Can someone be an employee if they provide “services” through a service company?
Yes, on the facts of the recent High Court case of Sprint Electric Ltd v Buyer’s Dream Ltd and another.
The law currently distinguishes between three categories of persons:
• Self-employed independent contractor.
The distinction in employment law between the three categories is important for a number of reasons. For example, certain important legal rights only apply if an individual is an employee. However, workers also have a number of statutory rights such as working time and the minimum wage.
The issue of employment status is often both a question of fact and a question of law and a number of case law tests have developed to determine whether an individual works under a contract of service or a contract for services.
This case concerned the ownership of source code and intellectual property rights. Sprint Electric Limited (SEL) recruited Dr Dr Potamianos in 1996 because of his particular expertise. He was required to work for SEL through a service company for tax avoidance reasons. Dr Potamianos accordingly set up Buyer’s Dream Limited (BDL) and entered into a contract for services, with SEL in 1997. In 1999 he was appointed a director of SEL.
Dr Potamianos was effectively SEL’s sole programmer. In 2007, Dr Potamianos assigned intellectual property to SEL and became a 40% shareholder in SEL. This agreement was again done for tax reasons.
In 2015, there were disagreements about SEL’s management and eventually in 2017, Dr Potamianos was removed as a director. When he left he took one of SEL’s computers.
SEL issued proceedings and claimed the intellectual property in, and delivery up of, source code from Dr Potamianos and BDL, his service company. Dr Potamianos and BDL counterclaimed for an injunction on the basis that they owned the copyright.
The High Court found in favour of SEL in relation to the source code claim, and decided that SEL owned the copyright in the documents and source code created by Dr Potamianos. The Court found that it was clear that Dr Potamianos had been obliged to personally perform the services to SEL and concluded that because of this and other obligations imposed on Dr Potamianos under the contract, the true relationship between Dr Potamianos and SEL was one of employer and employee. Therefore, the copyright in the code Dr Potamianos wrote in the course of his employment belonged to SEL.
The court rejected Dr Potamianos’s argument that it should not interfere with the contractual structures which the parties had chosen to adopt to govern their relationship.
Points to note
The court expressed concern about the practice of using service companies as a tax avoidance device and said that where a court has concerns that the parties are using false descriptions of their contractual relationships to deceive HMRC, the court should consider the issue of its own motion. If it is thought that the labels chosen by the parties to apply to their relationships are untrue, the court should declare the true legal position and leave it to HMRC to claim any taxes.
Although this case was decided in the civil courts on the issue of the ownership of intellectual property, it highlights that it is possible to construe an employment relationship even where the individual has a consultancy agreement with the client via a personal service company.
Action to take
1. Consider whether your consultancy agreements deal adequately with intellectual property rights.
2. Review contractual arrangements where individuals provide services via a service company and assess whether they reflect the reality of the relationship.
3. If in doubt or you have any questions on employment status, please contact us for specific advice.
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