Tech contractor secures full employment rights

A laid-off techie was right to say employment rights entitled him to claim unfair dismissal, despite being engaged as an independent contractor on a project with just a week's notice.

The ruling, obtained by CUK from the case lawyers, is being seen as a landmark decision, for potentially allowing contractors inside IR35 to claim employment rights from their end- users.

It is also signals, with more certainty, that previous guidance on employment status in past hearings is still central to deciding the outcome of future IR35 cases or employment disputes.

In this case, a Watford employment tribunal cited standards used to determine employment status in James V Greenwich Borough Council, where full employment rights were refused.

However unlike James, who was not controlled like an employee, the techie in this case, Andrew Tilson, was directed, supervised, controlled and "absorbed" by his 'client' Alstom Transport.

Working in technical roles for the firm, Tilson was answerable to a line manager; had all his training and equipment paid for; and could not supply a substitute, nor take leave as he liked.

Completing his employee-style profile, Tilson could hire staff, attend external meetings and negotiate contracts for Alstom, which maintains train fleets for London Underground. He was also permitted to buy the company's materials.

Ruling in favour of Tilson, Judge Smail said the close working proximity between the engineer and Alstom was the critical factor in determining that he was an employee, not self-employed.

Solicitors at Harold Benjamin, which represented Tilson, agreed, saying that the control that their client was under was the "key" determinant, before issues of tax, or how he was billed.

Yet these other signs for determining employment status, including mutuality of obligation and the structure of the vehicle used to supply services, also pointed away from self-employment.

Tilson was not a director or a shareholder of the limited company – Silversun Solutions Ltd - that supplied him to Morson Human Resources Ltd, his recruitment agent.

In fact, although named 'Contractor' on the contract, Silversun "provided no technical services at all," it merely signed the contract and passed on pay to Tilson, minus a service charge.

Judge Smail added: "He [Tilson] will have had a verbal agreement with Silversun whereby it was agreed that they would pass on to him less the 3% service charge any money received by them in respect of work" at Alstom.

Overall, he continued, Tilson's use of Silversun "amounted to a payment mechanism nothing more," which Tilson himself let on, by saying he saw self-employment as having tax advantages. There was no contract between the two parties.

Since the ruling, advisors at BFCA have said recruiters cannot expect to contract with 'payment mechanism' firms without risking exposure to employment rights and tax problems.

The chartered accountant also says that clients must ensure recruiters check they are contracting with appropriate entities, such as a limited company of which the contractor is a shareholder.

Tilson, who wasn't and used the limited company only as a cashier, outright refused Alstom's offer of full-time employment, citing concern about losing his tax-efficient status.

But evidence that Tilson took advantage of the tax position of self-employment was not disclosed in the tribunal, seemingly because he kept his tax affairs to himself.

"Silversun deducted nothing for tax and national insurance," the judge said in the ruling, handed down in March. "That was all handled by the claimant [Tilson]. At least I assume so.

"When it came to matters of taxation, the claimant was at best reticent. The claimant produced no tax returns or annual accounts."

This indirect invitation to HMRC became more glaring, when judge Smail concluded that "what his [Tilson's] tax employment status should be; might be an issue for the tax authorities".

If HMRC were to examine the contractual terms as a guide to Tilson's tax employment status, they would be of little use, as none of the contracts available reflected the working reality.

"The contracts that did exist created no more than a mechanism for payment," the judge ruled. "The mechanism involved an attempt to engineer a structure that deflected the possibility of an interpretation of employment."

Partly, it is the uniqueness of Tilson's structure why this case "does not automatically mean" that all other contractors who believe themselves to be inside IR35 could successfully claim employment rights, said BFCA.

Tilson was also not a 'contractor' in the strictest sense of the word, as Kate Cottrell, an IR35 adviser at Bauer & Cottrell explained.

"It seems everyone is shouting that this case opens the doors for those caught by IR35 to claim employment rights, but perhaps we should concentrate on the definition of a 'contractor' which in this case is an agency worker going through an agency, and a 'solution' as opposed to someone running a PSC where IR35 is the issue.

"We have two totally different types of 'contractor' here. For the Conduct of Employment Agencies Regulations (2003), the BERR uses the term 'work seeker' and 'incorporated work seeker' to differentiate."

Yet Cyril Dennemont, head of employment law at Harold Benjamin, cautioned that "contractors working in a similar way to Tilson, could unknowingly find themselves treated by the tribunals as employees."

He argued: "Where a sub-contractor has duties and tasks similar or identical to a permanent employee within a company, then that person could well find themselves treated as an employee because the distinction between self-employed and employed status fades away.

"And with employee status comes a whole raft of employee benefits such as unfair dismissal claims and other benefits such as maternity and paternity leave, holiday pay and pension entitlements."

To reduce the risk of a heftier bill for staff costs, BFCA said clients and recruiters need to accept that they either provide working conditions that are of a contract nature to contractors, or hire employees.

"They cannot continue to expect to control contractors like employees and have the 'best of both worlds,'" said the firm's Phil Jones. "[In other words they cannot continue to] expect to have the flexibility of a contractor and the control."

In Tilson's case, he was asked by Alstom to leave his role as technical manager, which he started in August 2004 on a project with a week's notice, following a "complaint of some description" in November 2006. The project was due to run until completion.

But Tilson had worked at Alstom since March 2003, firstly as an engineer. The resulting passage of time perhaps explains why he was "regarded as an employee albeit paid as a contractor", as his line manager volunteered to the tribunal.

Based on all the evidence, Judge Smail said he found mutuality of obligation in terms of the provision and performance of work, and "there would have been implied duties of fidelity and mutual trust and confidence."

Having concluded, then, that by most tests for employment status that Tilson was directly employed, the judge said that his termination was indeed a dismissal, for which he could claim by filing a Schedule of Loss.

Martin Hesketh, managing director of Brookson, cautioned that if Tilson has been paying tax as if outside IR35, the compensation due from his claim was "unlikely to outweigh the tax bill" from the Revenue.

Asked yesterday about the case, the Professional Contractors Group (PCG) responded: "PCG members are in business in their own right and want to be acknowledged as such; they are freelancers, the majority of whom are set up as limited companies. They do not want to be employees or seek employment rights."

John Brazier, managing director, said: "IR35 is a complex legislation and one which we are campaigning on vehemently in the hope that it will be abolished in favour of a fair and equitable tax system."

Editor's Note: Related Reading -

The tax tangle of the freelance who cried employment

Tech contractor wrongly given employment rights

Court rejects agency worker's claim to be an employee

Employers can treat agency staff as their own