Service company arrangement was really employer/employee relationship

In the following case the use of a personal service company, where it (rather than the individual) contracts with the client did not prevent the existence of a direct employment relationship between the client and the individual, and ownership of intellectual property in the work created by the individual was construed accordingly.

The facts in that case were that Sprint Electric Limited (SEL) wanted P to write source code for algorithms. It was decided that to avoid tax P should carry out the work through a personal service company (PSC) and he set up BDL which entered into a contract with SEL. BDL retained the source code.

Initially, the relationship between P and SEL worked well and P was made a director of SEL. However, when disagreements about SEL’s management emerged, P was forced out of SEL which triggered litigation over the ownership of the copyright in the source code authored by P.

Background
The general rule is that, subject to any agreement to the contrary, copyright in any work created by an employee in the course of his employment belongs to his employer. In settling disputes, the courts have typically had to decide whether the employee was working under a ‘contract of service’ (that is, as an employee) or a ‘contract for services’ (that is, as a freelancer or independent contractor). Where a person works under a ‘contract for services’ he will usually retain copyright in any works he produces.

Decision
The High Court upheld SEL’s claim that it owned the copyright in the source code authored by P. The court examined the practice of using a PSC in an employment context and expressed concern about the level of artificiality involved. Although in this case none of the parties had called into question the description applied to the relationship whereby SEL obtained the benefit of P’s services, there was a clear public interest in everyone paying taxes properly due and not escaping their tax liability by devices falsely describing their contractual relationships. Where a court had concerns that labels chosen by the parties to apply to their relationship were untrue and had been applied as a tax-avoidance device, it could and should consider the issue of its own motion.

The court decided that the true relationship between P and SEL was one of employer and employee. P’s argument that the court should respect the contractual structure which the parties had chosen to adopt was rejected.

Comment
In this case the ownership of the source code and the intellectual property in it was resolved by the court’s interpretation of a relationship which all the parties described as a consultancy. The case illustrates that the use of a personal service company, where it (rather than the individual) contracts with the client, will not prevent the existence of a direct employment relationship, although it should be noted that the tax position was not the subject of this decision and the outcome may differ in tax proceedings.

Case
Sprint Electric Ltd v Buyer’s Dream Ltd and another [2018] EWHC 1924 (Ch), 30 July 2018