Employment status: Lessons of substitution
The right to provide a substitute is one of the main indicators of self-employed status but as the workplace changes, the principles and guidance around the nature of substitution in the worker-engager relationship are also developing, writes Rebecca Seeley Harris.
Two recent cases have provided new guidance to those seeking clarity around substitution: one of the main indicators of self-employed status.
The recent HMRC guidance and the CEST update indicate that substitution has to be both “practical and plausible”.
Right of substitution
There needs to be a right of substitution in the contract as well as substitution in practice, for it to be truly effective. If no substitution has taken place, it is still necessary to have a substitution clause in the contract to allow for the possibility of substitution but, this must be genuine.
The fettered or unfettered clause
The right of substitution can be provided in a fettered or unfettered clause.
An absolute unfettered right of substitution is inconsistent with personal service. Equally, a fettered right will render the substitution clause invalid.
However, a clause can be commercially fettered to a degree to include, for example, the right to require the requisite skills and qualifications.
It is also important to understand whether the worker can substitute their services at any time because they are simply ‘unwilling’ to provide them or just when they are ‘unable’ to provide the services.
Pre-approved pool of workers
In Stuart Delivery Ltd v. Augustine  UKEAT/0219/18/BA, Augustine was a delivery driver who claimed employment rights. The employment appeal tribunal (EAT) considered he was a worker but not an employee. The engager, Stuart Delivery Ltd, appealed partly on the basis of the interpretation of substitution.
In Augustine, the EAT used the criteria established in Pimlico Plumbers v Smith CA  IRLR 323, which laid out the principles needed for personal performance:
- An unfettered right to substitute another person to do the work or perform the services is inconsistent with an undertaking to do so personally.
- A conditional right to substitute another person may or may not be inconsistent with personal performance depending upon the conditionality. It will depend on the precise contractual arrangements and, in particular, the nature and degree of any fetter on a right of substitution or, the extent to which the right of substitution is limited or occasional.
- A right of substitution only when the contractor is unable to carry out the work will, subject to any exceptional facts, be consistent with personal performance.
- A right of substitution limited only by the need to show that the substitute is as qualified as the contractor to do the work, whether or not that entails a particular procedure, will, subject to any exceptional facts, be inconsistent with personal performance.
- A right to substitute only with the consent of another person who has an absolute and unqualified discretion to withhold consent will be consistent with personal performance.
In Augustine, the EAT agreed with the tribunal that it had correctly identified the significance of
Augustine’s powers of substitution in deciding that he was a worker.
However, the tribunal had misunderstood the person whose consent is required for the fifth category – it cannot refer to the proposed substitute but instead, it refers to the employer or person for whom the work will be done.
In that case, it was the engager, Stuart Delivery Ltd, who had an absolute and unfettered right to withhold consent. This is because the substitute had to be drawn from the pool of couriers who could use the Staffomatic app to sign up for slots a fellow courier wished to relinquish. The worker Augustine, had no control over who, if anyone, would accept a slot he had signed up for and no longer wished to work.
In line with the guidance from HMRC, the engager will have the right to reject the substitute if the worker is only able to provide the substitute from a pre-approved list or pool of workers and that worker is paid by the hirer.
CEST and substitution
The updated CEST tool is accompanied by new guidance on personal service and substitution.
The CEST asks: ‘Does the client have the right to reject a substitute?’ or ‘Does your client have the right to reject a substitute?’
A client will have the right to reject a substitute if:
- The contract specifies that the worker will perform the work and is silent on substitution
- The hirer has an explicit right to reject a substitute
- The worker can only provide a substitute from a pre-approved pool of workers.
Substitution would not be practical or plausible if any factors exist which would make it unrealistic that a substitute could be provided. This could include timescales, the nature of the work or security restrictions.
Practical or plausible
The HMRC guidance takes a hard-line on the ‘practical and plausible’ condition. For it to be effective this needs to be based on case law, not just HMRC’s interpretation of the rules. It is important to remember that there may be case law that counteracts the HMRC arguments.
The contract may be silent on substitution but, if substitution has happened in practice, there is unlikely to be personal service. There may be a list of pre-approved workers because they have to be qualified to work, that does not necessarily mean the right to substitute is invalid.
CEST asks: ‘Would the worker have to pay their substitute?’ or ‘Would you have to pay your substitute?’
If a worker negotiates a fee with their substitute to complete the work and pays that person themselves, this would fall within the ‘Yes’ category for CEST.
If the hirer, or a third party such as an agency, pays the other worker this would fall within the ‘No’ category for CEST.
In order for the substitution to be effective, the substitute must be paid for by the original consultant. If the client, hirer or agency has the right to replace and pays for the individual this is replacement, not substitution. It is important to check the contract clauses to establish whether they are for substitution or replacement.
For substitution to be truly effective the worker must be:
- both unwilling and unable to provide the services;
- pay the substitute, and not allow the client or agency to pay them;
- have an unfettered, or commercially fettered contractual right to substitute; and
- there must be a clear commercial reason for a pre-approved pool of workers.
Substitution is the silver bullet which kills off personal service, but only if you can rely on it.
If substitution is not practical or plausible then you need to concentrate on the “control” elements of the relationship to show self-employed status.
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Rebecca is a leading expert in ‘employment status’ and IR35 and the law involving independent contractors and the self-employed for the purposes of tax and employment law. Rebecca has run her own consultancy for the past 20 years covering all employment status issues such as off-payroll in the private and public sector, otherwise known as IR35...