Mike Smith reports on a case which considered the question of whether agency workers can only be deemed to be employees of end-user clients if it 'necessary' to do so.  The Employment Appeal Tribunal reviewed recent case law on this issue, and confirmed the principles which should be applied when determining employment status. 

The background

The question of the employment status of workers can be common  when individuals are engaged through a third party to work for an end-user client (for example, Bank/employment agency staff), but the individual argues that an implied employment contract has arisen between them and the client. 

This issue has resulted in a long line of cases which have looked at the question of if, and when, agency staff may be treated as employees. 

As we reported back in 2008, the case of James v London Borough of Greenwich established that an employment contract between an agency worker and the agency's client will only be implied if it is necessary to do so – i.e. where there is no express contract between the agency and its client, or if there is evidence of a sham or other unscrupulous conduct (for example, using a purported agency / client relationship to avoid tax or other liabilities).     

Following the James case, the Court of Appeal (and, later, the Supreme Court) looked at this question again, in the case of Autoclenz v Belcher (please click here for our report).  The Supreme Court confirmed that, when determining an individual's employment status, employment tribunals may disregard terms included in a written agreement where they are a 'sham' and do not reflect the genuine agreement of the parties. The focus of the tribunal's enquiry should be on the "actual legal obligations of the parties". 

This month, in the case of Smith v Carillion, the Employment Appeal Tribunal (EAT) has provided a review of the principles in the cases of James and Autoclenz, and considered whether they still apply.

The facts

Mr Smith was engaged to work for Carillion Limited through an employment agency. He brought claims of detrimental treatment against Carillion, on the grounds of his trade union activities and activities as a health and safety representative. However, he would only have been entitled to bring those claims if he could establish that he was an employee of Carillion.  Mr Smith contended that, notwithstanding the contractual position, there were five factors which meant that an employment relationship should be implied.  These were that that he was

  • interviewed prior to his appointment
  • engaged on long-term assignments
  • fully integrated into the managerial structure
  • subject to a significant degree of control in the performance of his work, and
  • his 'dismissal' was decided by Carillion.

An employment tribunal decided that the above factors were not inconsistent with the an agency worker relationship and found that

  • no contract could be implied between Mr Smith and Carillion
  • there was no evidence that the contract between the parties was a 'sham', and
  • a contract could be implied only if it was necessary (in accordance with the principle in the case of James v London Borough of Greenwich).

Although Mr Smith might have 'looked' like an employee and might have been indistinguishable from Carillion's directly employed staff, this could not be regarded as supporting the argument that he had, as a matter of law, become an employee.

As the nature of the relationship between the parties could be sufficiently explained without having to imply a contract – because the agency agreement adequately described the relationship - it was not possible to imply an employment relationship. Therefore, Mr Smith could not bring his claims against Carillion, because the rights on which he was seeking to rely were only available to employees. Mr Smith appealed, largely on the basis that the approach outlined in the case of James was no longer good law, because the case of Belcher meant that the question is in every case is "what was the true agreement between the parties?"

The decision

The EAT dismissed Mr Smith's appeal. In making its decision, the EAT said that, when deciding whether a contract is to be inferred with an end-user in an agency agreement, the test of 'necessity' continues to apply – i.e. an employment contract will not be inferred if the relationship between the parties can be explained without having to imply a contract. The employment tribunal had been correct to apply that test.

What does this mean for me?

This decision provides welcome clarity that, when determining an individual's employment status, employment tribunals and courts may set aside express contractual terms which are inconsistent with the reality of the relationship of the parties. However, where there is a contract which adequately describes the true relationship between the parties, then the express contractual position will stand. It is the 'business reality' of the situation which is relevant; it is not for a court or tribunal to recast the parties' agreement.

Therefore, whilst staff engaged on long-term agency / Bank arrangements and / or staff who are embedded within the end-user's organisation to high degree may seek to establish employment status (and all the benefits that go with it), they will not be able to do so if the written agreement between the parties adequately explains the nature of the relationship.  Similar principles would apply to agreements with self-employed contractors.

This thorny issue comes up on a regular basis in our work with our clients, and I and other members of the Employment team have successfully defended many claims by contractors and agency/Bank staff who have wrongly sought employment status. In order to retain the maximum amount of flexibility, following the principles in this case, you may wish to:

  • review your contractual relationships with agency / Bank staff and self-employed contractors to ensure that they reflect your intentions in respect of employment status
  • ensure that any future documentation includes sufficiently clear wording to limit the likelihood of an employer/employee relationship arising
  • take advice if you are unsure about the status of staff that are engaged through agency / Bank or contractor arrangements.

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