Does the recent ET decision in Thompson v Paymaster (October 2013) doom the umbrella model?

The decision of an Employment Tribunal on 4th October 2013 meant that 6 individuals supplied as agency workers through the umbrella provider Paymaster were neither employees nor workers of Paymaster despite being signed up on written employment contracts, writes Adrian Marlowe of the recruitment and employment law specialist Lawspeed.

Paymaster had gone into receivership leaving the workers, an HGV driver, a seamstress, clinical support workers and a security guard, unpaid. All were being supplied through various employment businesses. The individuals were trying to obtain payment as employees of the umbrella company from the government under s.182 of the Employment Rights Act, which requires the Secretary of State (SoS) to cover arrears of pay, and as a result the SoS was a party to the claims.

The person responsible for paying the workers was Paymaster, not the supplying agency or the end user. Because of this and the arrangements between Paymaster, the supplying agencies and the individuals, which appear to be largely typical and in line with regular agency umbrella arrangements, the claimants had no entitlement and were left without any recourse. This decision seems perverse but it does highlight some worrying aspects on a number of different levels and so it is worth careful review.

First of all, all the individuals were agency workers entitled to all agency worker rights under the Agency Workers Regulations, but this did not feature at all in the case, which focused on whether unpaid wages should be made by the SoS.

Secondly, the Judge correctly identified that unless the individuals are actual employees of an umbrella company in this situation, they could not be ‘workers’ as defined by the Employment Rights Act or indeed ‘agency workers’ as defined by the Working Time Regulations for the purposes of claims for payment from the SoS. So far so good.

However the Judge concluded that Paymaster was not the employer, thus leaving the workers out in the cold despite the fact that they had each been engaged on a document described as an employment contract. This decision is critical, so why this outcome?

The written contract appears to be a fairly typical employment contract used by an umbrella company. This included an obligation by the employee to perform duties required by the employer ‘which may be set out in an assignment schedule’ and required the employee to devote time and attention to the duties required. It was accepted that there was mutuality of obligation, a crucial element necessary for there to be genuine employment.

All the same, in all the cases the Judge decided that the umbrella did not exercise sufficient ‘control’ for there to be an actual employment relationship, and indeed the contract ‘did not reflect what the parties agreed’, ‘parties’ referring to the individual the agency and the umbrella company. So what was missing? The answer to that is not clear.

Whilst there were no written assignment schedules provided by Paymaster, and the workers typically took their cue from the agencies rather than Paymaster, the contract did require the workers to perform duties. It is not clear that the law requires an employer, to be an employer, to direct the workers or do anything more than provide workers, who under contract agree to follow the instructions of the client, in this kind of case. Control in agency worker cases is often ceded to the end user.

Although it is not usually necessary to look behind the contractual terms, the Judge felt it necessary to do so even though the workers had historically been paid by Paymaster. Instead the Judge appears to have relied on the statements by the workers that they were pressured by the agencies into signing agreements with Paymaster, and that it was the agencies who directed where they should work. The question as to whether they wanted to be employed, to which the answer may have been yes, does not seem to have been put, but the conclusion was that the parties had not intended there to be employment.

Looking at it another way, had Paymaster not been insolvent it is hard to see that Paymaster could have successfully argued that it was not the employer, for example, if the workers had claimed that their employment rights had been infringed.

In addition, if Paymaster was not the employer and the individuals were not workers or agency workers, what was their (individual) status? And what was the status of Paymaster? If it was not an employer or hirer then what was it – a subcontractor? There seems to have been no investigation into the contract between Paymaster and the agencies. If Paymaster was just a payroll company, as appears to be the suggestion, then the agencies concerned are probably still liable for the payments. None of these points seem to have been argued, and this can be explained. The claimants were lay persons representing themselves and it should be noted that it was not in the interests of either Paymaster or the SoS to put other arguments forward.

So is this an important decision in the scale of things? Not in my view.

The outcome is obviously unsatisfactory particularly for the individuals concerned, and it reflects badly on the industry (and dare I say it the SoS and the legal system). However umbrella businesses should not over react for a number of reasons. This case is in the Employment Tribunal and does not set a binding precedent. The Judge was dealing with the issues in a technical way for the purpose of determining SoS liability. I do not think the decision concerning employment status was right, but this may be because the Judge based the decision on what was said by lay people who had no independent representation. The usual rule is that if you sign up to an agreement you are bound by it (particularly if you have received the benefit of it, e.g. receipt of payment) and statements from lay people indicating a lack of understanding should not change that default. But that is for the Judge to decide at the time.

What this decision does highlight is a need for agencies to check arrangements with umbrella companies they are dealing with and the contractual and practical arrangements they have in place, so that this kind of misunderstanding is minimised. At the same time umbrella companies should ensure that their contracts and practices do genuinely reflect employment arrangements that are properly explained to the employees.

Finally, I had thought the government was keen to support vulnerable individuals in this kind of position rather than rely on technicalities. Let’s face it, the claimants had done the work and should be paid.

Adrian Marlowe
Managing Director
Lawspeed