Agency workers are cause for concern

There has been considerable press coverage of the decision made on 9 March 2006 by the Court of Appeal in the case of Cable & Wireless v Muscat. The principle behind this case is that an agency worker or a temp can be an employee of the hirer. However, some have suggested that the case is not relevant as it turned on its rather unusual facts, so who should be concerned at the result?

First, the facts. Mr Muscat was originally employed by Exodus Internet Limited, which was eventually taken over by Cable & Wireless (C&W). To reduce headcount before the takeover, Muscat’s employment contract was “terminated” and he was re-engaged on a contract for services through his own personal services company. This was purely a paper exercise. C&W then bought out Exodus, and arranged for the personal service company to be supplied through a staffing agency, Abraxas. Again this was a paper exercise, as throughout, Muscat had worked in the same way at the same office. The engagement was then ended by C&W after a few months.

Unfair dismissal and redundancy claims

Muscat claimed unfair dismissal and redundancy on the basis that he was an employee throughout and that the contractual paper changes made no difference to his employment status.

Under case law established before 2004 it is unlikely that Muscat would have been successful. This is because a succession of cases had found that neither the hirer nor a supplying agency is the employer where a worker is engaged upon a properly formulated contract for services. In relation to the hirer, the reasoning was that there was no direct contract between worker and hirer. So before 2004 there did not appear to be any problems about reducing headcount in this way.

However, in 2004 there was a turning point – the case of Dacas v Brook Street Bureau. Mrs Dacas, an agency worker engaged on a contract for services from day one (so not exhibiting any of the unusual facts in Muscat), managed to extract strong guidance from the Court of Appeal that there could be a contract between worker and hirer, even though there was no document to that effect. Such a contract could be gleaned from the circumstances of the work arrangements.

So definitive was the Court of Appeal in this guidance that it stated that employment tribunals in future must review the circumstances in each case to establish whether there was an unwritten, but implied, employment contract.

Dacas caused a furore, but again at that time the opinion was expressed by some that the Court of Appeal was wrong and hirers should not be overly concerned. This was not least because of the three Appeal Court judges, only two had given the guidance, the third advocated strongly that there could not be a direct contract where a worker was supplied in the normal way through an agency to the hirer. The cautious approach was to accept what the third judge had said, and therefore there was no need for hirers to be overly concerned.

Since Dacas, employment tribunals have followed the guidance. Indeed this was central to the original tribunal decision in the Muscat case, as almost the entirety of the C&W defence was based on the premise that the Dacas guidance was wrong. C&W argued there could not be a contract of employment, because there was no direct contract and C&W, among other things, did not pay Muscat – the defence effectively picked up on the arguments laid down by the third judge in Dacas.

However, these arguments were robustly rejected by the Court of Appeal, which stated that the guidance provided in Dacas was “unimpeachable”.

The argument about whether Dacas was correct or not had no bearing upon, nor was affected by, the facts of Muscat’s hiring. The argument was intellectual and relevant to fundamental principles of employment law.

C&W lost the argument. In so doing it has allowed the Court of Appeal to establish a binding precedent (which Dacas was not). All employment tribunals and appeal tribunals are bound to follow this, and it is no longer possible to raise the argument that the guidance is wrong.

Serious implications

In any situation involving a claim for employment rights by an agency, the courts must consider whether a contract of employment can be implied between an agency worker and the hirer. This means it is now virtually impossible to rule out that there may be an implied direct contract of employment wherever a worker provides services to a hirer, is under the control of the hirer and is otherwise treated as an employee. Arranging for the worker to operate through a limited company or an agency does not in itself provide the protection previously perceived.

Could C&W have done anything differently to avoid this decision? Apart from the fact the company need not have appealed to the Court of Appeal, and thus could have avoided setting a precedent, in practical terms, the only change that could have been made would have been to terminate Muscat’s engagement when C&W acquired Exodus Internet.

This case resulted from an attempt to continue to engage an employee, but avoid that persons’ employment rights. Ending the engagement before 12 months had expired may have avoided the risk, since 12 months’ employment is required for a claim for unfair dismissal of this sort.
Having ended the engagement, if C&W had decided to rehire Muscat, the terms of the engagement should not have involved the same working conditions. Allowing him to continue to work from the same desk, subject to the same regime was a disastrous decision.

Who should be concerned?

It has been made very clear that where there is disparity between what the contracts say and what happens in practice, tribunals will look at all the factors to see if a contract of employment can be implied. Hirers must accept that they cannot exert the same level of control over temp workers as they do over their own employees. For example, they should not subject them to “employee-type” policies and procedures, nor should a grievance or disciplinary procedure ever be used.

This ruling ultimately affects crucial decisions about hiring policy and finance. So while a saving of 12.8% in National Insurance might tempt an employer to opt for an agency worker, this should now be balanced against the possibility of multiple claims by agency workers and temps as well as by the Inland Revenue, which may well claim if it thinks the workers are employees.

It is fair to say that the UK economy has thrived on a flexible workforce, and that historically there has been a sufficient degree of certainty about the legal position to allow for this. However, this case undermines one of the principle foundations of that flexibility – the ability to hire and fire at will. It would not be unreasonable to conclude that this decision attacks any possibility of obtaining certainty of status, particularly in the case of long-term work arrangements. There is little doubt that, because of the 12-month requirement for unfair dismissal, long-term hires and the temptation to extend shorter term contracts will create most problems.

As things now stand, every hirer must take heed of this case and take suitable steps to protect against claims being made. There seems little chance that the clock can be turned back. For that reason alone, it is no longer appropriate for anyone to advise that there need be no cause for concern. Indeed, finance directors and those in charge of procurement should be particularly careful to avoid the same trap as C&W.

Adrian Marlowe is a director at Lawspeed

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