Under UK law, an individual’s employment status determines their workplace rights and entitlements, as well as the obligations of their employer. Understanding the rules around employment status can be important in establishing the respective rights and responsibilities of the employer and the individual presenting for work. There are a number of legal tests to help determine this, including the mutuality of obligation test.
Mutuality of obligation refers to the expectation that an employer will provide work and that the worker will accept and perform it. It is a key factor in determining employment status under UK law. If mutuality of obligation exists, it may indicate an employer-employee relationship, entitling the worker to employment rights such as holiday pay, sick leave and protection against unfair dismissal.
For employers, understanding mutuality of obligation is important when engaging individuals on a self-employed or contractor basis. If a business consistently provides work and the individual is expected to accept it, there is a risk they could be classified as an employee rather than self-employed. This could lead to potential liabilities, including backdated tax, national insurance contributions, and claims for employment rights.
The following guide examines what is meant by the mutuality of obligation test and its significance, together with the rules in relation to this.
What is mutuality of obligation?
Mutuality of obligation refers to the contractual duty on the employer to provide work for the person presenting for work and the contractual duty on that individual to accept that work. As such, both parties are obliged under contract law to act upon their promises, where there is a clear intention to have their working relationship regulated by contract.
Mutuality of obligation & employment status
The key significance of mutuality of obligation is that this determines whether there is some form of contract in existence, where there can be no contract of any kind without this. However, it is only once the basic requirements for mutuality of obligation have been identified, and a contract exists, that it is then possible to consider whether the contract is either a contract of service (employment) or a contract for services (self-employment).
The concept of mutuality of obligation is often highlighted within employment protection law situations, where many entitlements only accrue after an individual has acquired a period of continuous employment. In this context, it will often be relevant whether work is undertaken by way of a separate series of contracts, where certain benefits and rights will not accrue or, instead, under a single ‘umbrella’ contract amounting to a continuing contract of employment. Where someone has been working under an umbrella contract for a period of at least 2 years, this may give rise to various key statutory rights, including the right to a statutory redundancy payment and the right to lodge a claim for unfair dismissal.
What is the mutuality of obligation test?
It’s important to note that mutuality of obligation alone does not determine employment status. The Supreme Court has clarified that while mutuality of obligation and control are necessary factors, they are not solely sufficient to establish an employment relationship.
The basic legal requirements as to the mutual obligations necessary to determine if there is a contract in existence at all between the relevant parties are:
- that the engager must be obliged to pay a wage and/or other remuneration, and
- that the worker must be obliged to provide their own work or skill.
These basic requirements were described by the House of Lords in Carmichael v National Power plc [2000] IRLR 43 as the “irreducible minimum obligation”, where the absence of mutuality on the particular facts of Carmichael defeated the claim to employee status and therefore a right to written particulars of the terms of employment. However, there is often confusion around the irreducible minimum for mutuality of obligation when compared with the irreducible minimum for a contract of employment. This is because the requirements for mutuality of obligation on their own — where a worker undertakes duties and the worker is paid for undertaking those duties — could be present in either a contract ‘of’ service or a contract ‘for’ services and will not determine the nature of the contract.
As such, once it has been established that there is sufficient mutuality of obligation for a contract to be present, it is necessary to determine the nature of that contract. The irreducible minimum requirements to establish a contract of service (employment) are:
- the requisite mutuality of obligation must be present
- a sufficient degree of control must be exercised on the part of the engager (employer)
- other provisions of the contract must be consistent with a contract of employment such as, among other things, how the parties have labelled or characterised their working relationship, the treatment of income tax and national insurance (NI), an entitlement to paid leave, and
- whether the person doing the work is part and parcel of the organisation — all of which are relevant but not, in themselves, conclusive of employment status.
Applying the mutuality of obligation test
At any point in which an individual is actually undertaking work, the question of mutuality of obligation poses no difficulty. The worker undertakes to work and the engager undertakes to pay for the work done, where the mutual obligations — to work on the one hand and be paid on the other — will continue to exist until the contract comes to an end.
In the decision of Stephenson v Delphi Diesel Systems Ltd [2003] ICR 471, in which an agency worker challenged the decision of the lower tribunal that he did not have sufficient continuity of employment to be able to claim unfair dismissal (just one year’s continuous employment under the law at that time), the Employment Appeal Tribunal (EAT) stated that for the period of time during which work was being done provided the basic requisite mutual obligations. The issue as to whether the engager is obliged to offer work, as available, and the worker is required to accept work, if offered, is irrelevant to the question of whether a contract exists at all during any period when work is being performed.
The question then is whether there is sufficient control to conclude that the contractual relationship is a contract of service (employment) or a contract for services (self-employment). On the facts of Stephenson v Delphi, the EAT was satisfied that Delphi could never have intended to enter into any direct contractual relationship with Mr Stephenson, or vice versa, in the context of the provision of agency workers. Still, the facts of that case have little bearing on the requirements for mutuality of obligation.
It is also worth noting that in Cornwall County Council v Prater [2006] EWCA Civ 102, the Court of Appeal held that the lack of mutuality of obligation between the assignments of a teacher working on a succession of contracts did not prevent each assignment from being a contract of employment. In summing up, Lord Justice Mummery said that it made no difference to the legal position that, at the end of each engagement, the council was under no obligation to offer another teaching engagement or that Mrs Prater was under no obligation to accept one. The important point is that, once a contract was entered into and while it continued, Mrs Prater was under an obligation to teach the pupil provided and the council to pay her for that teaching. That was all that was legally necessary to support a finding that each individual teaching engagement was a contract of service.
This essentially means that it makes no difference to the legal position that, after the end of each engagement, the organisation providing the work was under no contractual obligation to offer another engagement, nor that the individual was under no obligation to accept one. The main consideration is that, for the duration of any existing contract, the individual is under an obligation to do the work promised and, equally, the organisation is under an obligation to pay for the work made available. This is all that is required, legally speaking, to support any finding that each separate engagement was a contract of service.
Mutuality of obligation does not therefore have to be understood in a special sense of an ongoing duty to provide and accept work, provided the necessary mutual obligations are present. This also means that if there are individual engagements, each of which requires an individual to do the work and to be paid for that work, there may be sufficient mutuality of obligation to render the contract a contract of employment. The question at this stage, once the existence of a contract has been established, is whether other appropriate indications of such a contract, not least a sufficient degree of control which the employer exercises over the individual undertaking the work, is present.
In summary, the significance of mutuality of obligation is that it determines whether there is a contract in existence at all, while the significance of control is that it determines whether, if there is a contract in place, this can properly be classified as a contract of service, rather than some other kind of contract, such as a contract for services.
Practical considerations
When it comes to mutuality of obligation, the issue of whether there is a contract at all arises most frequently in situations where a person works for an employer, but only on a casual basis. In these circumstances, to be able to assert certain rights and benefits, the casual worker would need to be able to establish that they worked under a contract of employment in respect of each individual period of working, however short.
Additionally, to be able to assert certain key statutory rights, such as redundancy pay and unfair dismissal — which are dependent not only upon working under a contract of employment, but establishing a period of continuous service — the worker must show that the contract continues to exist in the gaps between the periods of employment. It is in this context that the tribunals and courts have frequently had to decide whether there is an over-arching contract, or what is sometimes called an ‘umbrella contract’, which remains in existence even when the individual concerned is not physically working for the employer.
In the Court of Appeal case of Nethermere (St Neots) Limited v Gardiner and another [1984] IRLR 240, Lord Justice Dillon saw no reason in law why the existence of a contract of service could not be inferred from a course of dealing continued between the parties over many years. In this case, there was a regular course of dealing under which garments were supplied daily to the outworkers, worked on, collected and then paid for. As such, where work is regularly offered and accepted over a period of time, even though the parties may claim that between each incidence of offer and acceptance of work there is no contractual obligation to offer or accept further work, such an obligation can be implied in certain circumstances and a continuous contract of employment may be created.
In the similar case of Airfix Footwear Limited v Cope [1978] ICR 1210, the tribunal again had to consider as a preliminary issue whether the applicant was an “employee” employed under a contract of service or whether she was self-employed under a contract for services. In this case, Mrs Cope assembled shoe parts from home, where she had been doing this work for 7 years, generally 5 days a week, with occasional breaks when demand was low.
The EAT confirmed the lower tribunal’s finding that there was in fact a continuing contract of employment, confirming the view that an umbrella contract can exist if a practice of dealing has built up over the years with expectations and obligations on each side. The net effect is that there can be an ongoing contract of employment for contractual stints, even or though there may be no continuing obligation on the employer to offer, nor on the employee to accept, any particular offer of employment that may be made in the future.
Mutuality of obligation & IR35
Mutuality of obligation has become increasingly important when engaging contractors or off-payroll workers through intermediaries but, in reality, these individuals are working as employees. As the implications around who is responsible for discharging the individual’s tax and national insurance (NI) obligations can be significant here, there is specific tax legislation to prevent workers from falsely operating on a self-employed basis.
The IR35 rules require that where an individual works in the same way as an employee and, but for having set up an intermediary company (often a personal service company), would have been regarded as an employee of the engaging business if they had been directly contracted, that individual is liable to pay similar tax and NI to other employees.
The IR35 rules were introduced by HMRC in 2000, based on the rationale that two individuals working similarly for a business should pay broadly the same income tax and NI, even where one of them works through an intermediate company. In deciding whether an arrangement is in compliance with the IR35 rules, mutuality of obligation represents one of a number of tests used to determine whether a worker falls within the scope of IR35.
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Mutuality of obligation FAQs
What is mutuality of obligation?
Mutuality of obligation refers to the expectation that an employer will provide work and that the worker will accept and perform it. It is an important factor in determining whether someone is an employee or genuinely self-employed.
Why is mutuality of obligation important for employers?
It helps determine employment status. If mutual obligations exist, a worker may be classified as an employee, which could mean they are entitled to rights such as paid leave, sick pay, and redundancy protection.
How can employers avoid creating mutuality of obligation?
Employers can avoid mutuality of obligation by ensuring that contracts clearly state work is offered on an ad-hoc or project basis without an obligation to provide or accept work. Actual working practices should also reflect this arrangement.
What happens if mutuality of obligation is found in an engagement?
If mutuality of obligation exists, a self-employed contractor may be reclassified as an employee, leading to potential liabilities such as backdated tax, national insurance contributions, and entitlement to employment benefits.
Can mutuality of obligation exist in casual or zero-hours contracts?
It depends on the arrangement. If there is no guarantee of work and the worker can refuse assignments without penalty, mutuality of obligation may not exist. However, regular work patterns could suggest otherwise.
Does mutuality of obligation apply to contractors working through a limited company?
Yes, even contractors working through a limited company may be assessed under IR35 legislation to determine whether mutuality of obligation and other employment indicators exist.
What should employers do to ensure compliance?
Employers should regularly review contracts and working arrangements to ensure they align with intended self-employment terms. Seeking professional advice can help reduce risks.
Can mutuality of obligation exist if work is occasional?
Even occasional work can suggest mutuality of obligation if there is an ongoing expectation of future work and acceptance of assignments. Each case should be assessed individually.
Glossary
| Term | Definition |
|---|---|
| Mutuality of Obligation | The expectation that an employer will offer work and that the worker will accept it, which is key in determining employment status. |
| Employment Status | The classification of a worker as an employee, worker, or self-employed individual, affecting their rights and obligations. |
| Self-Employed | Individuals who work for themselves and are responsible for their own tax and National Insurance contributions. |
| Employee | A worker with a contract of employment who is entitled to statutory rights such as sick pay, holiday pay, and redundancy protection. |
| Contract for Services | A legal agreement used to engage independent contractors or freelancers, typically without mutuality of obligation. |
| Contract of Employment | A formal agreement between an employer and employee outlining the terms of employment, typically demonstrating mutuality of obligation. |
| Zero-Hours Contract | A type of contract where an employer is not obliged to provide work, and the worker is not obliged to accept it, potentially avoiding mutuality of obligation. |
| IR35 Legislation | UK tax rules aimed at identifying ‘disguised employees’ who work through their own limited company but operate like employees. |
| Employment Rights | Legal entitlements such as minimum wage, holiday pay, and unfair dismissal protection, which may apply if mutuality of obligation is established. |
| Statutory Obligations | Legal responsibilities employers have towards employees, including paying National Insurance and providing workplace rights. |
| Working Practices | The day-to-day reality of how a working relationship functions, which can indicate whether mutuality of obligation exists. |
| HMRC | Her Majesty’s Revenue and Customs, the UK government department responsible for tax collection and enforcement of employment status rules. |
| Freelancer | A self-employed individual offering services to multiple clients without being tied to a single employer. |
| Independent Contractor | A worker engaged on a contract for services basis, typically without entitlement to employment rights. |
| Employer Obligations | Duties an employer must fulfil, such as ensuring legal working conditions and avoiding misclassification of workers. |
Author
Founder and Managing Director Anne Morris is a fully qualified solicitor and trusted adviser to large corporates through to SMEs, providing strategic immigration and global mobility advice to support employers with UK operations to meet their workforce needs through corporate immigration.
She is a recognised by Legal 500 and Chambers as a legal expert and delivers Board-level advice on business migration and compliance risk management as well as overseeing the firm’s development of new client propositions and delivery of cost and time efficient processing of applications.
Anne is an active public speaker, immigration commentator, and immigration policy contributor and regularly hosts training sessions for employers and HR professionals
