ESM0543 - Guide to determining status: mutuality of obligation

The significance of mutuality of obligation is that it determines whether there is a contract in existence at all. Without mutuality of obligation there can be no contract of any kind.

Only when the basic requirements for mutuality of obligation have been identified is it possible to then consider whether the contract is a contract of employment or a contract for Services (self-employment).

The basic requirements as to the mutual obligations necessary to determine whether there is a contract in existence at all are:

  • that the engager must be obliged to pay a wage or other remuneration, and
  • that the worker must be obliged to provide his or her own work or skill.

These basic requirements 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 contract.

(See reference to the concept of mutuality of obligation in Nethermere (St Neots) Ltd v Gardiner and Taverna at ESM7110).

Where a worker undertakes duties for an engager and the engager pays the worker for undertaking the work then there will be sufficient mutuality of obligation for a contract to exist. The question of mutuality of obligation poses no difficulty during the period when the worker is actually working for the engager. For that duration the worker undertakes to work and the engager in turn undertakes to pay for the work done. The mutual obligations (to work on the one hand and to be paid on the other) will continue to exist until the contract is terminated and will provide the basic requisite mutual obligations - see Stephenson v Delphi Diesel Systems Ltd [2003] ICR 471 at paragraph 13.

The issue whether the worker is required to accept work, if offered, or whether the engager is obliged to offer work as available is irrelevant to the question of whether a contract exists at all during the period when work is actually being performed - see Stephenson v Delphi Diesel Systems at paragraph 14.

See also the Court of Appeal case Cornwall County Council v Prater [2006] EWCA Civ 102 and the words of Mummery LJ and Longmore LJ

In his summing up Mummery LJ said:

“Nor does it make any difference to the legal position that, after the end of each engagement, the Council was under no obligation to offer her another teaching engagement or that she was under no obligation to accept one. The important point is that, once a contract was entered into and while that contract continued, she was under an obligation to teach the pupil and the Council was under an obligation to pay her for teaching the pupil made available to her by the Council under the contract. That was all that was legally necessary to support the finding that each individual teaching engagement was a contract of service.”

In reply to the submission from Counsel for the Appellant that mutuality of obligation had to be understood in a special sense of an ongoing duty to provide work and an ongoing duty to accept work, Longmore LJ said:

“[43] I cannot accept this submission. There was a mutuality of obligation in each engagement namely that the County Council would pay Ms Prater for the work which she, in turn, agreed to do by way of giving tuition to the pupil for whom the Council wanted her to provide tuition. That to my mind is sufficient “mutuality of obligation” to render the contract a contract of employment if other appropriate indications of such a contract are present.”

The concept of mutuality of obligation is often considered in more detail in employment protection law situations where many benefits and rights only accrue after a specific period of continuous employment. In employment protection law it will often be very relevant whether work is carried out under a separate series of contracts (where no benefits may accrue) or under a single ‘umbrella’ contract which amounts to a continuing contract of employment (where benefits and rights may well exist). This is the reason for the case law on the subject.

Where work is regularly offered and accepted over a period of time a continuous contract of employment may be created. The parties may claim that between each offer and acceptance of work there is no obligation to offer or accept further work. But such an obligation can be implied in certain circumstances. As Dillon LJ said in the Court of Appeal in 1984

’ I see no reason in law why the existence of a contract of service may not be inferred from a course of dealing continued between the parties over several years………There was a regular course of dealing between the parties for years under which garments were supplied daily to the outworkers, worked on, collected and paid for’

[Nethermere (St Neots) Limited v Gardiner and another (see ESM7110)]

In the similar case of Airfix Footwear Limited v Cope (see ESM7060), it was argued that there was no obligation on the company to provide work and no obligation on Mrs Cope, who was an outworker, to take the work offered. However, the Employment Appeal Tribunal confirmed the Industrial Tribunal’s finding that there was in fact a continuing, or ‘umbrella’, contract of employment.

The relevant issue in the case was whether Mrs Cope was employed under a contract of employment when the engagement was terminated. She had applied to the Industrial Tribunal for a determination of the question as to whether she had been unfairly dismissed. In order for the application to succeed, the Tribunal had to be satisfied that Mrs Cope was an employee and that she had been employed for 26 weeks.

In the case of Carmichael and Another v National Power plc (see ESM7200), Mrs Carmichael was engaged as a tour guide on a casual as required basis and she was trying to establish that she was not only an employee but an employee for at least thirteen weeks. The House of Lords decided, in December 1999, that the Industrial Tribunal was entitled to find that the original documentation and subsequent conduct of the parties indicated that there was no intention to have the relationship regulated by contract whilst Mrs Carmichael was not working as a guide. It was stated that ‘the documents provided no more than a framework for ad hoc contracts of service or for services’. The Courts did not consider the issue of status when Mrs Carmichael was actually working as a guide.

The Irreducible Minimum Requirements for a Contract of Employment

There is often some confusion as to what is described as the irreducible minimum for mutuality of obligation and the irreducible minimum requirement for a contract of employment.

Once it has been established that the basis mutual obligations are present (see above) and a contract is in existence, it is then necessary to determine the nature of that contract. The irreducible minimum requirements for a contract of employment are:

  • the requisite mutuality of obligation present;
  • a sufficient degree of control being exercised on the part of the engager;
  • other provisions of the contract being consistent with a contract of employment

Where it is claimed an overarching contract of employment is in place, see guidance at ESM2330 onwards.