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Introduction
The issue of whether an individual is engaged by a business as an employee or a self-employed “contractor” is important because it (a) dictates the tax and social security treatment of those individuals (and therefore, the financial liability of those engaging them) and (b) determines whether, and to what extent, important employment protection rights are afforded to them (and thereby, how quickly and cheaply their engagement can be terminated when circumstances so require).
Recent case law
Since the case of Dacas v. Brook Street in 2004, there have been a series of cases that have addressed the employment status of agency workers and, in particular, whether an “end-user” (to which staff have been provided through an agency or other staffing business) could actually be considered to be their employer. In such circumstances, the advantages of engaging workers on an agency basis, such as the flexibility afforded in terms of increasing and decreasing work force numbers as and when demand requires, and the accompanying fiscal benefits, would no longer exist.
In Dacas, the Court of Appeal suggested (although this was not part of its actual decision) that when an employment tribunal was determining the status of workers in a triangular relationship with an agency and the end-user client, it should consider not just the written contractual documents but also the possibility that there may be an implied contract of employment between the worker and the end-user. The Court also suggested that once an agency worker had been working for a year or more with the same end-user, the “inexorable inference” would be that a contract of employment had arisen.
In 2006, the reasoning of the court in Dacas was adopted and applied, without qualification, by the Court of Appeal in Cable & Wireless plc v Muscat, which held that a contract of employment did exist between an agency worker and the end-user where that agency worker had originally been an employee of the end-user but was forced to agree to an arrangement whereby he provided his services through an employment business. The Court’s decision in Muscat was cause for concern for those relying heavily on agency workers as it reinforced the possibility that all agency workers who had been engaged by the same end-user for more than a year might successfully claim that they were in fact employees, and thereby benefit from the employment rights accompanying that status.
However, later that year, in James v London Borough of Greenwich, the president of the Employment Appeal Tribunal (EAT), Mr Justice Elias, adopted a different approach, and even went so far as to say that the suggestion put forward in Dacas, that the effluxion of time could give rise to an employment contract, was wrong. Elias J considered that the real issue was whether there was a need to imply a contract of employment in order to give business efficacy to the agreement. Further, he indicated that when agency arrangements were genuine, and accurately reflected the actual relationship between the parties, tribunals were unlikely to find evidence entitling them to imply a contract between the worker and the end-user.
Those cases in this field that have been decided since James have favoured Elias J’s analysis and sought to limit and distinguish the rulings in Dacas and Muscat (which are, technically, binding on lower courts and tribunals). In January this year, the EAT found in the case of Craigie v London Borough of Haringey that, despite the fact that Mr Craigie had worked for the end-user for over a year, it was not necessary to imply an employment contract in order to give business efficacy to the arrangements between them. Rather, the triangular relationship expressly provided for in contracts between the end-user and Mr Craigie, and the end-user and the agency, governed the situation without difficulty.
Similarly in Heatherwood and Wexham Park Hospitals NHS Trust v Kulubowila and ors, also determined this year, the EAT found that it was not necessary to imply a contract of employment between the individual and the end-user merely because the facts were consistent with there being such a relationship. It confirmed that the question “Is it necessary to imply a contract to give business efficacy to the situation?” should be applied in each individual case meaning that the threshold for establishing employment status is high. It also confirmed that each case should still be considered in the light of Dacas and Muscat and would turn on its own facts.
Conclusion
The recent case law in this area of law has provided some comfort to organisations who, for a variety of operational reasons, prefer to engage agency staff rather than employ individuals in their businesses. In practice, it is therefore no longer so important to adopt often impractical risk mitigation procedures, such as the imposition of maximum assignment periods and employment claims indemnities on agency companies.
Nevertheless, Dacas and Muscat remain “good” law, and even those recent decisions that have held that no implied employment relationship exists between the end-user and the individual, have stressed the need to consider each case on its facts. In particular, there is still a clear risk that such a relationship could be implied where (a) the contractual documents are shown to be a sham, or designed merely to create the illusion of an agency relationship, (b) where individual contractors can show that they were forced to adopt such a contractual relationship against their will, and/or (c) if the basis of the relationship changes after the contractual documents have been entered into, so that a court or tribunal is forced to infer a new type of relationship.
Finally, it remains to be seen whether the plea, voiced by some of the Courts and tribunals referred to above, for legislative clarification as to the status of agency workers, is heeded. In the current political climate, where legislators have shown themselves reluctant to over-regulate the increasingly successful flexible labour market, such developments appear unlikely.
Lou Marshall
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Simkins' early warning bulletins are for general guidance only. Legal advice should be sought before taking action in relation to specific matters. Where reference is made to Court decisions facts referred to are those reported as found by the Court. Please note that past bulletins included in the Archive have not been updated by any subsequent changes in statute or case law.
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