Mr Smith worked for Reliance Water Controls Limited (“Reliance”), a wholesaler of plumbing and bathroom products, from September 1996 until he was summarily dismissed on 15 January 1999 for gross misconduct and breach of contract. He was a sales representative. Until January 1998 Mr Smith was employed under a contract of employment.

At the end of 1997, Mr Smith had approached the Finance Director of Reliance with a request that he continue working for Reliance on a self-employed basis. The request was discussed with the Managing Director of Reliance and an agency agreement was signed. This agreement set out a sales territory, sales targets and required Reliance to pay commission of 4.5% to Mr Smith on sales achieved. The new agreement was terminable on 3 months’ notice by either party. Further, under the new agreement Mr Smith was entitled to take up non-competing agencies and was responsible for his own expenses, car and mobile phone.

The main issue before the court was whether, in fact, the true effect of the new agreement was to make Mr Smith self-employed, or whether the reality was that he continued, as before, to be an employee of Reliance. The distinction was important because if Mr Smith continued to be employed, he would only have been entitled to modest damages for wrongful dismissal whereas, if he were self-employed, the Commercial Agents (Council Directive) Regulations 1993 would apply and his compensation would be more substantial.

The County Court found that there were no grounds for summary dismissal and that Mr Smith was entitled to damages. However, Judge Cavell also found that, despite the written agreement purporting to change Mr Smith’s status to self-employed (which he said was a “sham”), he had remained throughout an employee under a contract of service.

Mr Smith appealed this decision. The Court of Appeal stated that the important distinction between contracts of service (employment contracts) and a contracts for services (independent contractors) was one that had troubled courts on many occasions. However, the Court of Appeal found that Judge Cavell had been wrong to hold that Mr Smith remained an employee. The Court of Appeal held that the new agreement was not a sham and that Judge Cavell in the County Court had paid too much attention to the motive for the new arrangement and too little attention to the details of it. The Court of Appeal held that Mr Smith was an independent contractor having regard to the provisions of the new agreement were inconsistent with a contract of service. As such, Mr Smith was entitled to compensation under the Regulations as he was a self-employed sales agent.

This briefing note is for general information. For advice in applying this general information to your specific circumstances, please contact Stephen Sidkin or any member of the Fox Williams’ agentlaw team.(www.agentlaw.co.uk)

Written by Sarah Pooley

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