Employment status - tricky issues and grey areas
In the second of 2 articles, Emma Wilkinson looks at some of the common yet complex employment status problems faced by advisers
This article was originally published in the January/February 2016 issue of Adviser magazine and was correct at the date of publishing.
The rise of ‘atypical’ working arrangements
As the workforce becomes more flexible so what were once called ‘atypical’ working arrangements have become the norm. Agency work, zero hours contracts, compressed hours, temp, perm, part time and variable hours contracts (among many others) are commonplace and each requires an assessment of employment status in order to determine rights in exactly the same way as more traditional working arrangements.
We have previously discussed the basic principles of determining employment status. In this article, we concentrate on mislabelling and other more difficult areas.
Employment rights attach to status and so it might benefit an unscrupulous employer to mislabel a worker’s status to deprive them of their basic rights, either by simple misstatement - ‘you are self-employed’ - or by constructing a contract that contains ‘sham’ terms. These are terms which undermine employee or worker status but do not reflect the true nature of the agreement between employer and worker as to how the work is to be performed. It is useful to remember that the Employment Tribunals are not influenced by deliberate mislabelling and that the same employment tests apply whatever label has been applied.
The leading case on this area is the Supreme Court decision in Autoclenz v Belcher (2011) UKSC 41. On labelling, at the Court of Appeal stage, it was stated:
‘It matters not how many times an employer proclaims that he is engaging a man as a self-employed contractor; if he then imposes requirements on that man which are the obligations of an employee and the employee goes along with them, the true nature of the contractual relationship is that of employer and employee. I can see that the argument of the employee is rather less attractive where, for many years, he accepts that he is a self-employed contractor and benefits from the rather more favourable taxation arrangements which are available to people running their own businesses. However, it seems to me that, even where the arrangement has been allowed to continue for many years without question on either side, once the courts are asked to determine the question of status, they must do so on the basis of the true legal position, regardless of what the parties had been content to accept over the years.’
A sham term is one which, whilst included in the contract, does not reflect the reality of the employment relationship. The Autoclenz case determined that an employment tribunal is permitted to look behind the facade of a sham term. Anyone advising on employment status should investigate the reality of the situation rather than placing reliance on sham terms.
The facts of Autoclenz concerned car valeters who had a substitution clause in their contracts which undermined the ‘personal service’ requirement of ‘worker’ or ‘employee’ status. This clause, even on the employer’s own evidence, bore little or no relation to reality. The Court of Appeal held that the claimants were both workers and employees, stressing that the test is whether a contract term reflects the true intention of the parties. The Supreme Court agreed. In a commercial contract, both parties must have colluded to deceive an onlooker in order for a term to be found ‘sham’, but in employment cases, the inequality of bargaining power and the fact that it is the employer who drafts the written terms points to the test being whether the term represents the true agreement; only one of the parties need be the perpetrator of the sham.
A note about the labels used by the parties
We have already touched on mislabelling of the employment relationship above, but it is worth looking at it in more detail.
When courts and tribunals are deciding an issue of employment status, they are looking at the objective reality of the situation; the parties are not ‘free’ to decide the nature of the relationship themselves (although they frequently do, and when no disputes arise, no one is any the wiser!). However, in borderline cases, while the way in which the parties describe their relationship is not on its own determinative, it can sometimes be a relevant factor amongst others for the tribunal to take into account. In a borderline case, where it would be equally possible to conclude that the worker was an employee or an independent contractor, then an overt declaration by the parties as to status may tip the balance. There may also be cases where it is not just the wording of the arrangements but aspects of the parties’ dealings that could be a pointer to the true relationship. In Tilson v Alstom Transport  EWCA Civ 1308,  IRLR 169, CA an agency worker failed to establish that he had become the direct employee of the end user. Not only had the parties dealt with him as an agency worker, but the facts showed that the end user had offered him permanent employment which he had refused because the agency arrangement was more lucrative.
The Court of Appeal said that, while it is not the case that a contract of employment cannot be implied against the understanding of the parties, ‘the parties’ understanding that there is no such contract in place explaining the terms of their relationship, and their inability to reach an agreement on the terms which such a contract should contain, are extremely powerful factors militating against any such implication’.
The established position is that agency workers are not employees. This is because an employee relationship requires a contract between the potential employee and the potential employer. In an agency relationship, whilst there is a contract between (1) the client and the agency and (2) the agency and the end user, there is no contractual relationship between (3) the client and the end user and therefore, no employee status between client and end user. On the other hand, there is likely to be a ‘worker’ relationship between the agency worker and the agency. Some years ago a line of cases suggested that tribunals could ‘imply’ a contract between the worker and the end user but that was firmly ruled out in James v Greenwich Borough Council (2008) EWCA Civ 35CA where it was held that if the arrangement is explainable by the contract between the agency and worker and between the agency and ‘end user’ it is not necessary to imply a contract between worker and end user.
Agency worker rights are therefore likely to be limited to the rights of a worker enforceable against the agency. However do not forget that agency workers may bring discrimination claims against the end user under s41 of the Equality Act 2010 which relates to ‘contract workers’ as defined in that Act.
Since the Agency Worker Regulations 2010 came into force some agency workers have been given contracts stating that they are ‘employees’ of the agency. This is because an agency worker employed under a contract of employment by the agency is exempt from rights to equality of pay with the end user’s permanent staff. (This is often referred to as a ‘Swedish derogation’ contract). Such contracts will be easily identifiable as they must state that the agency worker is an employee of the agency. In this instance, the client can rely on the label given by the contract.
Zero hour contracts
A zero hours contract has no legal definition but is a general term used to describe an employment relationship where the employer does not guarantee to provide any hours (it guarantees to provide precisely zero hours) and the employee is not obliged to perform work where it is provided. In this arrangement, there is no mutuality of obligation and therefore no employee status. This may limit zero hours workers to ‘worker’ rights only. However, that is not always the case.
Perhaps the zero hours term is a ‘sham’ term? It may be arguable on the facts of the case that the zero hours term does not reflect the reality. For example, in one case, where carers were employed to look after severely disabled individuals who needed round the clock care, it was held to be ‘inconceivable’ that the employer genuinely expected the carer to be able to refuse to attend work or that the employer would not have work available. However, zero hours work such as security work is an example of a type of a situation where the parties may genuinely have embraced flexibility; on the facts of the case a tribunal may well find that the clause genuinely reflected the intentions of the parties, especially if there have, as a matter of fact, been periods without work or where the client has been allowed to refuse to accept a shift without penalty.
What is the client’s status if the zero hours term is not a sham? Even here there are two arguments that may establish ‘employee’ status:
The overarching, global or ‘umbrella’ contract argument (not to be confused with umbrella contracts below). This is where it is argued that, even though there was no obligation to provide work, there were still on-going obligations between the parties so that even during periods where no work was provided or done, there still existed a contract between them with sufficient mutuality for there to be a contract of employment.
The ‘mini contracts’ argument. This accepts that during periods where no work is provided or done there exists no contract of employment. However when a worker performs work, mutuality of obligation exists at least while they are performing it, and therefore they are an employee while doing so. Each shift/session/stint of work is a contract of employment. The next challenge is to show that those periods of performing work can be joined together as a period of continuous employment. This can be achieved in one of two ways:-
• If the worker has worked at least one day every week for a period of time then all of that time is a period of continuous employment
• If there are weeks when the worker has not worked there may still be continuity. Holidays, sickness of up to and absence in relation to maternity should not break continuity. Other periods where no work was performed will not break, and will count towards, continuity under the rules in section 212 of the Employment Right Act 1996. In particular, weeks in which the worker did not work because the employer had no work available may still count towards continuity on the grounds that they were ‘temporary cessations of work’.
The ‘mini contracts’ argument is often easier to run, although obviously you need to make sure facts of the case support the argument. It is likely to be fatal to the argument if the client has chosen not to work for a period of time even though work was available. You must also show that the client is an employee when they are actually performing work, so you must still establish about control and mutuality of obligation during those periods.
We have increasingly been seeing the use of umbrella contract arrangements. In the past this presented as an arrangement where an individual signed up with an agency, which supplied them to an end user. The individual was required to sign up with a payroll, umbrella or ‘managed service’ company as a ‘self-employed’ person and pay an administration fee for that privilege. This brought tax and national insurance breaks for individual, agency and umbrella company.
HMRC became alerted to the increased use of these arrangements, viewed them as being ‘bogus’ self-employment arrangements, and changed the rules so that the payroll company had to treat them as employed workers for tax and national insurance purposes, regardless of their status for employment rights purposes. The payroll companies had to start deducting PAYE and employer’s and employee’s national insurance contributions at source.
In response to HMRC’s change in the rules, the current practice is for the agency to require the individual to sign up to the umbrella company as an ‘employee’ of the umbrella company rather than as a self-employed person. PAYE and employee’s national insurance contributions are deducted at source, but the individual is now required to pay not only an administration fee, but an amount to cover the employer’s national insurance contributions for which the umbrella company is now liable.
They may be paid some of their wages as non-taxed ‘expenses’.
These arrangements are currently lawful provided that the amounts paid as expenses, the administration fees and the amount for employer’s national insurance contributions do not take the individual’s gross hourly pay below National Minimum Wage levels, since expenses are not ‘wages’ and payments that a worker makes to an employer, or deductions made by an employer, which are ‘in connection with’ the worker’s employment, or for the benefit of the employer, have the effect of reducing the gross amount of pay from which NMW is calculated. However, outside of that, all of the deductions are authorised under the contract. The arrangements are difficult for clients to understand and often lead to them taking home far less in net pay than they were led to believe.
When advising on the practical impact of the use of umbrella contracts I would suggest:
• checking whether the deductions are permitted under the contract and challenging the deductions if they are not
• checking that the client gets at least the NMW
• Discussing whether the client wants to seek advice from HMRC. It may well say that the scheme is legal but if it is not, there should not be any detriment to the client. HMRC will pursue the umbrella company for any underpayments of tax and NI.
Changes to tax relief on ‘expenses’ such as for travel and subsistence costs will come into force on 6 April 2016 and we will report on the effect of these changes on umbrella contract arrangements in future articles.
A final word
Establishing employment status is an area of employment law that is both generic and complex. There are tricky complexities which mean that there will always be grey areas and room for argument. An expectation of certainty in this area would be misplaced but do not be afraid to look behind the initial presenting facts in order argue the best case for your client.
Emma Wilkinson is the Senior Employment Expert from the Expert Advice Team at Citizens Advice.