Employment status: No further clarity any time soon

It’s official! No Employment Bill was announced in the Queen’s Speech, and so the raft of planned employment regulatory changes (that have been accumulating for some years) remains on hold.

Ministers say ‘minor’ employment legal rights changes, like the introduction of one week’s, self-certified, unpaid carer’s leave each year, may be attached to other Bills. Otherwise, the government position is that businesses are still recovering from the pandemic and this is not the time to increase employment legal regulation or add cost for businesses. With the price increases households face, however, some intended changes might have helped many workers, such as the introduction of a right to request a more stable contract for zero-hours workers with 26 weeks’ service.

Employment law still changes almost daily, but mainly by case law and so much less visible to businesses and other organisations.

‘Working status’ is an area often covered in case law, and an area in which the government has said it will regulate to provide clarity but shows no sign of grappling with it – despite the House of Lords’ recent reminder to the government, when looking at the off-payroll rules commonly known as IR35, that the Taylor Review recommended that tax law and employment law should be more closely aligned, and employment status not open to as much ambiguity as it is currently. This would allow businesses to easily determine the correct status to be applied.

Organisations without in-house employment tax and employment specialists will either need to be very nimble or well advised to assess the relevance and impact on their operations of these case law changes. Different legal cases covering the areas of employment rights and employment taxes have applied different treatments to tackle misdescriptions of status.

Employment legal status

One recent employment law case concerned a misclassification of travel sector personnel. An Employment Tribunal decided that an airline pilot was a ‘worker,’ though he had signed documents categorising him as self-employed. This was because the documentation he was told to sign was a sham. It had no purpose other than to try to defeat the argument that he had worker status, and therefore holiday pay and sick pay rights.

The airline he worked for as a pilot was not a client or customer of a profession or business undertaking carried on by him. Instead, he had a contract to supply services personally because every aspect of his engagement (including his uniform, roster and leave dates) was structured as the airline dictated.

Since he was not in business on his own account, and was supplied by an intermediary company (through which the airline dealt with all such pilots), he also met the legal definition of an agency worker. To be an agency worker, the work has to be temporary. Although he had a fixed term of five years, the Tribunal decided it was still ‘temporary’ because it was a time-limited appointment. Since he had worker status, an attempt by the intermediary to secure agreement from him to contract out of its Agency Worker Regulations obligations also failed.

This is a reminder to employers that Tribunals adjudicating on workers’ rights will look through people engagement structures and contractual terms that do not fit the reality of the working arrangements. Instead, they will give people the correct working status category, entitling them to the employment rights that go with that status. Any employers uncertain about the correctness of the working status category given to their people should check this and take legal advice.

Employment tax status

Two recent Court of Appeal judgments on employment tax regulation involving radio presenters, whose personal service companies were engaged by broadcasters to supply their services, provided guidance on the application of the employment status tests in the context of IR35.

In the first, Atholl House, the Court of Appeal ruled that, although there was a correct finding of mutuality of obligation and control, it was necessary to remit the case to the Upper Tribunal (UT) because the UT's application of the third Ready Mixed Concrete test (which requires an examination of all relevant factors) was flawed. While rejecting HMRC's submission that, when applying that test, courts and tribunals should focus exclusively on the terms of the contract, it agreed that facts arising after the tax years in dispute were not relevant. The Court of Appeal also agreed with the UT that the First-tier Tribunal had erred in applying the Supreme Court's decision in Autoclenz, confirming that such an approach was appropriate when analysing contracts in the context of applying legislation aimed at protecting vulnerable workers (as it was in the pilot’s case), but otherwise the normal principles of contractual interpretation applied.

In the second judgment, Kickabout, the Court of Appeal agreed with the UT's decision that there was an employment relationship based on the hypothetical contract, and noted that it had been for that tribunal to determine the weight allocated to the factors it considered when reaching its decision.

In both tax cases, the court emphasised that although findings of control and mutuality of obligation are necessary pre-requisites to employment, their existence did not create a presumption of employment. Instead, if those pre-requisites exist, the court's task is to examine all relevant factors, both consistent and inconsistent with employment, and determine, as a matter of overall assessment, whether an employment relationship exists. In doing so, the level of control and mutuality could be factors to be taken into account.

(HMRC v Atholl House Productions Ltd [2022] EWCA Civ 501 and Kickabout Productions Ltd v HMRC [2022] EWCA Civ 502 (26 April 2022)).

Conclusion

So, in summary, when vulnerable workers are asked to sign contracts which don’t reflect the reality, those contracts are ignored, and the correct status ascribed together with the working rights attached to that status. This does not apply in assessing hypothetical working relationships for tax status purposes where the old-fashioned idea of building up a kaleidoscope picture through a multifactorial approach remains the norm.

Businesses would be wise to keep this area continually under review to ensure they understand the risks and total cost of their workforce decisions. Government does not appear inclined to provide them with any greater clarity through a combined employment legal and employment tax status test any time soon.

How we can help

We can support employers who have not recently reviewed their workers’ employment legal and employment tax status to ensure they meet regulatory requirements. Our People Advisory Services specialists also cover both of these employment legal and employment tax status areas cohesively together for organisations. For more information, please contact Carolyn Brown or Susan Ball.