Employment Status & IR35 expert Re Legal Consulting Ltd
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Off-payroll: PSC and employment rights

Directors of PSCs may be able to claim employment rights if their PSC is ruled to be a deemed employee under the off-payroll (IR35) rules from 6 April 2020. Rebecca Seeley Harris uses employment case law to show how this can happen.

29th Oct 2019
Employment Status & IR35 expert Re Legal Consulting Ltd
Columnist
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Barclays Bank and Lloyds Bank have already declared that they will no longer be using limited company contractors or personal service companies (PSCs) other than through payroll having declared them all inside IR35.

In assessing the PSCs, the banks are effectively saying they do not pass the employment status test as self-employed. The corollary being that the PSC’s employment status is employed, rather than self-employed. The difficulty being that the PSC does not get any employment rights as they are only deemed employees for tax purposes. What exactly is their position under employment law?

Not an individual

The initial assumption is probably that the PSC is not entitled to employment rights because it is a limited company and, therefore, a separate legal entity. But could the PSC bring a claim to the employment tribunal?

If the PSC brought a claim to the tribunal, the tribunal would have to decide on a preliminary issue whether they had jurisdiction to hear the claim in the first place. The jurisdictional issue would be whether the claimant was either an employee, a worker or self-employed. This is exactly what happened in a case in 1994 where a disgruntled individual, who was providing their services through a limited company or PSC, brought a claim for unfair dismissal.

Case of the journeyman

In Catamaran Cruises Ltd v. Williams [1994] IRLR 386 EAT, Mr Williams was providing his services as a journeyman through a limited company Unicorn Enterprises Ltd to Catamaran Cruises. In 1988, the Inland Revenue (as it was then) told Catamaran Cruises that all their journeymen were employees for tax purposes. Catamaran Cruises then gave Williams the option of being paid under PAYE or to provide his services through a limited company.

After consulting his accountant, Williams opted to provide his services through a limited company.  Sometime afterwards Williams had a disagreement with Catamaran Cruises and had his contract terminated. He then put in a claim for unfair dismissal.

In order to claim unfair dismissal, Williams had to prove that he was an employee, not just a worker. He was asking the tribunal to disregard the imposition of his limited company and hold that he was in reality an employee. Catamaran Cruises argued that the formation of a limited company had the effect of creating a separate legal entity which operated between Williams and Catamaran and the existence of the which meant that Williams could not be regarded as an employee.

The Employment Appeal Tribunal (EAT) stated: “There is no rule of law that the importation of a limited company into a relationship such as existed in this case prevents the continuation of a contract of employment. If the true relationship is that of employer and employee, it cannot be changed by putting a different label upon it.”

The EAT continued: “In our view, it is a question of fact in every case whether or not the contract in question is one of service or a contract for services. We accept that the formation of a company may be strong evidence of a change of status but that the fact has to be evaluated in the context of all the other facts as found.”

Recent cases

In two more recent cases, individuals supplying their services through a limited company have been found to be either an employee or a worker. These cases obviously turn on their facts, but they are persuasive.

In 2018, in Sprint Electric Limited v Buyer’s Dream Limited [2018] EWHC 1924 (Ch), the High Court held that the director of Buyer’s Dream Limited who was engaged via his PSC was an employee of Sprint Electric Ltd. The case concerned who owned the intellectual property in some source code but, the judge determined that the PSC was a mere “tool or device” and the “true relationship” was one of employment, based on facts such as personal service.

In the most recent case of Community Based Care Health Ltd v Dr Reshma Narayan [2019] UKEAT 0162/18, Dr Narayan was held by the EAT to be a ‘worker’ for employment rights purposes despite providing her services through a limited company.

It had been found that the doctor had been integrated into the operations of Community Based Care Health Ltd (CBCH Ltd) and that CBCH Ltd was not the doctor’s client. As a worker, the doctor is entitled to all the day-one rights of an employee but, the main difference is that the worker is not entitled to unfair dismissal or redundancy. The main cost to the employer of a worker is holiday pay, especially if it is backdated.

Conclusion

There are obviously judgments to counter this argument that a PSC may be able to get employment rights but, these cases are persuasive. However, what has a contractor got to lose, now that taking a case to the employment tribunal is free?

Replies (2)

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By vstrad
30th Oct 2019 11:22

A good article. I've posited on here before that it's only a matter of time before someone in deemed employment goes to court to get employment rights. Now the off-payroll rules are being extended to the private sector, we may not have long to wait.

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By GR
30th Oct 2019 20:20

I don't think many end clients will engage limited company contractors as inside IR35. I believe end clients will hire contractors as individuals via a PAYE umbrella or via agency PAYE.

Any end client's engaging with PSC's on an inside of IR35 basis is just asking for employment tribunal trouble.

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