UK tribunal decides individual was agency worker despite use of PSC

The underlying dispute in the case concerned the wrongful deduction of employer’s National Insurance contributions (NIC) from a social worker’s pay. However, the ruling is significant for having determined that the social worker could be assessed as having worker status, despite being engaged by a business through a PSC. The case also provided interesting commentary on the court’s approach when determining a genuine business-to-business arrangement, according to labour supply and tax law experts at Pinsent Masons.

The claimant in the case was a social worker contracting via her own PSC with a recruitment firm to undertake work for the Home Office. The tribunal held that, despite being engaged through the PSC, she was in fact an agency worker and so was entitled to the protection of worker rights.

The tribunal considered the fact that she worked full time for the Home Office, which supervised, directed, and controlled what she did. As a result, the PSC was deemed to be no more than a vehicle for the payment of the social worker’s work and practically there was no difference in substance with a social worker engaged as an individual.

The tribunal noted that excluding the social worker from employment law protections because she had opted to work and receive payment through a PSC would erode statutory employment law protections.

Rami Labib and Penny Simmons of Pinsent Masons said the ruling is “a good reminder” for end user clients engaging PSC contractors and other off-payroll workers of the importance of undertaking comprehensive assessments of their supply of labour arrangements to ensure compliance with employment law and the agency rules, and to manage wide-ranging employment tax risks.

“Typically PSC contractors aren’t considered to be agency workers where they are truly in business on their own account. However, this recent decision is a good reminder for end user clients engaging PSC contractors, via an employment business or otherwise, that they cannot simply assume this,” said Labib.

In reaching its decision, the tribunal examined the form of the contract between the employment business and the PSC and said it wasn’t one of business-to-business, but rather was an agency worker relationship. Although there was a clause in the contract with the social worker’s PSC stating that the arrangement did not create an employment relationship or a contract of service, the tribunal concluded this “did not reflect the reality of the situation”, which was that the social worker was an agency worker.

“End user clients who are engaging PSC contractors should carry out a proper assessment on whether their arrangements are truly reflective of a business-to-business arrangement and whether the worker is truly in business on their own account. The fact that there is a contract between two limited companies does not automatically mean that there is a business-to-business relationship,” he said.

He added that end user clients should also make sure that their contractual arrangements with employment businesses supplying them with PSC workers are fit for purpose in order to mitigate this risk.

The ruling is also important for businesses in the context of the off-payroll working rules, known as IR35. The IR35 rules apply where a business engages an individual to provide services off-payroll and through an intermediary - commonly a PSC. IR35 targets the use of PSCs to avoid employment taxes.

Simmons said: “The tribunal’s decision is unsurprising, since it is established law that businesses cannot pass on the costs of employer’s NICs to workers, even those engaged through PSCs. Where an individual is paid through the PAYE system, the employer’s NICs cannot be deducted and instead they are separate costs to be borne by the engaging business.”

“The case is interesting because it is a reminder to businesses that when engaging with contractors and off-payroll workers and seeking to manage IR35 and employment tax risks, it is always important to consider the commercial and employment impacts of an engagement. IR35 and employment tax planning cannot be undertaken in isolation. Decisions need to be reached after proper consideration of the wider legal impacts of an engagement structure,” she said.