Mutuality of obligation is an important concept in employment law, as it forms a key part of the criteria used by tribunals for determining the employment status of an individual. Below we examine this concept in more detail, including how this is applied in the context of HMRC’s IR35 off-payroll working rules.
What is mutuality of obligation?
Mutuality of obligation is one of the tests used by tribunals to determine an individual’s employment status, helping to establish the existence, for example, of an employer-employee or contractor-client relationship. Put another way, it’s used to help decide if someone is either ‘employed’ or ‘self-employed’.
The obligation on the employer to provide work, together with the obligation on the employee to carry out that work, is a necessary feature of any employment relationship – typically, a relationship in which the employee is paid by their employer each week or month, until either they resign or their contract of employment is otherwise brought to an end through dismissal or redundancy.
In contrast, a contract for services, or self-employed contract, refers to a situation in which an individual works on a project-by-project basis, whereupon completion of a project the client is under no obligation to offer further work and the contractor is under no obligation to accept any additional work offered.
What is the test for mutuality of obligation?
The test for mutuality of obligation has two key elements that must be present:
- An employer is obliged to offer work to an individual, and
- That individual is obliged to do the work offered.
Essentially, for a contract of employment to exist, these reciprocal obligations must exist. Without the necessary obligations entered into by both parties, ie; that work will be provided and that this work will be undertaken, a contract cannot be a contract of service.
Where both elements are present, this provides a clear indication that the contract could be one of employment, whereas absent one or both of these elements, this is a strong indication that the worker is instead self-employed.
The essential elements within the mutuality of obligation concept that makes it possible for a contract to be classed as a contract of service is the reciprocal agreement to provide and undertake work, whether this be on a one-off basis or long-term. However, if a worker has a number of one-off contracts with different clients, it is less likely that they will be deemed to be contracts of service than where there is a succession of one-off contracts with the same client.
What are the other factors for employment to exist?
Under the Employment Rights Act 1996, a contract of employment is defined as an express or implied contract of service. However, save except that it states that this can be oral or in writing, the ERA does not provide a definition of a contract of service, where this is left to the courts and employment tribunal to decide who is classed as employed or self-employed for employment law purposes.
Mutuality of obligation is just one of a number of factors that are used to determine employment status, although this is often described as an ‘irreducible minimum’ without which a contract of service cannot exist.
Where mutuality of obligation can be established, however, a contract may or may not be a contract of service depending on several other factors, including the provision of personal service and the extent to which the individual controls how, when and where they perform their work. These are often referred to as:
- The substitution test – this test considers whether or not the individual could bring someone else in to complete the contract, or if they must complete the work themselves. If the contract requires the individual to undertake the work personally, using his or her own skill in the performance of a service, this will often indicate employment.
- The supervision, direction & control test – this test relates to how much say the work provider has over how the work is completed. If, for example, an individual is required to work at certain times, this would usually imply that they are working under a contract of service.
There are also various others factors that may be used to determine whether someone is performing the services as an employed person, or as a person in business on his or her own account. These could include any of the following:
- The level of any financial risk in performing the work, as well as the opportunity to profit from performance of that work
- The extent to which an individual appears to be part and parcel of the business they are working for, such as wearing a branded uniform
- The responsibility on either party for paying tax and national insurance
- The responsibility for providing materials, tools or equipment
- The degree of continuity in the working relationship, including how many engagements an individual performs, and whether they are performed mainly for one person or for a number of different people.
In broad terms, a person is generally classed as ‘employed’ if the following apply:
- They have a contract or other arrangement to do work or services personally for a reward, either verbally or in writing
- Their reward is for money or a benefit in kind, for example, the promise of a contract or future work
- They only have a limited right to subcontract, ie; to send someone else to do the work required
- They are under the direct supervision or control of a manager or director
- They have to turn up for work even if they don’t want to
- There is work for them to do as long as the contract or arrangement lasts
- The business deducts tax and NI contributions from their wages
- The business provides materials, tools or equipment they need
- They aren’t doing the work as part of their own limited company in an arrangement where the ‘employer’ is actually a customer or client.
It is important to remember that this list is not exhaustive. Each case is separate and will need to be judged on its own merits, where what may be classed as significant in one set of circumstances may not be so important in another.
Further, the presence of a particular factor is not conclusive proof of a person’s employment status, although it may act as a strong pointer.
What does mutuality of obligation mean for employment status?
Mutuality of obligation forms the basic foundation for any determination as to employment status that, in turn, will determine an individual’s entitlement to certain employment rights. In fact, this was one of the deciding factors in the 2018 Court of Appeal decision about the rights in regards to temporary work for Uber drivers (Uber BV & Ors v Aslam & Ors  EWCA Civ 2748).
In this case, the court looked at whether mutuality of obligation can exist when someone is entirely free to choose when they work, where some reciprocal obligations are required for both ‘employee’ and ‘worker’ status – a worker being someone who provides their services as part of a profession or business carried on by someone else, but is still entitled to basic employment rights.
The appellants argued that the respondents were independent third party contractors carrying on a business undertaking on their own account, and therefore not ‘workers’. The respondent Uber drivers, on the other hand, contended that during the periods covered by their claims, they were ‘workers’ for the purposes of the ERA, the National Minimum Wage Act and the Working Time Regulations, thereby entitling them to the minimum wage and paid leave.
The court agreed with the findings of the Employment Appeal Tribunal that the Uber drivers were indeed ‘workers’ within the meaning of the relevant rules, where they were found to be “working” whenever they (a) had the appellant’s app switched on, (b) were within the territory in which they were authorised to work, and (c) were able and willing to accept assignments.
That said, this matter has now been appealed to the Supreme Court, with judgment pending, so it is yet to be seen whether the decision of the Court of Appeal is overturned, and if any further guidance will be given on this matter.
It is also worth noting that the Uber decision was specific to the working arrangements of those drivers, and so does not necessarily apply to all atypical or casual working arrangements. Indeed, in circumstances where there is no clearly defined obligation to accept work or to have work offered, it can often be difficult to be sure of mutuality of obligation and expert advice should be sought.
What is the mutuality of obligation IR35 test?
In addition to its application in employment law, the concept of mutuality of obligation also forms a key part of the criteria for determining the employment status of a contractor in the context of IR35 legislation. HMRC introduced IR35, or the ‘off-payroll working rules’, in 2000 to tackle what it refers to as ‘disguised employment’. The IR35 rules are designed to assess whether an individual is a genuine contractor, rather than a disguised employee, for tax purposes.
In some cases, where a contractor works through a limited company, this will allow them to take advantage of greater tax efficiency, when in practice the contractor is essentially working as an employee. Further, the benefit for employers hiring workers in this way is that they don’t have to pay employers national insurance contributions or provide the normal employee rights.
If the necessary element of mutuality of obligation exists – described by HMRC as an obligation on the engager to pay a wage or other remuneration, and an obligation on the worker to provide his or her own work or skill – then HMRC may argue that the relationship between contractor and client resembles that of an employer and employee, placing the contractor inside the IR35 rules.
That said, the guidance provided by HMRC can be confusing, where it states that the basic requirements of mutuality of obligation could be present in either a contract of service or a contract for services and, on their own, will not determine the nature of a person’s employment status.
This means, according to HMRC, that mutuality of obligation exists in some form, even if someone is contracting outside IR35. It is also worth mentioning that HMRC may regard someone as self-employed for tax purposes even if they have a different status in employment law.
As such, given the ambiguity that has arisen here, and that there is no single simple answer when determining the employment status of an individual, and therefore whether IR35 applies, it is always best to seek expert advice.
Mutuality of obligation FAQs
What is mutuality in a contract?
Mutuality in a contract refers to a reciprocal understanding or agreement of the parties under the terms of the contract. It is essentially a legal principle that provides that both parties to a contract are bound, or neither should be.
What do you mean by employment status?
Employment status refers to how a person undertaking work is to be treated for employment law or tax purposes, where someone could be classed, for example, as employed (contract of service) or self-employed (contract for services). Under a contract of service a person could also be classed as either an employee or worker, where employees are entitled to greater employment rights.
What is the integration test employment law?
The integration test was a method used by the courts and employment tribunal to determine employment status. This denoted that under a contract of service a person is employed as part of the business, where the work performed is an integral part of that, although with the recent introduction of more atypical and casual working arrangements with the gig economy this test is now outdated.
What is contract for service and contract of service?
In a contract for service, an independent contractor, such as a self-employed person, is engaged for a fee to carry out a specific project, whereas a contract of service refers to an agreement between an employer and employee, where an individual is classed as employed for employment law and tax purposes.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.