Gabelle Tax Analysis: Stringfellows win – good news for contractors

Court of Appeal ruling on self-employed status

On 21 December the Court of Appeal ruled – in Stringfellow Restaurants Ltd v Nadine Quashie [2012] EWCA Civ 1735 - that a lap dancer was not employed under a contract of employment.

Although this is not a tax case, this is an important case for tax practitioners as an individual’s employment status will affect how he is taxed.

The law

Historically case law has relied on a number of tests to determine whether an individual is employed or self-employed. The Court of Appeal made reference to four key tests:

  • The control test – which focuses on the nature and degree of control exercisable by the employer.
  • The business integration test – whether the work provided is integral to the business or merely accessory to it
  • The business or economic reality test – whether in reality the worker is in business on his own account, as an entrepreneur.
  • The multi-factorial test – an analysis of many different features of the relationship as set out in the Ready Mixed Concrete case.

The Ready Mixed Concrete case stated that three elements must be present in a relationship which constitutes employment:

  • The contract must impose an obligation on a person to provide work personally.
  • There must be mutuality of obligation between the employer and the employee; some legal obligation towards each other which is a continuing overriding arrangement.
  • There must be some form of control over the employee by the employer.”

The facts

Some elements of the working relationship in this case suggested the Ms Quashie was employed and others suggested she was self-employed, viz:

Employed:

  • Fixed working hours.
  • Stringfellows’ customers bought vouchers from the club to pay and tip the dancers. These vouchers could not be used to purchase food or drink from the club. If a dancer was tipped in cash she had to immediately exchange it for vouchers. Stringfellows would then use the vouchers to calculate how much cash the dancer should be paid once appropriate deductions were made.
  • Must notify Stringfellows of any holiday but was not required to provide a substitute.
  • Although her contract permitted her to work at other establishment this was frowned upon by Stringfellows.
  • Required to work certain shifts and attend meetings.

Self employed:

  • Provided her own outfits (although she was encouraged to use approved suppliers).
  • Paid expenses including:
    • House fee (£65)
    • Commission (20-25%)
    • Fines for late attendance
    • Fees to the ‘House Mother’. The ‘House Mother’ dealt with outfit repairs, ironing, hair and make up)
    • DJ
    • Onsite hairdresser

    As a result Ms Quashie was sometimes out of pocket after a night’s work.

  • No holiday pay or sick pay.
  • Written agreement stated she was an independent contractor.
  • She paid her own tax.

The Court of appeal weighed up these facts and decided to place particular emphasis on the fact that Ms Quashie took an economic risk and the terms of the contract. It stated that:

“The fact that the dancer took the economic risk is…a very powerful pointer against the contract being a contract of employment. Indeed, it is the basis of the economic reality test, described above. It is not necessary to go so far as to accept…..that absent an obligation on the employer to pay a wage…the relationship can never as a matter of law constitute a contract of employment. But it would, I think, be an unusual case where a contract of service is found to exist when the worker takes the economic risk and is paid exclusively by third parties.”

And

“The Employment Tribunal’s conclusion was strongly reinforced by the facts that the terms of the contract involved the dancer accepting that she was self-employed, and she conducted her affairs on that basis, paying her own tax. In addition, and again consistently with that classification she did not receive sick pay or holiday pay…it is legitimate for a court to have regard to the way in which the parties have chosen to categorise the relationship.”

It was therefore held that Ms Quashie was self-employed.

This is an important case as it may be said to ‘lower the bar’ for self –employed status. HMRC take a tough stance on the perceived avoidance of tax by individuals claiming to be self-employed when in reality they are employees. In May last year HMRC introduced a risk based approach to determine which cases should be looked at more closely. Interestingly, under this test, Ms Quashie would be in the ‘high-risk category’.

Priya Dutta is a Senior Tax Consultant at Gabelle LLP. She can be contacted at priya.dutta@gabelletax.com or via TaxDesk on 0845 4900 509.