Employment Relationship Deemed to Exist Despite Contract with a Personal Service Company
In the recent case of Sprint Electric Ltd v Buyer's Dream Ltd the High Court has held that an individual who provided his services through a personal service company was in fact an employee of the client.
The Facts
Dr Potamianos was recruited by Sprint Electric Ltd (SEL) on the basis of his high level technical skill set.
Dr Potamianos set up a service company, Buyer's Dream Ltd (BDL), and SEL and BDL entered into a contract for the provision of 'technical services' in 1997. The purpose of the service company arrangement was to reduce tax liabilities for both parties.
In the following years a series of other agreements were entered into between the parties. In the High Court's view the purpose of these arrangements was to seek further tax advantages.
Following a dispute in 2017, litigation was triggered regarding the ownership intellectual property developed by Dr Potamianos and supplied to SEL under the 1997 contract.
The High Court Decision
The High Court examined the terms of the 1997 contract and found that Dr Potamianos was obliged to personally perform the 'technical services' which formed the subject of the contract. No-one else in SEL had his expert technical knowledge. The Court also found that Dr Potamianos was an integral part of SEL's organisation and that the other provisions within the 1997 contract either did not reflect the true position of the parties or were consistent with him being an employee.
Despite the fact that the written documentation and contractual structures in place purported to create a consultancy relationship between SEL and BDL, the High Court concluded that the true nature of the relationship was that of employer and employee, SEL being the employer and Dr Potamianos being the employee.
The Court therefore found that the disputed intellectual property created by Dr Potamianos was created in the course of his employment and belonged to SEL as his employer.
Implications and Best Practice
Whilst this case focussed primarily on complex intellectual property issues, it serves as a useful reminder that the courts are willing to look beyond contractual wording or 'labels' applied to a particular contract to find the true legal position between parties.
On the rather extreme facts of this case the Court will willing to look beyond the contract between SEL and BDL and infer a contract of employment between Dr Potamianos and SEL. It was also willing to do this despite the parties not raising the issue themselves. In the Court's view "Where a court has concerns that the labels chosen by the parties to apply to their relationship were untrue and had been applied as a tax avoidance device, it could and should consider the issues of its own motion".
When entering into an agreement to receive individual's services via a service company, employers shouldensure that the contractual documentation accurately reflects the true nature of the relationship and intentions of the parties. A proper assessment should be undertaken at the start of the relationship about whether being an employee or a consultant would be more appropriate, taking factors such as the creation of intellectual property into account.