Okunade V Minister for Justice [2012] IESC 49

Abstract

The 2023 Supreme Court ruling of Revenue Commissioners v Karshan (Midlands) Ltd t/a Domino’s Pizza [2023] IESC 24¹ represents a major milestone within Irish employment law, with particular regard to the doctrine of mutuality of obligation and its role in resolving future disputes. The distinction between contracts “for services” and “of services” is also examined in detail. This article critically analyses the Court’s reconfiguration of historic tests of employment status, particularly regarding mutuality of obligation. It argues that while the Supreme Court sought to clarify the legal tests for employment status, the reformulation of mutuality of obligation may create new interpretative complexities, particularly within a modern age of “gig work.” Part II outlines the development of employment status jurisprudence in Irish law prior to Karshan. Part III examines the reasoning of the three courts in detail, while Part IV considers the broader consequences of the decision for employment classification in the context of modern labour markets.

Introduction

The binary divide between the two forms of employment contract has come under increasing scrutiny — in today’s digital age more than ever — due to the highly fluid nature of modern employment and working life. Freedland has eloquently described modern employment laws as “highly problematic,”² given the complex minefield of terminology that must be navigated. The term “employee” refers to a person who has “entered into or works under a contract of employment.”³ The classification of a person as an “employee” carries significant legal consequences, with differing rights and obligations arising from a contract of employment as opposed to a contract for services. One instance of this arises within the tortious doctrine of vicarious liability, as seen in the Lister⁴ case, which held the employer vicariously liable for acts of its employee that were sufficiently within the course of employment — a finding that would not have been upheld had the wrongdoer been engaged under a contract for services. Mutuality of obligation is a central theme of the Karshan⁵ case, with Bruton⁶ outlining how “there must be mutuality of obligation between employer and employee” in order for a contract of employment to exist. Farnsworth explains this concept precisely: where two parties are bound by an exchange of promises, “neither one is bound until the other is bound.”⁷ It is an essential element of any contract of employment; however, its mere existence is not “determinative of the nature of the relationship”⁸ and requires further examination of the overall relationship.

Part II — Context and Legal Background

The Control Test

There are four distinct test approaches used to ascertain whether a person is an employee or an independent contractor. The first is the control test, which emerged in the 19th and 20th centuries.⁹ Historically associated with the “master-servant”¹⁰ relationship, it evaluates whether the employer has control over both what work the employee carries out and how they carry it out. In Roche v Kelly,¹¹ Walsh J held that the master must have the right to control not only what is done, but also how it is done. This test has come under scrutiny, particularly in the modern work environment, as employers may not exercise direct control over employees’ day-to-day activities. Bodie remarks that the control test is “not the unanimous answer,” and that it may be losing its “grip” on the category of employment.¹² In the more recent Troutbeck¹³ case, the Employment Tribunal held on appeal that treating the “absence of control as a determinative factor”¹⁴ was an error, as control alone was insufficient to determine the nature of the relationship.

The Integration Test

The second test is the integration test, first proposed by Denning LJ in Stevenson Jordan and Harrison Ltd v MacDonald and Evans,¹⁵ which outlined how an independent contractor’s work is not integrated into the business but is merely an accessory to it. This test was subsequently applied in Re Sunday Tribune Ltd,¹⁶ which involved three reporters who the company considered to be employees. Carroll J, applying both the control test and the integration test, held that two of the reporters were employees — one on the basis of sufficient control, the second on the basis of their work being integral to the business — but found that the third was not an employee, as her work was not integral to the business. The principal drawback of this test lies in the ambiguity surrounding the definition of “integration.”

The Enterprise Test and the Multi-Factorial Test

The enterprise test concerns capital investment and an element of financial risk. First introduced in Market Investigations v Minister for Social Security,¹⁷ it received a clear endorsement¹⁸ from Keane J in Henry Denny & Sons (Ireland) Ltd v Minister for Social Welfare,¹⁹ which involved a shop demonstrator who was held to be an employee despite her contract describing her as an independent contractor. Keane J was satisfied that Denny’s had provided her with the necessary equipment and that any replacement required Denny’s approval.

In more recent times, a hybrid multi-factorial test was developed by McKenna J in Ready Mixed Concrete Ltd v Minister of Pensions and National Insurance.²⁰ This test requires three conditions to be met: remuneration (or other consideration) in exchange for the worker’s own labour in the service of the employer; a sufficient degree of control exercised by the employer over that work; and all other contractual terms being consistent with a contract of service.

Part III — Case Analysis

In Karshan,²¹ disputes arose over the tax treatment by the respondent of their workers, who were delivery drivers. Karshan claimed the drivers were merely independent contractors rather than PAYE employees, which would result in a different pay structure. This was the first case in the Irish courts to deal with short-term “gig economy” work of the kind associated with services such as Deliveroo and Uber Eats.²² The High Court acknowledged that there was “no comprehensive statutory or common law definition”²³ of a contract of service, and instead took the four concepts of mutuality, substitution, integration, and the terms of the written contract, articulating a “bespoke consideration”²⁴ for each individual case.

High Court Decision

The High Court was first satisfied that there was a mutuality of obligation, as drivers were required to complete an availability sheet one week in advance — a process which the court found constituted a contract containing mutual obligations for both employer and driver. Secondly, the court held that substitution was not established, as drivers could not substitute themselves freely but could only nominate a replacement driver who was, critically, approved and paid by the employer. With regard to integration, the court rejected the respondent’s claim that the drivers were a “mere accessory”²⁵ to the business, finding to the contrary on the basis of several factors, including that drivers were required to wear Domino’s branded clothing and took orders directly from Domino’s rather than from customers. Finally, the court rejected the respondent’s claim that the Tax Appeals Commissioner had erred by failing to give “proper weight”²⁶ to the terms and conditions of the written contract. Ultimately, the High Court upheld the Tax Appeals Commission’s ruling classifying the drivers as employees. While the issue of mutuality of obligation was addressed in the High Court decision, critics would argue that it was not examined with the depth its importance warranted.

Court of Appeal Decision

That criticism was subsequently addressed when Karshan appealed to the Court of Appeal, which focused on the doctrine of mutuality of obligation as an “essential component of a contract of employment.”²⁷ In Carmichael v National Power plc,²⁸ the claimants were casual tour guides who worked only when called upon and could refuse even then. There were no guaranteed hours and no obligation to provide or to perform work on either side. The courts described this as the “irreducible minimum of mutual obligation necessary to create a contract of service,” establishing that the existence of mutuality of obligation should be the first matter to be determined in any such dispute. Were this requirement not satisfied, a contract of service could never arise.

In the UK case of Autoclenz Ltd v Belcher,²⁹ the Supreme Court grappled with the issue of mutual obligation in relation to car valets whom the company described as self-employed subcontractors. Autoclenz argued there was no mutual obligation, as the contract placed no obligation on the company to provide work and no obligation on the valets to perform any work offered. However, this contractual description was found not to reflect the true relationship: the valets worked regularly, personally, and under the firm’s control. Lord Clarke held that the “bargaining power” of both parties must be analysed, as the “written terms may not reflect the true agreement.”³⁰ The Supreme Court found there to be mutual obligation and ruled in favour of the valets. The Uber³¹ case reaffirmed this approach, emphasising the importance of examining the reality of the working relationship rather than simply accepting the written contract at face value. The courts noted that the written terms had been devised by Uber and presented to drivers without any possibility of negotiation.³²

In Karshan,³³ the Court of Appeal ultimately held that the Tax Appeal Commissioners had erred in their finding of mutual obligation. Despite individual contracts having been signed with Karshan, the court found that mutuality of obligation must be ongoing and must exist throughout the entire employment period.³⁴ While ultimately finding insufficient material to establish mutual obligation, the Court of Appeal clearly applied a similar line of reasoning to that adopted in Autoclenz³⁵ and Uber,³⁶ and on a 2-1 majority overruled the High Court. The Court of Appeal made concerted efforts to place mutuality of obligation at the forefront of any contract of employment dispute.

Supreme Court Decision

Predictably, the Revenue Commissioners appealed to the Supreme Court. The appeal centred on the importance of mutuality of obligation to a valid contract of service and whether it constituted a critical component of that contract. The respondent’s theory of mutual obligation focused on four elements: ongoing commitment, an extension of that commitment into the future, the employer’s obligation to provide work, and the employee’s obligation to perform that work.³⁷ Murray J commented pointedly³⁸ that the phrase “mutuality of obligation,” through “a combination of overuse and under analysis,”³⁹ had been moulded into something entirely separate from what it was originally intended to mean. He drew on Keane J’s judgment in Denny’s,⁴⁰ specifically his absence of any reference to mutual obligation and the absence of any requirement for a continuing obligation to provide or accept work.

In Minister for Agriculture v Barry and Ors,⁴¹ the concept of mutuality arose in a dispute involving temporary veterinary inspectors and the plaintiff. The High Court held that there was no mutuality, as the State had not guaranteed any work; however, it failed to draw a clear distinction between the wage/work bargain and the ongoing contract stipulation.⁴² Karshan had defined mutual obligation as “an ongoing reciprocal commitment extending into the future to provide and perform work on the part of the employer and employee respectively,”⁴³ relying on the Barry⁴⁴ approach to mutuality of obligation. Murray J described this as a “fundamental error,” observing that a considerable “parade”⁴⁵ of contracts of service had been navigated prior to 1980 without any reference to the mutual obligation concept upon which Karshan had placed such heavy reliance.

Murray J held that the first and second elements of Karshan’s mutuality theory are not required, provided that the delivery drivers are employees during the periods for which they are rostered and paid.⁴⁶ He further identified remuneration for work performed as the employer’s core obligation, effectively dismissing the third and fourth elements of Karshan’s theory. Ultimately, mutuality of obligation, while typically present to some extent in an employment relationship, is not a conditio sine qua non of that relationship.⁴⁷ As Bell summarises: “Mutuality of obligation, the court held, means no more than the ‘wage/work bargain’ that is satisfied when a worker agrees to undertake a particular item of work in return for pay.”⁴⁸

Part IV — Broader Implications

Murray J began with a discussion of the two leading English cases on employment status. He first referenced Ready Mixed Concrete,⁴⁹ in which McKenna J had introduced the hybrid, multi-factorial approach to determining whether a contract of employment or a contract for services was in place. As previously noted, McKenna J’s approach hinged on three considerations: remuneration in exchange for work; sufficient control over the employee without necessarily requiring direct supervision; and contractual terms consistent with a contract of employment. Murray J took the opportunity to restate and clarify that mutuality of obligation plays no role in this test in the manner argued by Karshan.⁵⁰

Murray J also drew upon Market Investigations,⁵¹ which had developed and complemented McKenna J’s test from Ready Mixed Concrete.⁵² That case concerned casual interviewers who carried out surveys on an occasional basis, and the question arose again as to whether they were employees or independent contractors. Cooke J declined to rely solely on the control test, instead asking whether the person performing such services was doing so “as a person in business on his own account.”⁵³ While acknowledging that control as a concept would “always have to be considered,”⁵⁴ he found it inadequate as the sole differentiating factor. In applying the multi-faceted “in business” test, the court held the interviewers to be employees, consolidating McKenna J’s test within the foundations of modern employment law.

Building on this foundation, Murray J and his six colleagues laid out a new five-stage test for assessing the validity of a contract of employment:

1. There must be a wage or other remuneration in exchange for work.
2. The worker must commit to providing their own services personally.
3. The employer must exercise sufficient control for the contract to be capable of being a contract of employment.
4. The factual working arrangements, supported by evidence, must be consistent with an employment relationship.
5. Any relevant legislative provisions must be taken into consideration.

In light of this new test, the Supreme Court was satisfied that the delivery drivers were employees of Karshan, despite certain features of their activities being consistent with independent contractor status.⁵⁵ The court held that there was a sufficient exchange of consideration in return for labour,⁵⁶ and that the circumstances of substitution and control pointed to an employment relationship. Additionally, for reasons including the fact that drivers did not take calls directly from customers, their work was “in every sense work for Karshan,”⁵⁷ and the court rejected Karshan’s argument based on the written contract’s treatment of mutual obligation, having regard to the broader factual situation. As no specific legislative considerations arose, the ruling in favour of an employer-employee relationship was upheld.

The landmark decision underscores the extent to which mutuality of obligation can influence the classification of a worker, particularly in distinguishing contracts of service from contracts for services. While not as linear as the Court of Appeal’s approach, mutual obligation continues to play an important role alongside the five-stage test in assessing contracts of employment.

Part V — Conclusion

The Supreme Court’s reformulation of mutuality of obligation represents a “bright line adaptation” of Irish common law, as Bell⁵⁸ reflects. While the doctrine has undoubtedly undergone a series of modifications throughout history — and particularly within the modern landscape of gig economies — the legal framework now appears considerably more settled than before. Mutuality of obligation, while not the sole determinative factor, remains an important component in resolving disputes between contracts “of” and “for” employment. The judgment highlights that rigid adherence to a single factor, such as mutuality of obligation, may obscure the practical realities of modern work relationships, underscoring the importance of a broader and more holistic analysis of the employment relationship. With that said, the Supreme Court deftly frames mutuality of obligation as a useful lens through which contracts of employment should continue to be examined.

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