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Nasa Consulting - Mutuality of Obligation

This is one of three traditional pillars (with personal service and master servant control) required to create an employment relationship between a worker and an engager. Whilst court judgements now tend to look at a case holistically, rather than just the three pillars, MOO does need to be present for a worker to be able to claim an employment relationship with their client, and consequently for IR35 taxes to be applicable.

What is it?

In employment law it is the requirement within a period of engagement for the employer to have to provide work or at least pay to the employee. In an employment relationship an employer cannot simply say there is no work today, therefore you will not be paid. The employer must pay someone in an employment relationship irrespective of the amount of work they provide them during the employment (and cover minimum wage rates).

If the relationship is one where there is no obligation to provide work within a period of contract, then there is no employment mutuality of obligation between the parties and the relationship is not one of employment.

What is it not?

It is not the offer and acceptance of money and work between an engager and a worker. It is not the fact that work is carried out between the two parties. These are the consideration (value) of the contract by each party and not issues that create an employment relationship. Almost every type of contract for services has consideration between the parties.

It also does not involve the obligation to provide further work once a period of contract is completed. This is simply parties agreeing they have compatible requirements and agreeing to do something again, and does not mean they are creating an employment.

Perhaps the greatest support for these points is from the High Court Judgement of Usetech V Young (HMRC inspector) 2005 where the judge stated:

‘it is an over-simplification to say that the obligation of the employer to remunerate the worker for services actually performed in itself always provides the kind of mutuality which is a touchstone of an employment relationship. Mutuality of some kind exists in every situation where someone provides a personal service for payment, but that cannot by itself automatically mean that the relationship is a contract of employment: it could perfectly well be a contract for freelance services.’

Legal Precedent

House of Lords - Carmichael v National Power plc 1999 – power station guides who claimed to be employed had their claim dismissed by judge as it ‘foundered on the rock of absence of mutuality’

The guides were paid only for the hours they worked, and tax and national insurance contributions were deducted, and their contracts described them as ‘casual’ workers. The judgement said they were not employees because there wasn’t sufficient mutuality of obligation. 

Application to Contractors

PSC contractors usually have clauses in their contract which prevent there being employment mutuality of obligation between the parties and point strongly to being outside of IR35. These include:

  • No obligation to provide work in the contract or notice period

  • No obligation to pay the worker if they cannot evidence work completed via submission of invoice with work record/proposal.

  • The ability of the client to decline to provide work if there is none available and that the worker cannot then be paid.

  • Where there is no exclusivity in a contract, it implies the worker is not obliged to always accept work as it can perform works elsewhere.

Conversely the following indicates an element of MOO which may be sufficient for an employment relationship and for IR35 taxes to apply:

  • Obligation to provide a minimum amount of work during a contract period or within a notice period. NB the presence of a notice period is not the material issue, but it is the obligation to provide work in that period which does or does not create the MOO. Court cases involving TV presenters have found that the worker was guaranteed a minimum amount of work days, which created the MOO.


HMRC’s CEST tool does not include questions on MOO which is why it is widely regarded in law as unfit for purpose (although end clients still like to use it as evidence). HMRC’s argument is that employment MOO is present in every worker’s contract with their client and thus they don’t need to ask questions about it in the CEST tool.

HMRC use the flawed argument that where one party agrees to do work and the other agrees to pay them an employment relationship is always created.

If the CEST Tool was to include questions on the lack of obligations to provide work and pay, as is typical of PSC contactors, it is likely that the law will agree everytime that the worker is not in an employment relationship and IR35 taxes do not apply. As HMRC have lost almost all of their IR35 cases at tax tribunal (many on MOO grounds) it is unfortunate that they are not more accurate about this pointer in their assessment tool and process.

Further info

Unfair dismissal cases concerning workers are generally concerned only with whether there is an overarching contract of employment which continues when the worker is not actually working.

However taxation under Schedule E, unlike the right to claim unfair dismissal or the obligation to IR35 taxes, only requires a contract of employment, it does not require continuous employment over any minimum period. Contracts of service lasting only for a day are sufficient for the worker to be taxed under Schedule E even though they are insufficient for a claim of unfair dismissal or for IR35 taxes to have to apply.

In Hafal Ltd. v Miss Lane-Angell 2018 , a mental health care worker took her case to the employment tribunal when she believed she had been unfairly dismissed from her role.

Miss Lane-Angell had been suddenly removed from her rota and she was offered no further work following a ‘three strikes and you’re out policy’. Initially the employment tribunal allowed her claim however an Employment Appeal Tribunal later over ruled and found Lane-Angell not to have been an actual employee of the company.

Because her contract clearly showed there was no minimum hours the company was required to offer and Lane-Angell only needed to provide services when she was available there was no mutuality of obligation between them.


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