Payroll and umbrella companies targeted in latest landmark employment judgment

Following the recent spate of important judgments to affect the employment status of works (such as Uber and Deliveroo workers, amongst many others) the Employment Appeal Tribunal (EAT) has today delivered a judgment in regards to the use of payroll companies (often referred to as ‘umbrella’ companies) which could have wide reaching implications, not only for the recruitment sector, but also for many companies that engage workers in this way; something quite common in the construction and IT sectors for example.

A pipefitter, Russ Blakely, supported by his union Unite, brought a claim against an employment agency (On-Site Recruitment Solutions Limited) and also the payroll company Heritage Solutions City Ltd, through which he was engaged. His claim was for the unlawful deduction of wages and employer’s national insurance contributions as well as the non-payment of holiday pay.

Having lost his claim at the Employment Tribunal, on the basis that he was not a worker, the EAT today delivered their judgment (full judgment here) which overturned that decision in what is thought to be the first appellate level consideration of a challenge against the alleged self-employment status of an individual contracted via the use of a payroll company.

The EAT held that:

• The tribunal was wrong to decide that Mr Blakely was not a worker.
• When determining whether there was a contract (part of the test of whether someone is a worker) the tribunal must consider the intentions of the worker and all surrounding circumstances, not just the intentions of the employer.
• There was a contract between Mr Blakely and On-Site (the agency) - importantly, the use of a payroll company did not circumvent this relationship.
• Mr Blakely (and therefore other agency workers being paid through payroll companies) could be a worker of the agency, the payroll company or both.

The case has now been returned to the employment tribunal, to determine who was Mr Blakely’s employer, whether it was On-Site, Heritage or both, and then to assess compensation.

This is an extremely important EAT decision and whilst it is premature to conclude that this will bring about the demise of umbrella companies, it would also be naïve to underestimate its potential impact. It is my understanding that over 200,000 professional contractors in the UK operate via some form of payroll or umbrella company and the implications for them, any employment agency that has assisted them, the payroll company and the ultimate end-user, the client or as it may now transpire the employer, are significant. Further, the use of a structure such as this in the non-professional sector, as we can see in Mr Blakely’s case, is likely to be even more fraught with danger. Many parties who operate in this way are going to need to urgently undertake a risk assessment of their position and may need to consider preventative measures, but each case is going to be different and, as I say, it is too early to reach any sweeping conclusions.

Unite are perhaps unsurprisingly bullish about the significance of the EAT’s decision, commenting via their assistant general secretary Howard Beckett that “It blows a hole in the way that employment agencies hide behind payroll and umbrella companies and pretend that they are not responsible for the employment of the workers they recruit. The fact the EAT held that a worker could be jointly employed by two organisations is a game changer in the campaign against bogus self-employment. Unite will be ensuring that the EAT’s findings are fully utilised to ensure that other workers are not denied their basic employment rights or exploited by agencies and parasitical payroll companies.”

For any clients or prospective clients that wish to obtain advice on this matter, please either contact me or our Employment Team.