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IR35 employment status tests for contractors are not relevant to AWR, and vice versa

The tests used to determine employment status for IR35 are not necessary when considering a worker’s status under the Agency Workers Regulations (AWR). That’s according to employment law expert Adrian Marlowe of the recruitment law specialist Lawspeed.

He says that, despite early draft guidance from the Department for Business, Innovation and Skills (BIS), IR35 employment status tests and AWR agency worker tests should not be linked.

There is a clear difference between the two, as Marlowe explains: “Under IR35, it is the two-way relationship between the client and the contractor under scrutiny. For AWR to apply there must be a tripartite relationship between the worker, the hirer and an agency.”

AWR tests are about whether workers are ‘agency workers’, not whether they’re ‘employees’

Early drafts of the BIS guidance for recruiters and hirers referred to ‘tests’ devised by the courts to establish employment status, as well as to Business Link guidance on employment status. Both of these cover IR35. But BIS removed mention of IR35 and its employment tests from later versions.

As Marlowe explains, under AWR the objective is not to determine whether an individual is employed or has an employment relationship with the client, but whether they are an agency worker.

“The starting point is that an individual who is supplied to work under the direction and supervision of a hirer is always an agency worker,” he says. “This is regardless of any hypothetical employment tests such as are used to determine IR35 status.”

That is a subtle but vital distinction, which helps clear up the apparently contradictory nature of the IR35 and AWR tests.

The starting point is that an individual who is supplied to work under the direction and supervision of a hirer is always an agency worker

Adrian Marlowe, Lawspeed

“Carrying on a profession or business undertaking”

Another key change since the early guidance from BIS is a more recent inclusion that helps to show that if an agency worker is “carrying on a profession or business undertaking”, it is possible to be taken out of scope of the AWR provided they have the right contract.

“The draft guidance was not clear on the status of individuals running a business, such as contractors,” says Marlowe. “It was always the plan to allow genuine business-to-business relationships to be excluded from the scope of AWR and there are options within the regulations for this. It was important that the guidance reflected or referred to those options to exclude such contractors.”

Highlighting some continuing confusion over this, Marlowe says it is important that hirers and agencies understand that contractors genuinely in business and working through a personal service limited company could be outside the scope of AWR but only if the right contract terms are in place and agreed with the hirer. “There is no automatic exclusion of contractors from scope, a point that Lawspeed has been emphasising since the AWR was published,” he adds.

Contractors can be in scope of AWR but outside of IR35

The two pieces of legislation are unrelated and the tests used to define an agency worker are different from those used to define an employee under IR35. It is therefore possible for a contractor to be an agency worker for the purposes of AWR and not a ‘disguised employee’ for the purposes of IR35.

Marlowe explains: “To be an agency worker, the individual must be under the supervision and direction of the hirer. To be a disguised employee under IR35, there are various tests, one of which is whether the worker is under the control of the hirer, their quasi-employer. ‘Control’ and ‘supervision and direction’ are not the same thing.

“A worker can be under the supervision and direction of a hirer, but it does not automatically follow that the worker is under the hirer’s control. So a limited company contractor could claim equal pay and rights under the provisions of AWR and not be concerned that this places them automatically inside IR35.”

Exclusion from AWR could demonstrate a contractor is ‘in business’

However exclusion from scope under the AWR would help a contractor to demonstrate a commercial relationship which in turn would be supportive for the purposes of IR35.

“Lawspeed sought counsel’s advice on the status of contractors working through personal service companies (PSCs),” continues Marlowe. “The opinion supported our view that a PSC is a business undertaking, and the regulations allow individuals carrying on a business undertaking to be excluded. It is important to note that this does not extend to umbrella companies.”

Marlowe confirms that the opposite could also be true; a PSC contractor could be inside IR35 and not be in the scope of AWR. However, he says care should be taken over interpreting the regulations, as they will only be properly tested in the courts in the months and years after they come into force on 1 October 2011.

A worker can be under the supervision and direction of a hirer, but it does not automatically follow that the worker is under the hirer's control

Adrian Marlowe, Lawpeed

BIS guidance adapted to meet industry concerns

Feedback from the Association of Recruitment Consultancies (ARC), of which Marlowe is also chairman, and the industry led to BIS removing the link between IR35 employment status tests and AWR agency worker tests, explains Marlowe.

“After the draft guidance was published in April 2011, ARC worked with BIS and hosted an event at the BIS conference centre, which we believe to be the first of its kind. Hirers, recruiters and other organisations, including contractors, were invited to provide feedback on the draft guidance directly to the civil servants actually managing the process.”

Marlowe says: “It was following feedback from ARC and other delegates at the event that plans to include IR35 in the guidance were dropped by BIS officials. This was a welcome move as it avoids the potential misleading impression that could have been given had inclusion of IR35 tests been retained. Hopefully the picture is now much clearer. ”

Published: 13 July 2011

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