Cable & Wireless v Muscat Court of Appeal

It is a finance directors role, amongst other things, to find ways of
reducing overhead. Costs actually saved without affecting performance
is the ideal. Attributing costs to one type of overhead instead of
another can also have benefits, allowing budgetary targets to be met.

Traditionally one method for larger organisations to reduce and/or
reallocate cost has been to reduce headcount amongst employees. Laying
off staff removes the entire overhead but loses the resource, and thus
can affect performance. Converting staff from being employees to being
self employed however has enabled savings to be made without necessarily
affecting performance, and historically has provided the added bonus of
achieving hiring flexibility. Non employed staff do not need statutory
notice to end the contract, and do not have the right to claim unfair
dismissal or redundancy (or for that matter other pure employment
rights) – and so such staff can be fired at will. In addition employer’s
national insurance need not be paid, providing a saving of 12.8% on
“salary” overhead.

The same benefits traditionally have applied when new staff are hired on contracts that are not employment contracts.

To achieve these savings an employment relationship must be
avoided. To avoid employment a hirer will ensure that the worker signs a
temporary contract for services. A more prudent hirer may well use an
agency to resource and supply new workers the agency, on the face of it
taking over responsibility for entering into contracts with staff
subject to headcount reduction. Sometimes staff are asked to operate
through limited companies in an attempt to further push away any
semblance of an employment relationship. Having taken these steps a
finance director may feel content to allocate the overhead away from
“salary or wages”, and safely bag the 12.8% saving – job done.

However things are now no longer as simple as that. In a recent Court of Appeal ruling (Cable and Wireless v Muscat)
guidance in an earlier case (Brook Street Bureau v Dacas) has been
unambiguously upheld. In Dacas the Court of Appeal laid down clear
guidelines requiring any Tribunal to consider in every case whether a
worker is an employee of the hirer, largely regardless of any written
agency contracts.

The result is that non employed staff that are treated as employees
by the hirer may well now have full employment rights, and, if they do,
they are in fact employees for all purposes. This in turn means that
all of the benefits, the flexibility, the exclusion of rights to claim
unfair dismissal and so on, are lost. This applies to all categories of
temp staff including interim managers.

Temp staff can make claims to employment tribunals for enforcement
of employment rights including unfair dismissal, and are likely to
succeed if the criteria is met. If they do succeed not only will orders
for payment of  awards have to be met, but the Revenue will have to be
reckoned with. The Revenue is no longer shy in coming forward to claim
employment tax and national insurance if it considers there is an
employment relationship that has not been disclosed. In addition, wasted
management time will be irrecoverable from any source.

There are steps that can be taken to avoid such staff being treated
as employees. However there is no silver bullet solution and each
organisation will have different issues that should be confronted. It is
possible to arrange affairs so that a good degree of flexibility is
still retained without the risks. Some staffing agencies, even those
purporting to offer a managed service in this area, simply do not have
the expertise or process in place to provide real security in this area.
It would make sense therefore to obtain specialist independent advice,
to identify the risk not only relating to the worker, but also which
could be engendered by an unaware agency, and to devise a strategy for
dealing with it. This could restore the benefits of using temp workers.
However to ignore this issue following the ruling in Muscat would be to court disaster on a number of levels.

May ’06

To be kept up to date with this and other current issues which have an effect on your company and industry register for Agencyzone, Lawspeed’s free newsletter service.