‘Approximately two thirds of the way into a 12 month agency
contract, the client told all the contractors that we had until the end of the
week to agree to a 10% cut in rates (to be effective 4 weeks later). Anyone not
agreeing would be given notice of termination. Further, when each persons
contract came up for renewal the standard working week would be reduced from 40
hours to 35, resulting in an overall drop in income of 22.5%. If we are ‘disguised employees’ within IR35,
is there anything in employment law that might make this behaviour
illegal? Alternatively, is this helpful
for IR35?’
Let us assume for starters that the combination of these
contractors’ contracts and the actual working arrangements are sufficient to
amount to an implied contract of employment, within the meaning of s230
Employment Rights Act 1996, despite the fact that the actual chain has a
contractor’s company and an agency in the middle, and that there is no direct
contractual relationship between the individual and the client (see my
Freelance Informer article of 29th June 2001 on the ‘Nuclear Option’). I don’t say that this is or is not the case
here, we’ll just assume for the purposes of this article that it is, and see
where we would end up, were that true.
Such an implied contract of employment causes just the same
‘raft’ of implied terms and employment rights to arise as would be the case if
the contract were indeed a conventional employment contract.
An employment contract is, in many ways, a contract just
like any other. Basic principles of
contract law apply. Once made, it is and
remains binding until and unless changed, either by express agreement to change
(which agreement would itself require all the essentials of a contract – clear
agreement on terms, consideration, and intent to be legally bound), or by it
being ended (with consequences, if the ending were unlawful) and then replaced
with another contract, or under some express contractual term allowing
variation (such a term may exist, but is likely to have limited effect, so far
as allowing the rights of the other party to be varied is concerned).
The termination of an employment contract requires notice,
being the longer of (1) the period required by statute (by employer: after 1 month’s employment, 1 week; thereafter 1 week per year, up to a maximum
of 12 weeks) and (2) the period expressly required by the contract itself. If the contract itself contains no express
provision for termination by notice then it cannot be so terminated, unless
there are grounds for implying such a term.
Here, we’ll assume (a) that none of the contractors has been
continuously engaged by the client for more than 4 years (ie 4 weeks’ notice,
and (b) that in each case there is a contractual provision (in the agency
contract) for termination by notice. So
the termination as envisaged by the client’s threat can lawfully take place –
though for contractual reasons, this would need to be effected through the
agencies.
Where an employment has lasted more than 1 year, the
employee has the right not to be unfairly dismissed. Termination (broadly defined – this can
include a simple failure to offer a renewal) of such a contract by the employer
may be unfair, unless the employer can show that it was for one of 5 grounds,
and in addition that the employer acted overall in a way that was
reasonable. The 5 grounds are (1)
related to the employee’s capability or qualifications for doing the job, (2)
related to the employee’s conduct, (3) redundancy (meaning a genuine reduction
in the business needs for the number of employees required to do that job), (4)
that if the employment were to continue, some statutory provision would be
breached, and (5) ‘some other substantial reason’ such as to justify dismissal
of an employee in that position. Here, I
would suggest that (5) is the only one likely to apply. This may include necessary business
reorganization, and economic, technical, or organisational
reasons entailing changes in the workforce.
A simple desire to make more profit may not be sufficient; on the other hand, making necessary economies
may be enough.
For the employer to be able to show that he had acted in a
way that was reasonable will depend on the ground applying in the particular
case. Here I suspect the client is
relying on economic reasons. If the
client were to treat contractors in similar positions differently, then I
suspect the client might have a problem in showing that it had acted
reasonably. However, that does not
appear to be the case here. If however
we ask whether the Client treated contractors and staff in similar positions
differently, then we might come up with a different answer – although the
Client’s response may well be to say that there is a valid economic reason for
doing so, assuming that Contractors are paid significantly more than its staff.
So, overall, if the client is indeed able to show that it
has acted in this way in order to make necessary economies, then I suspect that
even in the case of those contractors who have been engaged long enough to have
acquired rights not to be unfairly dismissed, the Client is on fairly safe
ground.
So far as the reduction in hours on a renewal is concerned,
given that failure to renew can be a dismissal for the purposes of the unfair
dismissal legislation, similar logic applies.
So far as the question of whether this is helpful for IR35
purposes is concerned, I suspect the answer is that if the events showed that
the contractors were more exposed than conventional employees to such risks,
then maybe. The risks themselves are the
same, but the prospect of the risks becoming a reality appears greater. So it may be a minor IR35+ - as an acceptance
of greater financial risk.
Overall, does employment law interfere with the effect of
market forces in such situations as these?
I suspect that the answer is ‘no’.
However, it is a reminder that within this market sector particularly,
loyalty is easily overcome by economic demands – and I suspect that in times to
come, this client will have cause to regret these recent actions. Contractors are unlikely to forget.
I'd really appreciate your feedback on this FAQ - so mail me and tell me what you think of it, if it's been useful to you, or let me know of any specific problem you have where I may be able to help.
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