Umbrella company tribunal cases are opening up; are your wages subject to unlawful deductions, too?

We’re not even at the end of its third quarter but 2023 has already seen quite a lot of activity on umbrella companies.

The government’s consultation on tackling non-compliance in the umbrella market has finished canvassing views, and there are three new umbrella company cases, concerningly, all on the unlawful deductions of wages, writes Rebecca Seeley Harris of ReLegal Consulting.

To appeal or not to appeal?

All these cases were in front of the Employment Tribunal (ET). Judgments from the ET do not set a precedent, so other judges do not have to follow them but, each of the three could be considered as persuasive.

Indeed, it may be that some of the invovled umbrella companies may not want to appeal, because a decision at the Employment Appeal Tribunal which goes against them would set a precedent.

1. Binns v. Umbrella Company Ltd [2023] ET 2402352

In March 2023, there was another case of unlawful deductions by Umbrella Company Ltd --  the first being Zajota v. Umbrella Company Ltd [2022] in September 2022. In that initial case, the tribunal held that there had been no unlawful deduction of wages. The tribunal did consider the Zajota case in the Binns cases, but considered that there were factual differences.

In Binns, however, Mr Binns was claiming for both an unlawful deduction of employment costs, holiday pay under the Working Time Regulations (WTR) and a breach of the Agency Workers Regulations.

The Binns case centred on rolled-up holiday pay

The Binns case concerned rolled-up holiday pay and whether it had been included or rolled-up into the agreed hourly rate of pay, or whether it had not been paid on top of the agreed hourly rate. Also, whether because of this practice, Binns was denied the entitlement to take annual leave.

In Binns, the issue was -- what was the hourly rate Binns should have been paid? Well, the tribunal found that it had not been clearly explained to Mr Binns by either the recruitment agency or the umbrella company that ‘employment costs’ would be deducted from the assignment rate.

Umbrella Company Ltd was held to be in breach of the WTR for refusing Mr Binns's entitlement for paid annual leave and was also in breach of contract for not paying holiday pay at the rate of 12.07% on top of the per hour gross pay.

2. Pajpani v. DNS Umbrella Ltd [2023] ET 3309112

In March of this year, it was ruled that DNS Umbrella Ltd made an unlawful deduction of wages and was ordered to pay £29,885.12 back to the worker, Mr Pajpani.

And if ‘rolled up holiday pay’ was the term which the Binns case focused on, in the Pajpani case the term at the fore was:

‘Umbrella company basis’

As the judgment records, DNS Umbrella  made deductions for Employer’s National Insurance and the Apprenticeship Levy.

A Key Information Document had been provided and Mr Pajpani had a contract of employment. The rate was stated as “£800 per day on an umbrella company basis”.  But the term “on an umbrella company basis” was not specifically defined anywhere in documents presented to the tribunal.

Mr Pajpani claimed that he did not understand what being paid “on an umbrella company basis” meant and the tribunal accepted his evidence. 

Contra Proferentem

The case was decided in favour of the worker (Pajpani) on the basis that there was ambiguity, and the ambiguity was construed against the umbrella company which was seeking to rely on it.

This is a rule of contract law called ‘contra proferentem’ and is quite unusual so, in this instance, the Pajpani ruling is probably not one to rely on.

3. Collins v. Amaze Umbrella Ltd [2023] 2300419

In July 2023, it was heard that Ms Collins claimed that Amaze Umbrella Ltd had made unlawful deductions from her wages but also, had breached the WTR by paying her rolled-up holiday pay. 

First, it is worth acknowleding that the tribunal judge spoke of being“entirely unsurprised that the claimant found these arrangements confusing.” 

The tribunal found, however, that Amaze had explained the rates to Ms Collins -- and that they had also been clearly explained in the contract of employment. As a result, the tribunal held that there had been no unlawful deduction of wages and that the rolled-up holiday pay had been properly paid.

Clearly explained?

On reading the judgment in Collins, I agree that it is entirely unsurprising that contractors would find the arrangements of an umbrella company confusing. Not only the arrangements but the case law too.

The differences in these cases, including Zajota of 2022, is the factual matrix.

In Zajota, the tribunal found there had been no unlawful deduction of wages because the decisions had come out of the assignment rate and not the wages.  In Binns, the tribunal found that it had not been clearly explained that the employment costs would be deducted from the day rate.

In Pajpani, the tribunal found that there was sufficient ambiguity in the phrase ‘on an umbrella company basis’ to hold the umbrella company liable for the breach. And finally in Collins, the tribunal found that the terms had been clearly explained so there was no unlawful deduction of wages.

Government, it’s over to you…

The moral of this sudden opening up in umbrella tribunal cases? It is up to umbrella companies (and recruitment agencies in the chain) to make sure that the rates they pay to contractors are clear and that such workers know exactly what they are going to get paid. The Key Information Document is, well, ‘key’ to this understanding. And this is hopefully something that will be addressed by the now-closed umbrella company consultation -- it is certainly an area that I brought to officials’ attention in my submission, so the government has no excuse if it truly wants to unburden our burdened tribunal system and in turn, we’d see fewer umbrella companies dragged through the courts with unhappy contractors in tow.

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Written by Rebecca Seeley Harris

Rebecca is a leading expert in employment status, IR35 and the law involving independent contractors and the self-employed for the purposes of tax and employment law. Rebecca has run her own consultancy for the past 20 years covering all employment status issues such as off-payroll in the private and public sector, otherwise known as IR35, s.44 and any issues affecting the self-employed and personal service companies.
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