Category Archives: employment contract

Frustration of Contract in Employment

Frustration of contract occurs where it is impossible for that contract to continue.   In employment that means that the employment contract ends.  Frustration will occur only where the circumstances that lead to the consideration to terminate the contract were unforeseen and it is impossible to continue the employment relationship.  Furthermore it will have not been the fault of either party.  Reasons for frustration could include imprisonment, death and devasting illness.  Where a contract is found to be frustrated each party is discharged from future obligations under the contract and neither party may sue for breach.  Frustration automatically ends the contract.  There is no dismissal in law so no need for notice to be given by either party.

Where prison is concerned an employee sentenced to fairly short terms may be able to argue that there is no frustration if the employment contract allows for other absences of a similar duration such as long term sickness absence.  Indeed if the statutory or contractual notice period that the employee is entitled to is approximately as long as the prison sentence the contract would not necessarily be frustrated.  Where an employee has been bailed, it will not necessarily amount to a frustrating event.  It is the conviction that counts.

Also the cost of replacing the imprisoned employee would need to be considered.  An employer could not be expected to incur substantial costs keeping a job open if it would be reasonable of them to stop employing an employee by reason of frustration.

If the contract contains an express clause detailing the circumstances that could lead to frustration then indeed that frustration would not occur as it would have been foreseen.

Where illness is concerned, it must be a really serious condition (permanent incapacity) with no prospect of recovery.  In a ruling which clarifies the interplay between disability discrimination rules and the doctrine of frustration,  Warner v Armfield Retail & Leisure Ltd [2012] the Employment Appeal Tribunal has ruled that where a worker was laid low by a serious stroke, rendering him incapable of carrying out the functions of his job, his employer was entitled to treat his contract as at an end.

The worker’s role as a construction site manager had required a high level of mobility and decision-making ability. His stroke had greatly affected his ability to get about and his dexterity, co-ordination, memory and concentration were also substantially impaired. Although his employer had initially treated him well, granting him sick pay above his contractual entitlement, he was eventually sent his P45.

The worker claimed unfair dismissal, breach of contract and disability discrimination. However, in the light of medical evidence that he was highly unlikely ever to regain a full capability to perform his former roles, an employment tribunal ruled that his employer had been entitled to treat his contract as frustrated.

Ruling on the worker’s challenge to that decision, the Employment Appeal Tribunal (EAT) found that there had been no error of law in the tribunal’s conclusion that the employer had not breached its duty to make reasonable adjustments and had been entitled to treat the purpose of the contract as unachievable.

The tribunal had also found that the contract’s termination was a proportionate means of achieving a legitimate aim. However, in allowing the worker’s appeal in part, the EAT noted that the tribunal had not dealt with his arguments that he had been treated less favourably within the meaning of the Equality Act 2010, in that the employer had failed to carry out any form of procedure, however rudimentary, to test his capabilities prior to dismissing him. That issue was remitted to the tribunal for fresh consideration.

Frustration of contract in employment is very rare due to the vast amount of legal protection available to an employee and employers should tread carefully when using this as a defence.  Factors which the courts will typically take into account when determining if a contract has been frustrated in long-term ill health absence cases will be the nature of the job role itself, the employee’s length of service, the length and effect of the illness, whether any wages had been paid, whether the employee needed replacing and whether it was reasonable for the employer to wait any longer for the employee to return to work.


What you need to know about contractor agreements and tax

The BBC have recently announced their intention to review the type of contract they provide to their staff following a tax review.  Issuing the correct type of contract is important to avoid the heartache of tax implications for both employer and employee for getting it wrong.

The BBC currently have lots of staff who are working as “personal service companies”.  The term personal services company was devised by HMRC following the introduction of IR35 by Gordon Brown in 2000. 

There is no clear definition in law of what actually constitutes a personal service company, HMRC often use this lack of clarity to their advantage when investigating the tax affairs of contractors.  In the contracting sector, the generally accepted definition of a personal service company is a limited company that typically has a sole director, the contractor, who owns most or all of the shares.

The contractor’s personal service company generally supplies professional services to end user clients, either directly or via an agency. The professional services, typically IT or engineering, are delivered by the contractor and, just to reinforce the point, they are also the owner and director of the business.

A limited company is a tax efficient way for contractors to work as income is split between salary and dividends.  Employers and employees class 1 national insurance is not paid on a large part of their income therefore they pay less tax.  No wonder this situation is often  under the scrutiny of the taxman.

The use of these contracts allows a company to avoid the hassle and expense of hiring an employee showing they do not wish to have an employer-employee relationship with contractors.  Some companies use agencies to act as a further buffer between them and the contractor.

 However the introduction of IR35, which is designed to generate additional tax revenue, has placed the contracting industry at risk of being investigated and liable for higher tax bills.

Companies can protect themselves from the ravages of IR35 by having clear written agreements in place with their contractors.  The agreements should incorporate a clause stating the contractor is solely responsible for managing tax and NI and they should be required to invoice the company.  The contractors should have the freedom to choose to where to work and provide an agreed substitute and they should use their own equipment rather than that belonging to the company.  Furthermore they should have the freedom to work for other companies at the same time. 

The nature of the contract should be reflected in actual working practice.  A company that issues such an agreement then treats a contractor like an employee with the ensuing control of the employment relationship is taking a risk of being investigated by HMRC with huge cost implications for both parties.  For the protection an employment contract (contract of services) should be provided, which is what the BBC intends to do with many of its staff working for personal service companies.