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 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 Supreme Court in PGMOL characterised mutuality of obligation at RMC stage 1 as a pre-condition to employment and referred to it as the ‘wage-work bargain’ as per Cotswold Developments Construction Ltd v Williams [2006] IRLR 181, where an individual provides his or her own personal service in return for payment. This was described as an essential element of a contract of employment. The Supreme Court endorsed the following Court of Appeal findings in PGMOL:

The question whether a single engagement can give rise to a contract of employment is not resolved by a decision that the overarching contract does not give rise to a contract of employment.

The fact there is no obligation under an overarching contract to offer work or to do work does not decide that the single engagement cannot be a contract of employment. This reinforces the view that the nature of each contract is a distinct question and must be considered independently.

A single engagement can give rise to a contract of employment if work which has been offered is done for payment, sometimes referred to as the wage / work bargain.

The right of either party to cancel the contract in the period between acceptance and performance does not affect this view. The Supreme Court in PGMOL found that provisions in a contract which allow either party to withdraw before the performance are irrelevant at RMC stage 1 and do not negate the presence of mutuality of obligation.

The Supreme Court in PGMOL is the leading authority on mutuality of obligation at stage one of the Ready Mixed Concrete test and confirmed the principles from the following cases of lower authority:

Cornwall County Council v Prater [2006] EWCA Civ 102

The fact that an individual is entirely free to work or not and owes no contractual obligation to the person for whom the work is performed when not working, does not preclude a finding that the individual is a worker, or indeed an employee, at the times that he or she is working.

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

Where work is regularly offered and accepted over a period 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 further work, but such an obligation can be implied in certain circumstances.

Carmichael and Another v National Power plc (see ESM7200)

This case was not advanced on the basis that when the workers performed work they did so under successive ad-hoc contracts, the case was put on the basis they were employed on umbrella contracts. There were not the required mutual obligations in place to create an umbrella contract.

The nature and extent of mutuality of obligation can be factored into the evaluative exercise when determining employment status.

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