Contractors that have been assessed as ‘inside IR35’ by clients under the Off-Payroll legislation - the private sector implementation of which has now been postponed until April 2021 - may be able to secure full employment rights via an Employment Tribunal (ET) claim.
However, those considering action are advised to base their decision on the true nature of the engagement, as an ‘inside IR35’ assessment alone will not form the basis of a strong case if the working practices are akin to a contract for services.
Though previous ET rulings have held that contractors were employed by their end-clients, few have seen contractors stake a claim for full employment rights on these grounds. Nonetheless, with ‘inside IR35’ blanket decisions widespread, some contractors may view a retrospective employment rights claim as a means of securing some form of compensation for their ‘employed for tax purposes’ status, albeit an impractical and unpredictable route.
Could ET claims restore parity for ‘inside IR35’ contractors?
Despite presenting largely untested waters, Financial Secretary to the Treasury, Jesse Norman, recommended that ‘inside IR35’ contractors bring ET claims for employment rights in March 2020, stating: “Those who wish to challenge their employment status for rights can take their case to an employment tribunal, regardless of their tax status.”
Though many will view the requirement to pursue an ET claim for rights to accompany ‘employed for tax purposes’ status unjust, some contractors will consider the prospect of employment rights fair compensation for being rendered a ‘deemed employee’ by their client.
Case law applicable to this scenario is thin on the ground, and past cases have yielded mixed results. However, tax barrister Alexander Wilson of Invicta Chambers believes employment rights claims resulting from ‘inside IR35’ assessments are likely, despite their unpredictability. Not only this, Wilson points towards the case of Cable & Wireless v Muscat [2006] as one that might encourage some contractors to pursue a claim:
“In this case, a contractor succeeded in a claim for unfair dismissal on the grounds that he was an employee of the client by virtue of an implied contract,” comments Wilson. “This was a court of appeal decision which would take precedent over any ET decision on matters of law. It’s likely that we will see claims and my view, though untested, is that the Cable & Wireless v Muscat decision establishes a precedent that it can be done.”
ET claims need to consider the ‘reality of the engagement’
However, though an ‘inside IR35’ assessment may contribute towards a strong case for employment rights, contractors are advised not to undertake legal action based solely on a status determination:
“It’s important that the prospect of success be considered based on the reality of the engagement,” notes Wilson. “For example, if the client has simply deemed a strong contract for services to be ‘inside IR35’ in order to negate any potential tax liability risk, the contractor should expect to fail as the ET would pick up on the true nature of the engagement.
“That being said, if the engagement is genuinely deemed ‘inside IR35’, I can’t see how it is theoretically possible that you can have a ruling on employment status for rights that differs. Because the tests of employment are the same, the correct answer for one test can only be the correct answer for the other.”
What are the risks associated with an employment rights claim?
Before contemplating action, contractors should consider any previous engagements with their client, and specifically how they assessed their own status prior to the introduction of the Off-Payroll legislation.
The defence of any canny client will undoubtedly question the contractor about how they viewed their employment status before the burden for status assessments shifted onto the client. Wilson also notes that the possibility of HMRC monitoring tribunal activity cannot be ruled out:
“What contractors need to be conscious of is anything that could alert HMRC to the transition from outside to inside IR35, as this could increase the risk of a retrospective enquiry into their affairs. We can’t say whether HMRC would be keeping tabs on the tribunals to scope out potential targets, but you’d be unwise to disregard it as a possibility.”
The costs associated with bringing a claim are another obvious factor. Contractors are advised to consider the cost in terms of lost earnings, acknowledging that while they’re attending the ET they’re not receiving an income. And though an ET claim can be made at no cost, Wilson observes that contractors would be ill-advised to act without first taking legal advice:
“The risk and reward always need to be considered with regard to individual circumstances and I would always recommend taking advice if you can afford it,” says Wilson. “If you’re contemplating trying to secure employment rights off the back of an IR35 assessment, you ought to be getting a strong view on your actual employment status. Otherwise, any case made is unlikely to withstand the scrutiny of the courts.”
Employment Tribunal claims: processes and timings
Those who decide to make an ET claim must first notify the Advisory, Conciliation and Arbitration Service (Acas) of their decision. Acas’ ‘Early Conciliation’ service offers an opportunity to settle the dispute without going to court. If this route doesn’t work, Acas will send the individual an early conciliation certificate, which will be needed when making a claim to the tribunal. The claim itself can be made online via Gov.uk.
The respondent is usually required to reply to the claim in writing within 28 days of receiving the claim form. Once the respondent has replied, and provided details concerning their side of the case, the tribunal will decide whether there will be a full hearing. Claimants may be invited to a preliminary hearing with the judge to decide upon issues such as whether part or all of the claim can go ahead, as well as dates and times.
Once a hearing has been confirmed, the tribunal will typically issue a timetable for the exchange of relevant documents between claimant and respondent. Parties are not permitted to withhold requested documents, which may include contracts, payslips, or meeting notes. This is also the point at which parties should arrange any potential witnesses to provide evidence.
During the hearing, the claimant’s side will typically present their case first, before the respondent presents their case. Both parties can ask questions of the other. A decision will typically be sent to both parties within a few weeks of the hearing.
If the claimant wins, the tribunal can order the respondent to compensate the claimant and may require that the respondent cover any witness expenses incurred by the claimant. The respondent is not required to pay if they appeal the decision, in which instance the case will go to the Employment Appeals Tribunal (EAT). The respondent has 42 days to lodge an appeal.
If the claimant loses, they can ask the tribunal to reconsider the decision in writing within 14 days of receiving the decision. This request must be detailed and must provide legitimate reasons for reconsideration. Alternatively, if they believe that the tribunal made a legal mistake, the claimant can appeal directly to the EAT.
How can clients avoid legal action from ‘deemed employees’?
There are a range of measures that clients can take to avoid the risk of an employment rights claim. Engaging contingent workers via a fixed-term employment contract is one approach that affords the individual employment rights from the offset. Though inevitably a more expensive engagement model for clients, this at least leaves no scope for future disputes.
Similarly, clients might opt to engage individuals as agency workers, with more limited rights afforded to them by the Agency Workers Regulations 2010 (AWR). However, for firms that don’t wish to overhaul their means of engagement, Wilson offers a simple alternative.
“Be absolutely clear. People are falling into traps because they’re trying to put the cart before the horse. You either decide whether you want to take on employees or hire an external provider of services at an arms-length relationship, and you need to be up front and open about your decision. The contractor should also be clear as to whether they are in business. It’s a matter of honesty and communication.”
Wilson adds: “If clients are to engage contractors on a self-employed basis, they need to carry out their due diligence and take the necessary measures to ensure that this is the case. Obviously, this needs to be accompanied by a fair IR35 assessment and will help mitigate any perceived tax risk resulting from an ‘outside IR35’ determination.”