A contracting loophole: James Fairchild explains how the law on implied employment status has created risks for companies that use agency workers.

AuthorFairchild, James
PositionLegal briefing

Recruitment agencies have existed for many years, but it's only in the past two decades that they've become a multi-billion-pound industry. Their traditional role of finding candidates for permanent jobs and placing short-term temps has been supplemented by a newer pursuit: providing contract workers. This trend started in the late eighties as managers saw a way to get round recruitment freezes during the recession. Less scrupulous employers also saw it as a neat method of avoiding new employee rights laws.

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In 2004 the Court of Appeal ruled that Ms Dacas, formerly a cleaner for Wandsworth Council, had been the employee of the local authority and not of Brook Street, her agency. There followed a number of cases where tribunals looked beyond the paperwork--usually a contract of self-employment or for services between worker and agency, plus a purchase-supply contract between agency and end user. In 2006 the Court of Appeal ruled on the case of Mr Muscat, an IT contractor with his own service company. He invoiced the agency, which paid him and then invoiced the end user, Cable and Wireless. The court held that C&W had in fact been Muscat's employer. This meant that the end user and/or agency should have been making income tax and national insurance payments--and that future claims by contractors of unfair and/or wrongful dismissal would be more likely to succeed.

But new regulations on managed-service companies (MSCs) may prove to be the final blow to contracting. HM Revenue & Customs (HMRC) had been unhappy that people were taking jobs with end-user firms via agencies and setting up their own limited companies, usually run by an MSC. A big source of labour for such providers (at least in London) is Australians and South Africans, who sign up even before booking their flights over and then follow the MSCs' advice to minimise their tax costs. They do this in two ways: they attend one regular workplace (often for months) but claim a travel allowance on the grounds that they're visiting a client's office; and they take the lowest possible salary--often about 5,000 [pounds sterling] (the approximate personal allowance for income tax purposes)--and take further profits as dividends.

HMRC's new rules mean that payments to individuals from MSCs are now subject to income tax and national insurance. If you use such workers, this creates another risk. If HMRC can't recover the tax owed from the individual or the MSC, it can seek...

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