thought it was illegal and could not be enforced by either party and they could not get any advantage out of it, at any rate not in any case where they had to rely on it as the basis of a claim: see Alexander v Rayson. An arrangement between two parties to put forward a dishonest description of their relationship so as to deceive the Inland Revenue would clearly be illegal and unenforceable. On the other hand, if their relationship is ambiguous and is capable of being one or the other, then the parties can remove that ambiguity, by the very agreement itself which they make with one another. The agreement itself then becomes the best material from which to gather the true legal relationship between them. This is clearly seen by referring back to the case of Inland Revenue Comrs v Duke of Westminster. The Duke had a gardener and paid him for his work a weekly sum. But, in order to avoid tax, his solicitors drew up a deed in which it was said that his earnings were not really wages, but were an annual payment payable by weekly instalments. The House of Lords held that, to find out what the true relationship was and what the true nature of these payments were, you had to look at the deed. Lord Tomlin said ([1936] AC 1 at 19, [1935] All ER Rep 259 at 267): 'Every man is entitled, if he can, to order his affairs so that the tax attaching under the appropriate Acts is less than it is otherwise would be.' The gardener did the same work as before but the legal relationship was changed by the deed drawn up by the solicitors.
Likewise in this present case Mr Massey, as the tribunal found, worked under the new agreement in 1973 exactly as he worked under the previous agreement. The practical difference, they said, was that Mr Massey ceased to be a member of the company's pension scheme, and the pension contributions he had made under the previous agreement were returned to him. But otherwise everything went on just the same as before.
It seems to me on the authorities that, when it is a situation which is in doubt or which is ambiguous, so that it can be brought under one relationship or the other, it is open to the parties by agreement to stipulate what the legal situation between them shall be. That was said in Ready Mixed Concrete (South East) Ltd v Minister of Pension and National Insurance in 1968 by MacKenna J. He said ([1968] 2 QB 497 at 513):
'If it were doubtful what rights and duties the parties wished to provide for, a declaration of this kind might help in resolving the doubt and fixing them in the sense required to give effect to that intention.'
So the way in which they draw up their agreement and express it may be a very important factor in defining what the true relation was between them. If they declare that he is self-employed, that may be decisive.
Coming back to this case, for myself I have considerable doubt whether Mr Massey was really a servant from 1971 to 1973. It looks to me much more as if he was even in that time a commission agent. He could take on other work. He did in fact work for another insurance broker. He was paid on commission. He received a minimum sum but over and above that he was paid on commission as many commission agents are. So I think it is very doubtful whether he was under a contract of service from 1971 to 1973. But I am perfectly clear that afterwards in 1973, when this agreement was drawn up and recast, although the same work was done under it, the relation was no longer a master and servant relationship. It was an employer and independent contractor relationship. The change to 'John L Massey and Associates' was an unnecessary complication. It is significant that the tribunal found that both sides agreed that the agreement was, and was intended to be, a genuine transaction and not something which was done solely for the purpose of deceiving the inspector of taxes. They said: 'Had we thought otherwise, we would have held the agreement to be tainted with illegality with the consequence that it would have been void.'
It seems to me that those findings of the industrial tribunal were well-justified in the circumstances of this case. Mr Massey was not an employee. He was not employed under a contract of service so as to be able to avail himself of the unfair dismissal provisions in the 1974 Act.
I would only say a word about the recent case of Ferguson v John Dawson & Partners (Contractors) Ltd. That case turned on its facts. Boreham J held that the real relationship of the parties was that of master and servant and that they had put the wrong label on it be regarding him as working on 'the lump'. The majority of this court accepted that view. But Lawton LJ ([1976] 3 All ER 817 at 828, [1976] 1 WLR 1213 at 1226) thought that the partners had deliberately put the right label on their relationship. The man was on 'the lump'. He had had all the benefits of it by avoiding tax. It was contrary to public policy that, when he had had an accident, he could throw over that relationship and claim that he was only a servant.
In most of these cases, I expect that it will be found that the parties do deliberately agree for the man to be 'self-employed' or 'on the lump'. It is done especially so as to obtain the tax benefits. When such an agreement is made, it affords strong evidence that that is the real relationship. If it is so found, the man must accept it. He cannot afterwards assert that he was only a servant.
In the present case there is a perfectly genuine agreement entered into at the instance of Mr Massey on the footing that he is 'self-employed'. He gets the benefit of it by avoiding tax deductions and getting his pension contributions returned. I do not see that he can come along afterwards and say it is something else in order to claim that he has been unfairly dismissed. Having made his bed as being 'self-employed', he must lie on it. He is not under a contract of service.
I agree entirely with the industrial tribunal and with the Employment Appeal Tribunal that he does not qualify to claim for unfair dismissal in this case, and I would dismiss the appeal.