The muddy waters when a contractor becomes an 'employee'

In the past contractors have neither sought nor wanted to be treated as 'employees' of their client - and clients have not wanted them 'on the books'. But IR35 has the potential to muddy the waters and disturb the natural dynamics of the flexible economy.

Kevin Miller, the PCG Finance Director, has been giving talks about this possible scenario since the autumn of last year. He said, "The PCG has long recognised that if tax law is going to define contractors as disguised employees then employment law will follow closely behind. The tests that IR35 applies, to identify disguised employees, are largely the same as are used to determine employment status.

"However, we believe that the logical conclusion is not that businesses should avoid using contractors but that they should ensure that their contractual relationship with the contractor falls outside IR35. If, under the IR35 tests, it is quite clear that the client/contractor relationship meets the tests of self-employment then it is very unlikely that any potential employment liabilities can pass to the client.

"It is the nature of this contractual relationship which is vital, not issues such as whether there is an agency involved in the relationship. Businesses which fail to grasp this fact are not only exposing themselves to undue employment risks but will, in the long run, lose access to the best contractors who increasingly will only work under contracts that pass the IR35 tests."

Sir Ken Jackson of the Amalgamated Engineering and Electrical Union, when asked for his thoughts on IR35 back in October 1999, said, "The latest draft of these proposals is a charter for employer exploitation. Contrary to the original stated intent of IR35, the current proposals will legitimise the process of sacking employees, and then re-hiring them through their own service companies. Thus avoiding employers NICs, training, sick, holiday, etc...

"We have long had a stated campaign to ensure that lines are clearly drawn between employees and the self-employed for the purposes of tax, NI, holidays, etc... Many of our members have, in the past, suffered by being forced into self-employment when they did not want to by employers who wished to avoid the costs associated with direct employment. We will always be against any measures that, in our opinion, have a detrimental and unfair effect on our members' employment rights."

Tony Lennon - President of BECTU.

In the first ever case of its kind, the Broadcasting Entertainment Cinematograph and Theatre Union (BECTU) recently took the Government to court over the paid holiday benefits that companies' employees can enjoy, but from which short-term contractors are excluded.

Tony Lennon, President of BECTU told UKTECH last week, "The Advocate General has unequivocally recommended that the UK Government is in breach of the working time directive. The UK Government has actually indirectly sent messages through saying 'Please don't proceed with this case', but we stuck two fingers up at them. Our lawyers are absolutely confident following the Advocate General's advice that we are going to win when it goes into court session before the end of April."

"The UK Government has actually indirectly sent messages through saying 'Please don't proceed with this case'" - Tony Lennon hints at the Government's desperation for BECTU to drop their case

"The problem for everybody where that kind of contract is prevalent is the employers' response in the UK if they say 'we were going to contract you for 3 weeks and that adds up to £1450, but we're now going to contract you for 3 weeks and 2 days so you'll still get £1450 and the last 2 days will be your holiday. So that's the next battle to fight, where the courts can't help and so it's going to be an industrial battle."

Asked if that would have any impact on IT contractors, he replied, "Of course. Anyone who qualifies as a worker. The nice thing about working time directives - due to a translation error, is that the UK legislation factually offers the widest possible interpretation of who qualifies for it. Had the UK Government had its way under Thatcher they would definitely not have allowed our kind of casuals and your kind of casuals in because your people, I would argue, are almost self-employed. However, workers are workers under the directive and our case is absolutely founded on the notion that our self-employed contractors would qualify for [paid] holidays."

The news comes as Microsoft makes a $97m settlement with its long-running temporary employees who say they were consistently denied permanent employment benefits despite continuing to work for the company for a number of years.