The Supreme Court decision in Revenue Commissioners v Karshan t/a Dominos [2023] IESC 24
23 October 2023
The long-awaited decision of the Supreme Court in The Revenue Commissioners v Karshan (Midlands) Ltd t/a Domino’s Pizza[2023] IESC 24 (“Karshan”) was published on Friday, with a single, lengthy judgement by Murray J on behalf of the seven-judge siting of the Court.
In this highly-significant decision, Murray J engaged in an exhaustive analysis of previous jurisprudence, both here and in England, before arriving at what now stands as the definitive statement in this area of law.
Murray J’s decision overturns previous jurisprudence by downplaying the importance of “mutuality of obligation”, and provides welcome clarity on the factors to be considered in assessing whether someone is an employee or an independent contractor.
The key points of his decision are discussed below.
The facts of the case:
In 2014, the Revenue Commissioners determined Karshan as owing €215,718 in tax for the years 2010 and 2011, arising from what it considered to be the incorrect classification of its delivery drivers as working under contracts for services.
This decision was upheld by the Revenue Appeals Commissioner, who based their decision on the fact that the relationship between the parties involved a hybrid contract – an “overarching umbrella contract” under which drivers were free to work whenever they chose, and a series of individual contracts based on the availability of the drivers and the requirements of the company.
The Commissioner held that once a driver notified the company of their availability, and the company rostered a driver for a shift, there was a contract in place which contained mutual obligations.
The company appealed the decision to the High Court, which upheld the findings at first instance, and held that the Commissioner did not err in their consideration of whether a mutuality of obligation existed. This resulted in a further appeal to the Court of Appeal, which delivered its decision in May 2022. Costello J and Haughton J allowed the appeal, and Whelan J delivered a dissenting judgment. In his decision, Murray J noted with approval many of the findings from this dissenting judgment. For a detailed consideration of this decision, see here.
The Supreme Court decision on “Mutuality of Obligation”:
Murray J arrived at several significant findings, the most significant being that the “mutuality of obligation” test, on which such reliance had been placed in recent Irish jurisprudence, had been wrongly interpreted in previous decisions.
This test, first applied in this jurisdiction by the High Court in Minister for Agriculture v Barry [2009] IR 215 (“Barry”), and relied upon so heavily in both the High Court and the Court of Appeal in these proceedings, was posited thus by Edwards J at para 47 of his decision:
“The requirement of mutuality of obligation is the requirement that there must be mutual obligations on the employer to provide work for the employee and on the employee to perform work for the employer … It was characterised in Nethermere (St Neots) Ltd. v. Gardiner …. as the “one sine qua non which can firmly be identified as an essential of the existence of a contract of service.” Moreover, in Carmichael v. National Power plc… it was referred to as “that irreducible minimum of mutual obligation necessary to create a contract of service”. Accordingly, the mutuality of obligation test provides an important filter … If there is no mutuality of obligation it is not necessary to go further: whatever the relationship is, it cannot amount to a contract of service.”
It has thus been considered a “threshold” test in this jurisdiction since Barry – a hurdle which must be overcome before any person can be considered to be an employee. From the outset of his decision, however, Murray J cast doubt as to whether the “mutuality of obligation” test should be considered a threshold test, as had been ventilated in the previous decisions of lower courts.
Firstly, he held that the test itself, which had its origins in UK jurisprudence, had been misinterpreted since Barry. He disagreed, at para 206 of his judgment, with the first strand of the test, namely that the employer must be under a duty to provide work. Instead, the obligation on the employer is not to provide work, but to pay for the work:
“It cannot be disputed that a contract of employment can only arise where the putative employee agrees to provide their own work and skill to the employer. However, the contention that there could only be a contract of employment if the employer agrees to provide the employee with work is misplaced … It has been clear since the decision in Turner v Sawdon [1901] 2 KB 653 that the obligation of an employer may be to pay, not to provide work.”1
Secondly, Murray J fundamentally disagreed that any such obligation must be an “ongoing” one. At para 112, he concluded from the UK authorities that mutuality of obligation does not demand an ongoing obligation on the employer to provide work and on the worker to accept work:
“it is clear from the decisions in McMeechan and Prater that where a worker works intermittently for an employer it is possible for the worker to be an employee for those periods when they are actually working. The fact that the employer has no obligation to offer further work, or that the worker is under no obligation to work if it is offered, does not prevent the agreement between them from being a contract of employment. However, it is also clear from Quashie that where there are no ongoing obligations of this kind, this will be a relevant factor in considering whether the relationship insofar as the individual stints are concerned is one of employer/employee or not.”2
Turning to the decisions of the lower courts in Karshan, Murray J was unequivocal in his rejection of their findings in respect of this issue:
“…this does not mean that in order for a person to be an employee while carrying out work it is necessary that at a point anterior to their actually attending to do the work there be an obligation to offer or to do work. Obviously, the agreement to work and to pay will predate the undertaking of the labour, but the requirement fixed upon by Karshan and identified by it as sufficient to fulfil the requirement of mutuality of obligation as it defined it (an obligation to offer and accept work that extends into the future and is ‘stable’) is not supported by authority. There is, it must be stressed, nothing in any of the cases in England, or in any other jurisdiction, that so suggests and, indeed, it is difficult to see how such a principle could be precisely and coherently formulated.”3
Murray J held at para 71 that holding mutuality of obligation as an absolute necessity would be inconsistent with the ratio of the Supreme Court in Henry Denny v Minister for Social Welfare [1998] 1 IR 34 (“Henry Denny”), which he stated was authority only for the proposition that the absence of obligations to offer or to perform work were notnecessarily inconsistent with the existence of a contract of employment of a continuing or ongoing character.
Murray J put to rest the belief that “mutuality of obligation” as a sine qua non of employment law in this jurisdiction, or a “threshold test” in any consideration of the employment status of a worker. He held at para 210 that:
“The fact is that the term ‘mutuality of obligation’ has, through a combination of over-use and under-analysis been transformed in employment law from what should have been a straightforward description of the consideration underlying a contract of employment, to a wholly ambiguous label. That ambiguity has enabled it to morph from merely describing the consideration that must exist before a contract is capable of being a contract of employment, to its being presented as a defining feature that in itself differentiates a contract of service from a contract for services.”
Instead, Murray J held at para 212 that the question of whether a worker has an ongoing right to be offered work into the future, and where so offered an obligation to perform it, is relevant to the question of whether the worker is an employee or an independent contractor – “It is not, however, a sine qua non of such a relationship.”
Contract of service v Contract for services:
Murray J considered the previous decision of the Supreme Court in Henry Denny, and J noted at para 70 that the Supreme Court had held that the factors that weighed in favour of the worker being an employee were this as follows:
- She was provided with the clothing and equipment necessary for the demonstration;
- She made no contribution financial or otherwise of her own;
- The remuneration she earned was solely dependent on her providing the demonstrations at the times and in the places nominated by the appellant;
- She was not in a position by better management and employment of resources to ensure for herself a higher profit from her activities;
- She did not as a matter of routine engage other people to assist her in the work, and where unable to do the work herself, could only arrange for it to be done by someone else, subject to that person being approved of by the appellant.
He also noted that the decision in Henry Denny stressed that stating in the contract that the person is an independent contractor is not determinative, and that certain factors such as looking after their tax affairs were of marginal importance.
Murray J was clear that talk of a “test” was inappropriate. Instead, he felt it more useful to identify “factors that will be usually be relevant to the inquiry.” In identifying these factors, he delved into the “warehouse of cases” from the previous 50 years, with particular attention being given to two English decisions – Ready Mixed Concrete v Minister for Pensions and National Insurance [1968] 2 QB 497 (“RMC”), and Market Investigations v Minister of Social Security [1969] 2 QB 173.
He listed the relevant factors at paragraph 253 of his judgment,4 concluding that the question of whether in any given case a worker is an employee should be resolved by reference to the following five questions:
- Does the contract involve the exchange of wage or other remuneration for work?
- If so, is the agreement one pursuant to which the worker is agreeing to provide their own services, and not those of a third party, to the employer?
- If so, does the employer exercise sufficient control over the putative employee to render the agreement one that is capable of being an employment agreement?
- If these three requirements are met the decision maker must then determine whether the terms of the contract between employer and worker interpreted in the light of the admissible factual matrix and having regard to the working arrangements between the parties as disclosed by the evidence, are consistent with a contract of employment, or with some other form of contract having regard, in particular, to whether the arrangements point to the putative employee working for themselves or for the putative employer.
- Finally, it should be determined whether there is anything in the particular legislative regime under consideration that requires the court to adjust or supplement any of the foregoing. (My emphasis)
The first of these five questions requires little by way of elaboration. Nonetheless, Murray J outlined at para 221 the different considerations that may arise in respect of remuneration:
“There will, in some circumstances, be an issue of characterisation that this case shows can be important: is the contract a regular wage for work bargain with ongoing obligations to pay and work, is it a series of employment agreements governing the discharge of particular tasks, is it an agreement to complete one identified task, is it an ongoing agreement defined by an umbrella contract, is it some combination of the foregoing and, indeed, is the agreement one for the exchange of labour for pay at all?”
In respect of the second question and “providing their own services”, Murray J stressed at para 220 that personal service was “a requirement and not merely a factor to be put into the mix.” While stating that personal service is the essence of an employment agreement, he observed at para 224 that “At the same time, it is clear that some degree of limited substitution is permissible.”
As regards the degree to which a person may use a substitute and still be considered to be operating under a contract of service, Murray J made the following observations at para 226:
“An unfettered right to substitute is inconsistent with an undertaking to provide the worker’s services personally. A conditional right to substitute may or may not be inconsistent with personal performance depending on the conditionality, and in particular on the nature and degree of any fetter: a limited and occasional right will point to personal service. A right of substitution available only where the worker is unable to carry out the work is consistent with personal performance. A right of substitution limited only by the need to show that the substitute is qualified to do the work is not consistent with personal service, while a right only with the consent of another person who has an absolute and unqualified discretion to withhold consent will be consistent with personal performance.”
Turning to the third issue – the central one of control – Murray J pointed out that the level of control exerted by the decision maker will vary depending on the nature of the work involved. While this originally involved control over the manner in which the work was done, Murray J noted that the situation evolved in the mid-20thcentury when the test had to accommodate within the concept skilled workers, professionals, and managers over whose day-to-day work those retaining them very often lacked the skills which the workers possessed, and could therefore not direct them as to how to perform their work. In respect of how this required the issue of control to be analysed, he held at para 30 that
“…the focus shifted from whether the employer controlled the way in which the work was done, to a more remote (and in some formulations, theoretical) power of direction and authority.”
Later in his decision, Murray J clarified that the relevant issue is whether the decision-maker is concerned to establish a right of control, over what is to be done, at least generally the way in which it is to be done, the means to be employed in doing it, the time when and the place where it shall be done:
“…in cases involving skilled work, it is to be expected that the employer will not have the right to direct how the work is to be done, the test requires that the employer retain some residual authority over it. An analysis of the cases suggests that experienced fact finders have had little difficulty in distinguishing those cases which present this minimum level of control, from those that do not.”5
Another factor to be considered in respect of the control test is the question of integration of the worker into the employer’s undertaking. Murray J held at para 35 that:
“One feature which seems to me to run through the instances is that, under a contract of service, a man is employed as part of the business and his work is done as an integral part of the business.”6
As the fourth question begins with the words “if these three requirements are met…”, it appears that the first three requirements constitute a threshold test. Unless (i), (ii) and (iii) are answered in the affirmative, then the contract cannot be one of service, and the inquiry need go no further.
In respect of a consideration of the factual matrix of the case, Murray J formulated the central issue to be the actual dealings between the parties, rather than the description of the relationship in the contract.
“There can be no dispute around some consequences of these statements. They mean that where an agreement purports to characterise the relationship between or the status of the parties, that description does not fetter the function of the court in determining what, as a matter of law, the agreement actually is.”7
Further findings
At para 246, Murray J expanded on some factors that are inconsistent with a contract of service:
“…the law makes it clear that the capacity to profit in a material way from their own skill, the need for the employee to invest significantly in their ability to undertake the work, and the requirement to bring tools or equipment to the task all lean against the existence of a contract of employment.”
He returned to the the central issue of ‘control’ at para 247, holding that:
“It is appropriate to consider control again at this stage, as there will be cases in which it is so extensive as to point overwhelmingly in the direction of employment, just as there will be cases in which it is so attenuated as to push the agreement towards another type of relationship … it is not possible to separate the question of control from the question of whether the evidence points to the worker carrying on business on their own account.”
The decision re. the delivery drivers:
Applying the series of questions that he considered pertinent to the facts of the case before him, Murray J upheld the decision of the Appeals Commissioner.
- As regards the individual assignments of work, the requirement for personal service was met the substitution clause in the contract did not involve an unqualified power to delegate work contracted for.
- As regards the question of ‘control’, the Commissioner had considered the operation of the rosters and weekly allocation of work, the fact that Karshan had control over the manner the drivers dressed, the time the drivers were there, and the number and extent of deliveries the drivers were to undertake.
- In respect of the fourth question concerning the ‘circumstances of their employment’, the factors taken into account in this regard by the Commissioner were correctly viewed by her as militating against their being independent contractors:
– The drivers did not take calls from customers;
– The did not employ (or have the right to employ) their own labour to undertake the tasks;
– They took no credit or economic risk;
– They worked exclusively from Karshan’s premises;
– Their ability to maximise their own profits was very limited and constrained by the control exercised by the on-site managers;
– They did not advertise their services and they did not scale their delivery business to any particular market;
– The fact that the drivers were required to wear uniforms, to carry branding on their vehicles and that they could deliver only those pizzas directed to them by the managers.
In short, Murray J held at para 259 that their economic activities were so restricted by the terms and conditions imposed by Karshan that they could not be said to have been engaged in their own business.
Murray J noted the plain language of the agreement under which the drivers operated, which stated in at least four different clauses the company’s position that drivers were “independent contractors”, and at clause 14 that it did not undertake to give the driver any work. Murray J held at para 56, however, that
“the fact that there is no obligation under the overarching contract to offer, or to do, work in the event that it is offered or indeed where there are to be found clauses expressly negating any such obligation is not in and of itself determinative that a single engagement cannot give rise to a contract of employment and the relationship of employer and employee.”
Murray J referred to a similar clause that was considered by the UK Supreme Court in Autoclenz Ltd v. Belcher [2011] 4 All ER 745, in which the Court held that “The Tribunal had also found that a clause in the relevant agreements to the effect that there was no obligation on the employer to offer work or on the claimants to accept such work, was not consistent with the practices of the parties. These, it was held, were unrealistic possibilities that were not truly in the contemplation of the parties when they entered into their agreements.”
In addressing the dissenting opinion of Whelan J in the Court of Appeal, Murray J noted the judge’s remarks about the unequal bargaining power between the parties which required the court to look beyond the words of the contract, and look instead at the true nature of the agreement between the parties as gleaned from its operation in practice over time:
“In a similar vein, she was of the view that the court had to look beyond the label imposed on the arrangement, particularly where one party has drafted the agreement, in order to evaluate whether, on its true construction that agreement accorded with the label so attached to it.”8
Summing up his finding that the decision of the Appeals Commissioner should be upheld, Murray J stated the following at para 275:
“…the Commissioner was entitled to reach the conclusion she did. The drivers worked at and from Karshan’s premises wearing uniforms directed by it, conducting a critical part of its business, delivering in accordance with the directions of the managers, and advertising Karshan’s business as they were required to do. Their remuneration was fixed by Karshan, as was the rate at which they would be paid for each pizza delivery. They did this on foot of a contract which had the effect that they committed to do the work a week or so prior to their assignment and the employer was required if not to give them work then certainly to pay them for the rostered time. They brought little by way of personal investment to the activity and had but a very limited opportunity to increase the profitability of their work. They were controlled by Karshan, and they were not conducting business on their own account. The contract was one that envisaged personal service by them, with the facility for substitution on certain conditions, the substitutes being paid by Karshan and not by the driver originally rostered. The Commissioner was entitled to find that they were employees.”
Summary:
Murray J’s decision is not only a highly significant one. It also provides an encyclopaedic summary of the jurisprudence involving considerations of a person’s employment status, and clears up misconceptions and misunderstandings which appear to have filtered into previous decisions in this jurisdiction.
It should be noted that the learned judge himself remarked on the limited applicability of his decision, involving as it did a consideration of the position of the Respondent’s pizza delivery drivers for the purposes only of their taxation status. For this reason, as he observed in his conclusion, the question of the status of workers when continuous employment is a necessary ingredient, as in many provisions of employment law, will have to wait for another day.
Furthermore, when applying the questions which the Supreme Court has now identified as being the crucial ones, any decision arrived at will still be dependent on the facts of the individual case. As the details of the working relationship between an organisation and a worker will always differ from one case to another, it would be unwise to draw too many wide-ranging conclusions, even within the relatively narrow confines of the “gig economy” model in which fast food delivery drivers operate. It’s entirely conceivable that while Domino’s Pizza drivers may be considered employees for the purposes of taxation, a rival pizza company’s drivers may not.
Notwithstanding this caveat, Murray J’s decision is hugely welcome for the clarity it provides in what has long been a contentious issue. Its principles have broad application, and will no doubt provide interesting reading for any legal professionals involved in proceedings concerning a person’s employment status.
Ends.
1 Murray J also cited the decision in Forstaff Pty Ltd v. Chief Commissioner of State Revenue [2004] NSWSC 573 in support of this, which held that ““The irreducible minimum of mutual obligation necessary to create a contract of service” to which Lord Irvine referred should be expressed, not as an obligation on the one side to provide and on the other side to perform work, but as an obligation on the one side to perform work (or provide service) and on the other side to pay.”.
2 Murray J also referred at para 56 to the decision of the UK Court of Appeal in O’Kelly v Trusthouse Forte Plc[1983] ICR 728, saying that “The significance of the case thus lies in both its acknowledgement that ‘mutuality of obligations’ in the sense of an ongoing obligation to offer and perform work was relevant to the determination of whether there was a continuous contract of employment, and in the assumption made throughout both the argument of counsel … and the judgments that this was no more than a factor to be considered, rather than a sine qua non ofeveryemployment relationship.”
3 Karshan, at para 114.
4 He repeated them at para 281
5 Karshan at para 234.
6 It is noteworthy that much of the early UK case law concerns workers performing the work in private, without any public visibility of a connection with the employer. In Karshan, however, the workers performed a hugely public-facing role, and were in fact in many cases the only face to face contact that the customer would have with the business from which they ordered their pizza. The public-facing element of their employment should be considered a factor which enhances any claim as to, at the very least, how the worker is integrated into the undertaking of the employer.
7 Karshan, at para 240. He sounded the following note of caution, however, in the next paragraph: “The issue of whether the court can disregard provisions of a detailed written contract of employment that define the legal rights and obligations of the parties (as distinct from purporting to describe the legal consequences of those rights and obligations) where those provisions are inconsistent with the manner in which the parties have conducted themselves, raises more complex questions.”
8 Karshan, at para 178.