When is a recruitment agency the “employer” of its candidates?

Background

In Appiah v Tripod Partners Ltd, Ms Appiah was an independent social worker who used a recruitment agency, Tripod Partners, to obtain work on an assignment with the Home Office. As a non-small business and the end user of Ms Appiah’s services, the Home Office carried out a status determination, as required under the off-payroll working rules. This status determined confirmed that IR35 applied, such that Ms Appiah ought to be taxed as an employee.

Where an engagement falls within IR35, the off-payroll working rules require that the individual’s “deemed employer” be responsible for deducting income tax and employee National Insurance. They are also required to pay employer’s National Insurance themselves, unless an exemption applies.

If you are interested in learning more, we have discussed IR35 and the off-payroll working rules in more detail elsewhere – you can find links to these articles at the bottom of this page.

The “deemed employer” for the purposes of the off-payroll working rules is usually the party responsible for paying the individual’s fees – in this case, Tripod.

Tripod explained to Ms Appiah that her options were to either engage with them:

• through an umbrella company (as she had done previously);
• under PAYE; or
• through her own personal service company (PSC).

Ms Appiah decided to proceed via the PSC route, and established a PSC to enter into a contract for services with Tripod on this basis. This contract was framed as being a contract between two businesses – Ms Appiah’s PSC and Tripod – rather than the contract of a worker or employee with their employer.

Once the contract was in place, Tripod began making deductions for income tax, employee National Insurance and employer’s National Insurance from Ms Appiah’s earnings. Ms Appiah accepted that Tripod were entitled to deduct income tax and employee National Insurance from her pay, but asserted that they had acted unlawfully by deducting the employer’s National Insurance. Tripod defended the claim on the basis that Ms Appiah was not a worker and that she was therefore not entitled to bring a claim for unlawful deductions.

Tribunal’s decision

The key issue for the Tribunal to determine was whether Ms Appiah was a worker for the purposes of the Employment Rights Act 1996, and therefore able to bring a claim for unlawful deductions.

Although the contract was between Ms Appiah’s PSC and Tripod, this alone did not decide the issue. In determining whether there is an employment relationship for the purpose of employment rights, employment tribunals will consider the arrangement between the parties in practice, not just what is written in the contract.

In practice, Ms Appiah worked full time on her assignment with the Home Office, always performing her services personally (rather than using a substitute). She also submitted timesheets to Tripod, rather than invoices, in order to receive payment. These actions suggested that she was not genuinely operating her own personal business and meant that neither Tripod nor the Home Office could be seen as her clients.

As such, the Tribunal found that Ms Appiah was a worker. Having established this, the Tribunal confirmed that she was protected by the same statutory provisions as an employee would be, and therefore had the right to bring a claim for unlawful deductions. Under section 13 of the Employment Rights Act 1996, an employer can only make deductions from wages if:

• the deduction is authorised by a statutory provision;
• the deduction is governed by a term in the worker’s contract; or
• the worker has provided written consent to the deduction.

Tripod sought to argue that Ms Appiah had provided written consent in communications outside of the contract, as Tripod had set out in various emails that “all employment taxes” would be deducted from her pay. However, the Tribunal rejected this argument, on the grounds that it was not reasonable to assume that this would include employer’s National Insurance and Ms Appiah did not provide written consent in response in any event.

Tripod also argued that Ms Appiah ought to be responsible for the employer’s National Insurance, on the basis she was an employee of her own PSC (and therefore not an employee of Tripod). This argument failed because the off-payroll working rules provide that the “deemed employer” will remain responsible for the payment of all income tax and National Insurance, regardless of how the other party is engaged.

The Tribunal concluded that Tripod had been making unlawful deductions from Ms Appiah’s earnings in respect of the employer’s National Insurance right from the start of the engagement. As such, they were ordered to reimburse Ms Appiah for the full amount that had been unlawfully deducted from her earnings.

Comments

This case highlights the importance to businesses of carefully considering the actual working arrangements when engaging consultants. Having an express term in the contract which states that the consultant is not a worker, or otherwise framing the relationship as one of principal and consultant, will not suffice if the arrangement mirrors an employment relationship in practice.

We would always strongly recommend obtaining advice before entering into such an arrangement. If you have any questions regarding deemed employment status, please do get in touch at [email protected]