Employment Status & IR35 expert Re Legal Consulting Ltd
Columnist
Share this content

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.

18th Dec 2019
Employment Status & IR35 expert Re Legal Consulting Ltd
Columnist
Share this content
Worker Replacement
istock_anastasiia_new_aw

Two recent cases have provided new guidance to those seeking clarity around substitution: one of the main indicators of self-employed status.

In Pimlico Plumbers, the five principles of substitution were laid out, and in Augustine, a clarification of substitution where there is a pre-approved pool of workers was given.

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 [2019] 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 [2017] IRLR 323, which laid out the principles needed for personal performance:

  1. An unfettered right to substitute another person to do the work or perform the services is inconsistent with an undertaking to do so personally.   
  2. 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. 
  3. 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.
  4. 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.
  5. 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.

Who pays?

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.

Conclusion

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.

Replies (20)

Please login or register to join the discussion.

Dave Chaplin
By Dave Chaplin
18th Dec 2019 09:57

Great piece Rebecca. We must remind ourselves that HMRC guidance is not justicable before the courts. What this means in plain English is this: HMRC can write whatever they want, but it may not align with the law, and guidance cannot be printed off and used as evidence in court as if it is factually correct in law. Or, even simpler. It cannot be relied upon.

Re substitution, from the thousands upon thousands of assessments we have conducted, only about 3% of contractors have even substituted. For IR35, the other factors need to be focused on, particularly control and mutuality of obligation.

Thanks (3)
avatar
By proactivepaul
18th Dec 2019 10:06

Could the editor please read this conclusion . . .

"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."

. . . and then rewrite it using the normal rules of normal English? Thank you.

Thanks (1)
Replying to proactivepaul:
Rebecca Seeley Harris
By Rebecca Seeley Harris
18th Dec 2019 11:42

: and ;

Thanks (0)
By tonyaustin
18th Dec 2019 10:48

I hope all the contractors with ineffective substitution clauses inserted into what are otherwise employment contracts read this and now realise that they are actually inside IR35 and always have been. Over the years I have heard many contractors and accountants say that IR35 cannot apply simply because there is a substitution clause when in fact the client has a total right of refusal. Excellent article (despite the grammatical error in the conclusion - proactivepaul's pedantic comment - which does not make it any less intelligible)!

Thanks (1)
Replying to tonyaustin:
Rebecca Seeley Harris
By Rebecca Seeley Harris
18th Dec 2019 11:38

Thanks Tony, I am still hearing it now that the substitution clause is the 'be all and end all'. In fact, the other day someone from a large agency tried to tell me that their substitution clause had been approved by HMRC!! Of course there are industries where substitution does happen, so don't discount it too readily.

Thanks (0)
Replying to tonyaustin:
avatar
By proactivepaul
18th Dec 2019 11:52

I may be mistaken, but I believe that it is the role of legal experts such as Rebecca, and it is the role of professional resources such as AccountingWeb, to reduce ambiguity and not to increase it.

Rebecca's conclusion states "For substitution to be truly effective there must be a clear commercial reason for a pre-approved pool of workers".

I have reviewed dozens and dozens of contracts and IR35 issues. All of them have been silent on the issue of "a pre-approved pool of workers". I can second guess what is meant, but that is not what it says.

My clients expect professional, unambiguous advice from me, written in competent English. Can we not expect the same of the legal profession?

Thanks (0)
avatar
By matthewleitch
18th Dec 2019 11:15

I'm not an expert but it seems there is something wrong with this 'substitution' idea for some kinds of workers. Suppose a former Prime Minister retires from politics and begins working as an after-dinner speaker. He gives 100 or so performances a year for many different organizations. Can he substitute someone else to do the speech? No, obviously. It has to be the former PM or people will be angry and baffled. He can't substitute, but does that in any way tell us he might be employed by the various clubs, businesses, and agencies he speaks at? I don't think so.

Thanks (3)
Replying to matthewleitch:
Rebecca Seeley Harris
By Rebecca Seeley Harris
18th Dec 2019 11:32

Hi Matthew, this is a general article on substitution and doesn't get in to any depth. If it did I would discuss the position of the expert, who cannot substitute and balance that with the lack of control that the client has over an expert. It's too complicated to explain in full but, all the employment status factors are weighted according to the circumstance.

Thanks (0)
Replying to seeleyharris:
avatar
By matthewleitch
18th Dec 2019 11:40

Thanks Rebecca. They are not weighted according to circumstance on the revised CEST tool, which still thinks I am a casual worker because of lack of substitution, even though I am more of a mini-celebrity (not retired PM level of course). Rather frustrating.

Thanks (0)
Replying to matthewleitch:
Lone Wolf
By Lone_Wolf
19th Dec 2019 11:54

A mini-celebrity you say. What is the reason for your fame?

Thanks (0)
Replying to Lone_Wolf:
Stepurhan
By stepurhan
19th Dec 2019 12:05

Band of Brothers?

Thanks (0)
Replying to stepurhan:
Lone Wolf
By Lone_Wolf
19th Dec 2019 14:02

That's the first hit on Google, but seemed a bit too exciting for AWeb.

I was expecting an extra on Coronation Street, or a town crier.

Thanks (0)
Replying to Lone_Wolf:
avatar
By matthewleitch
19th Dec 2019 16:25

I'm not the actor, but I've written a couple of books, have been involved with standardisation in the area of risk management, and now lecture on the management of risk and uncertainty. As I say, a mini-celebrity, but it does matter that it's me not just anyone with a Powerpoint file.

Thanks (0)
Replying to stepurhan:
Hallerud at Easter
By DJKL
22nd Dec 2019 15:01

Who, when they were based in England pre D Day, were in Aldbourne, Wiltshire, where my grandfather was originally from - a very pretty village which I visited for the first time about three years ago.

https://en.wikipedia.org/wiki/Aldbourne

Thanks (0)
Replying to seeleyharris:
avatar
By Kemu
02nd Jan 2020 16:48

seeleyharris wrote:

Hi Matthew, this is a general article on substitution and doesn't get in to any depth. If it did I would discuss the position of the expert, who cannot substitute and balance that with the lack of control that the client has over an expert. It's too complicated to explain in full but, all the employment status factors are weighted according to the circumstance.


Thanks for this article, Rebecca. It is indeed helpful. I, too, am interested in this topic, having just been approached by an expert similar to that which Matthew describes. A new area for me.
I, too, cannot see that the CEST tool allows for other factors to be 'weighted according the circumstance' (like not having total control over what and how she will say and do her 'thing' while stipulating the time and place of the event - and the expected outcomes). My client is hired, by many different organisations, for her expertise - which includes the contracting entity's estimate of how she will 'fit' with the audience and presentation team. She can offer a replacement suggestion in an emergency - but not a substitute within the described meaning of the guidance. My viewing of the CEST tool is that it is too unsubtle for this. I can only hope for any challenge being rebuffed at a later stage by some common sense, such as you describe. It will, however, cost us to find out ...
Thanks (1)
Replying to Kemu:
avatar
By johnjenkins
03rd Jan 2020 09:52

Unfortunately HMRC are not looking to cover any eventuality. They just want as many people as possible back on PAYE and they will use whatever means possible. When an entity such as HMRC are guided by that thesis, then it's not rocket science to discover the mess it creates.

Thanks (1)
avatar
By johnjenkins
18th Dec 2019 12:19

The obvious answer is that HMRC have no right to determine employment status, it is a commercial decision (the tax benefits or not are a by product). This new Government could well do away with IR35 and HMRC sticking its nose in where it shouldn't. In fact I wouldn't be surprised that within the next 5 year we will see Accountants taking over the administration, allowing HMRC to concentrate on investigations and tax collecting.

Thanks (1)
avatar
By unclejoe
18th Dec 2019 13:54

The whole system of personal taxation needs reform. It is fundamentally designed to be unfair. Consider this: my son had income from 8 sources last year; 2 were restricted hours employments, 6 were short term casual work which he declared as self employment. The shortest was three days warehouse cover. He is dyspraxic His total income is hardly above the tax threshold. Completing the tax return and complying with tax legislation is a nightmare for him. The first question on the tax return is what is your business name. Err, it does not have a name. What does it do - warehouse work, caring for an elderly person, anything really that earns a few pennies. He lives in fear that he will get something wrong and be penalised. I am retired, I have pension income and some share and building society investments. I get a tax allowance for the pension, capital gains allowance for part of any capital gains, a dividend allowance and a savings allowance! I can live on tax free income reasonably comfortably. And in addition I have investments sheltered in an ISA all tax free. Is that fair? NO! Income should be taxed as income at the same rates from whatever source, and everyone should be entitled to claim legitimate expenses incurred in generating that income, whether employed, self employed or from other sources. The economy would work more efficiently; resources would not need to be wasted on arguments about employment status. Everyone would be able to make work arrangements that work for them. A mantra of the Conservative party is that we all benefit from a healthy economy. Let us hope that BJ addresses this issue over the next five years.

Thanks (3)
Replying to unclejoe:
avatar
By matthewleitch
18th Dec 2019 14:22

It's not the most urgent or talked about priority for the government, but if they wanted an easy way to get started perhaps the way forward would be this: Develop one or more alternative tax regimes for individuals that people can opt into that are radically simpler and more flexible, acknowledging that more people than ever are doing a variety of things to be useful and make ends meet. As someone on this page suggested, let the tax payer choose which regime to use, but make sure the tax paid tends to be very similar and the administration is radically easier. That way, eventually, people will switch to the new, simpler calculations.

Done properly, the new calculation would be so simple that anyone can do it, with a spreadsheet or the back of an envelope. Unrealistic? It depends on whether you have a vested interest in keeping tax complicated or not. It means letting go of obsolete incentive schemes, vote hunting tweaks, anti-evasion ideas that cost more than the tax saved, and all the other historical junk that has accumulated over the decades. Radical simplification, a free choice for tax payers, and an end goal of retiring the old stuff when nearly everyone has forgotten it's still available.

Thanks (0)
Replying to matthewleitch:
Hallerud at Easter
By DJKL
22nd Dec 2019 15:13

Agreed- in Germany where my son worked in Frankfurt as a contractor (software development) they have a particular form of entity especially designed for professional contractors. It is surely not beyond the wit of the UK government to create something similar.

Now he is back in the UK (contracting for the Scottish Government at present) he jumps through multiple hoops re how he operates- our tax system is really behind in how it operates and is just not fit for purpose in the 21st century.

https://www.contractoruk.com/overseas_guides/contractors_guide_contracti...

Thanks (0)