Agency workers ruled employees of their client
Many contractors have reported instances of clients and agencies refusing to countenance any changes to their standard agency contract terms, even though the proposed changes might better reflect the intentions of all parties while also assisting the contractor in passing the IR 35 tests.
However, a recent employment tribunal decision indicates that clients and agencies are exposing themselves to growing risks that they will suffer employer liabilities if they do not ensure that the contractors they use or supply meet the accepted self-employment criteria that are being used by IR 35.
Background
The so called IR 35 tax legislation comes into effect from 6th April 2000 and seeks to tax contractors, who work through a personal service company (or partnership) - the 'intermediary' - as if they were employees of their client. The key to escaping the substantially higher tax bills that IR 35 will impose is being able to demonstrate that, if the contractor worked direct for the client rather than via an intermediary, then the relationship would be one of self-employment rather than employment.
Very few contractors or clients actually want to create an employer/employee relationship. One of the fundamental reasons for clients using contract staff is that they have a short term skill gap, often in terms of a team to complete a project, and the contractor is needed to fill this gap. Clients do not want to take on employer responsibilities for such short-term resources and using a contractor also saves the client the employer's National Insurance costs.
Contractors on the other hand have voluntarily sought to go into business for themselves for the flexibility it provides and for the independence of being their own master. They also expect to reap the additional rewards that come from taking on such risks as:
· Not gaining further work, or
· Falling sick and being unable to work,
· Training in new skills which prove not to be in demand.
The new rules would prevent affected contractors from making a profit from their activities and taking that profit as a dividend (which is not subject to National Insurance) or carrying it forward as reserves for future investment.
Contractors therefore need to ensure that their contractual relationship with the client passes the self-employment tests. However, this situation becomes more complex given the frequent involvement of agencies, which are often interposed between the client and the contractor.
Agencies help the client locate needed resources and frequently act to reduce the client's need to manage the contractor relationship. In effect clients outsource the problem to the agencies. For contractors the agencies act as a marketing resource, helping the contractor to secure new assignments, as well as providing invoice discounting services with the agency billing the client for the contractor's services and then paying the contractor - often before the client has paid the agency. For this the agency takes a commission, which might range from as low as 5% to rates as high as 25% in some cases.
Given the interrelationships between clients, agents and contractors one might have expected them to produce a united response to the threat of IR 35. Certainly anything that threatens to reduce the post tax income of a typical contractor by as much as 20-25% could seriously affect the availability of contractors. This could impact the market place and affect both agents and their clients.
However, the picture is more complicated than it appears.
Agencies
Agencies have taken a battering with the enormous increase in legislation introduced by this Government. Working time regulations, discrimination issues, working families tax credits, the list is endless. Agency conferences in the past used to address how to improve their service and get more business. Increasingly they are a showcase for employment and tax lawyers to pitch for business.
IR 35 was introduced at the same time the Agencies were facing a major review of the regulations that govern their Industry. Whilst many individual Agencies recognised the threat to their contractor customers posed by IR 35 they were sadly let down by their representative bodies who refused to engage effectively on the issue. They considered that it might compromise their chances of a favourable deal on the Agency legislation. This has proved to be a mistake. It has served to worsen an already poor relationship with the contractors. At the same time it had little beneficial impact on a Government inherently suspicious of private sector involvement in helping people find work.
Some agencies have tried to mobilise contractors to engage on this issue by sending out details of IR 35, but the failure of the Agency Representative bodies to give a clear lead on this issue has resulted in a poor response. Agencies trying to persuade their clients to amend contracts to reflect a self-employed relationship are often in a poor negotiating position. Dealing with the client's Human Resources (HR) department, as opposed to procurement, suggestions that amending the contractual relationship could assist contractors to retain a tax advantage seems to be meeting a negative response. It is difficult to say whether this reflects an unwillingness by overstretched HR staff to deal with the resulting administration workload; or a sense that, as contractors enjoyed a bonanza in the run up to Y2K, clients are reluctant to put any effort into helping these contractors avoid higher tax bills.
Other, less professional agencies, realising that they have no liability for the increased tax or any requirement to reveal details of their contracts with their clients are not even bothering to approach the client to amend their standard contracts. They are being assisted in this by certain accountants and tax advisers, who are selling "IR 35 proof" contracts and suggesting that the agency/client contract is irrelevant in determining the contractor's status under IR 35.
Many clients are also taking a similar attitude believing that, as their contract is with the agent, the contract between the agent and the contractor is of no interest to them. They want to retain maximum control over their "flexible resource" without accepting any of the downside employment risk.
However, this current situation may well change as a result of a recent employment tribunal decision.
Agency workers are employees of their client
An employment tribunal in Southampton has recently ruled that two "self employed" workers, supplied via an agency, were employees of their client at the time they were dismissed. In a decision, dated 19 May 2000, in the case of Andrea Jarvis and Others versus Brentvine Limited (an agency) and Esso Petroleum Company Limited (case number 3102574/99) the tribunal concluded that two women, who had worked at Esso's Fawley refinery in a clerical capacity for several years, were in fact employees of Esso.
Brentvine had supplied the two women under a series of 6 month contracts which matched 6 month purchase orders from Esso to Brentvine. The workers had no contractual relationship with Esso but had each worked there for nearly 10 years. The terms of engagement between the workers and Brentvine confirmed that the agreement between Brentvine and the workers was a contract for service and not a contract of employment and that there was no obligation on either party to offer or accept work. These two workers did not use a service company and were therefore paid net of PAYE and NI by the agency in accordance with the requirements of S134 ICTA 1988, but the issue of whether they worked through a service company or not does not seem to have been particularly relevant in this case.
The tribunal was required to decide if the workers were employees of Esso or of the agency, Brentvine. The tribunal stated that it was for the Applicants to prove they were employees of Esso or Brentvine and, if on the balance of probabilities, the tribunal were not satisfied then it would follow that the Applicants were self-employed.
The tribunal considered a number of factors in forming their judgment, none of which was considered individually to be pre-eminent. These factors included:
1. Did the Applicants provide their skills and work in return for remuneration?
2. Was the degree of control on the part of either party sufficient to enable the worker to be called a servant?
3. Were there any other factors that were inconsistent with the existence of a contract of service?
In the Tribunal's view the only factors that suggested that Brentvine might be their employer were:
1. The contract of employment between the workers and Brentvine.
2. The fact that Brentvine paid the workers.
The Tribunal noted that the workers were not a party to the contract between Brentvine and Esso and that certain conditions in that contract, that were required to be introduced into the contract between Brentvine and the workers, had not been so introduced. These included disciplinary procedures and a requirement for Brentvine to incorporate into the contract the Esso drugs and alcohol policy. It also noted that Brentvine only had a general knowledge of what the workers did at the refinery and no day-to-day control over their activities. It concluded that Brentvine did little more than act as a post office forwarding monies received from Esso after deducting their commission.
With regard to their relationship with Esso the Tribunal noted that, while there was no contract, written or oral between Esso and the workers, there were several factors consistent with contracts of employment subsisting including:
1. Esso, not Brentvine, interviewed and chose the workers.
2. The workers were paid when they worked and received fixed rates of pay and uplifts for "overtime".
3. They undertook similar work to Esso's employees and were treated very much the same by Esso, to the extent that they were regarded as "part of the team".
4. They received similar induction training into site procedures and changing work practices.
5. They were under the day-to-day control of Esso supervisors who could allocate alternative duties to them.
6. The workers had to obtain the supervisors' permission for holidays (notwithstanding that they sometimes took more holidays than Esso employees were permitted).
7. The workers did not have a right of substitution.
8. They signed Esso confidentiality undertakings and copies of the Esso business ethics and conflict of interest policies.
9. One of the workers received a bonus on completion of one task.
Contrary indicators were:
1. The lack of any grievance or disciplinary procedures for the workers,
2. The fact that they did not receive holiday pay and were not part of the company pension scheme, and
3. The fact that they did not receive any redundancy payments which would have been payable had they been employees.
Overall, however, the tribunal concluded unanimously that both of the women were in fact employees of Esso.
Conclusions
What does this decision say about the risks of using contractors? As agents have argued, there are employment risks associated with using contractors. Many have exploited this argument to create Fear Uncertainty and Doubt (FUD) with clients to justify their position.
This mirrors decisions made in the USA where 'permatemps', who are employees of the agencies they work through, have won employee rights against clients. Several hundred 'permatemps' working at Microsoft recently won share option rights against the company.
As this case demonstrates the key issues that tribunals will use to determine a worker's employment status are essentially the same issues as will determine a contractor's status under IR 35. Any employer wanting to be certain that they are not storing up potential employer liabilities, when they use a contractor, needs to ensure that the contractual arrangements between them and the agency and between the agency and the contractor meet the self-employment tests.
The fact that the agent/contractor contract seems to pass the tests does not protect the client if their contract with the agency does not also have the required attributes. Agencies that fail to alert their clients to the dangers of using contractors who might not pass the IR 35 tests are exposing themselves to potential liabilities if contractors subsequently sue clients for employment rights.
Agencies and clients must expect that when contractors are being taxed as the disguised employees of their clients, they will have every incentive to claim for employee benefits. This case suggests that many could succeed in their claims. Clients who suffer this fate in the Courts will look to their agencies to compensate them for the losses suffered as a result of poor advice from agents.
The time has come for agents and their clients to recognise that it is in their best interests to ensure that, when they use contractors, those contractors will pass the IR 35 employment tests. This is not tax evasion or even tax avoidance. It is ensuring that the contractual relationship matches the overall intentions and desires of both the client and the contractor not to be either the employer or the employee of each other.
Companies who think they can control contractors as if they were employees, without incurring employer liabilities, are trying to have their cake and eat it. Employment tribunals can see through this and will make such companies pay the price.
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Kevin Miller