Avoiding deemed employment

Recent high profile court cases¹ have found that some of the characteristics of the relationship between the contractor and the end client have effectively formed an employment relationship between the two. David Greene of Nasa Consulting looks at this issue.

David Greene writes:

The consequences of this 'deemed' employment are that both the worker and the end client can be in line to suffer higher levels of taxation and national insurance.

This issue is now top of the concern list of many of the companies that use interim workers. Here we have a look at the steps the end clients can take to ensure that an agency or business relationship is maintained and that the relationship does not reflect an employment.

Length of time

The first and perhaps most critical determinant of the relationship is the length of time the contractor has spent working with the client. In this article, we are not concerned with the contractor who operates under PAYE for three to six months as it is highly unlikely that an employment relationship could be formed in that period. We are instead looking at those relationships which last over six months and which often continue for many years.

Contractors who have an ownership of their limited company or in a shared company are showing less employment characteristics than those contractors who work under a full PAYE payroll service. The latter group are being payrolled in the same manner as an employee and certainly in the longer term are themselves acting like employees, whilst those who have company ownership incur business expenses, extra admin but receive taxation allowances which reflect they are in business on their own account.

Opting out

Contractors who opt out of the 'conduct of agency' regulations are taking on more business risk and showing less employment characteristics than those contractors who do not opt out of the regulations.

Those opted out contractors who have ownership in their company show significantly less employment characteristics than PAYE payrolled workers who have not opted out. End clients should have the highest level of concern of a deemed employment with this last group of workers and certainly if the working relationship lasts for over 12 months, they do set themselves up for employment issues.

It is allowable for recruitment agencies and businesses to advertise roles as being 'opt out' roles and it is up to the end client to request this when notifying the agency of the vacancy.

Other important factors that end clients consider when handling temporary workers include:

• Distancing the worker from employees by not inviting use of company facilities, inviting them to social functions and providing mobile phones


• Ensuring any training courses and professional development costs are borne by the contractor


• Ensuring recruitment agencies handle any termination processes


• Ensuring there are no obligations to provide the contractor with work during the period of contract


• Managing the contractor through the procurement side of the business and not the Human Resources department.

By providing strong contract documentation for the supply of services together with the above suggestions, end clients significantly reduce the likelihood of an employment, especially if their contractor has share ownership of their supplying company and has opted out of the Conduct of Agencies regulations.

¹ Muscat v Cable and Wireless 2006, Brook St v Dacas 2004, Demibourne Ltd v Revenue and Customs 2005

David Greene nasa consulting

Editor's note:

The DTI has commented on this article. See DTI: Employment Agencies Act - Oct 2, 2006