Flexibility under fire

Temporary workers have always been a popular choice for UK businesses. But that
flexibility is under threat as never before – not just from Europe but from our
own courts too. Kevin Barrow reports

British business continues to rely heavily on agency and contract workers.
The benefits to employers are numerous. The resource can, in theory, be turned
on and off at will, without the need for redundancy procedures or the risk of
employment claims. Hard-pressed HR departments and line managers do not have to
worry about administering or funding National Insurance Contributions, working
time rights, flexible working rights, pensions and other benefits. Increased
competition, wider use of technology and the current relative lack of
regulation mean employment agencies are providing an increasingly
cost-efficient service to end users.

The flexibility of this business model is said to give the UK a competitive
advantage over the rest of Europe, and is one way for UK companies to try to
match the flexibility and lower cost bases of offshore suppliers.

However, it now faces unprecedented legislative and judicial challenges.

– The proposed Temporary (Agency) Workers Directive seeks to give temps and
perhaps contractors the right to terms and conditions (including fringe
benefits) equivalent to those enjoyed by permanent employees

– The proposed Conduct of Employment Agencies and Employment Business
Regulations (the ‘conduct regulations’) impose procedural requirements on the
recruitment sector, pushing up overheads for staffing companies and at the same
time, limit the scope for staffing companies to charge end users ‘temp to perm’
and ‘temp to temp’ fees

– There has been a series of apparently contradictory cases about the
employment status of contractors and temps – the most recent confirmed that
even where there is no formal written contract of employment between an end
user and temp, it is possible that a contract may be implied in some

The Temporary (Agency) Workers Directive

This controversial directive seeks to protect the rights of temporary agency
workers and standardise regulation of the staffing industry across the EU. A
final draft may be agreed at the European Council in June.

The directive may give temporary agency workers the right to contractual
terms and conditions (including pay, fringe benefits, access to training or the
opportunity to apply for permanent jobs) equivalent to those of permanent
employees. The most recently tabled proposal suggests such entitlements should
apply after six weeks of employment.

There has been considerable wrangling over this issue. The UK government has
long argued for the entitlements to apply after a period much longer than six
weeks (for example six to 12 months), and it has been reported that Denmark,
the Republic of Ireland and Germany support an extended period. A final
decision on this is likely to be reached in June.

In practice, it will probably be a considerable time before the directive is
implemented in the UK. Even if political agreement can be reached at EU level
in June, there will inevitably be an extended ‘grace period’ before the UK is
required to implement the directive in all respects.

The difficulty of drafting regulations that implement the agency workers
directive effectively may also mean delay. Bringing contractors under the ambit
of the directive will prove tricky as outsourcing, consultancy and secondments
could unintentionally be included within its scope. The DTI will have to
exclude workers provided through such intermediaries.

The Conduct Regulations

The first draft of these regulations was put forward by the DTI in 1999.
Various redrafts have since been circulated, and it now seems unlikely they
will be finalised until some time after the European Council finalises the
temps’ directive. The DTI seems to be rightly concerned about inconsistencies
between the European proposals and the Conduct Regulations.

As with the directive, it is unclear whether the Conduct Regulations will
effectively cover workers provided by personal service companies. It seems
unlikely the DTI will be able quickly or effectively to draft the regulations
in such a way.

Other legislation affecting temps and contractors

The application of discrimination legislation, the Working Time Regulations,
minimum wage legislation and other recent statute to temps and contractors is
not always a straightforward issue. While temps and contractors usually have
rights under the relevant pieces of legislation (such workers’ rights do not
usually depend on the existence of a contract of employment), it is not always
straightforward to establish who owes the rights. For example:

– for contractors, it is arguable that working time and paid annual leave
rights are owed by the contractor’s personal service company, rather than the
staffing company or end-user

– It has only recently been clarified in relation to temps that employment
businesses must comply carefully with the paid holiday provisions in the
Working Time Regulations, and that they cannot roll up holiday pay into salary
(MPB Structure Ltd v Munro (CA) April 2003 – see page 11)

– Discrimination liability can lie with either the end user or staffing
company. This is not always easy to establish. Where a staffing company seeks
to fulfil a requirement for an end user, and an act of discrimination (such as
the unwitting application of indirectly discriminatory criteria) is committed
by the staffing company on behalf of the end user in the recruitment process,
how will a tribunal decide whether the discriminatory act was by the end user
or the staffing company – or both?

Case law – can temps have employment rights?

While the temporary workers directive and the Conduct Regulations have been
drifting along, employment tribunals have decided on a number of cases relating
to the duties of end users and staffing companies to temps and contractors.

By mid-2002, the law seemed to be as follows:

– Under Section 230 of the Employment Rights Act 1996, an employee is
defined as an individual who has entered into, or works under, or worked under
a contract of service. They are entitled to general employment rights subject
to satisfying various qualifying criteria and employment tests

– The EAT decisions in Hewlett Packard v O’Murphy, 2002, IRLR 4 and Esso v
Jarvis, 2002, WL 347188 seemed to establish that contractors do not have general
employment rights against end users. Emphasis was placed on the absence of any
‘technical contract’ between the end user and worker, and if there is no
contract, there can be no employment rights

– The Court of Appeal decision in Montgomery v Johnson Underwood Ltd, 2001,
IRLR 269 likewise stated that a temp had no general employment rights against
an end user

– The House of Lords decision in Carmichael v National Power plc, 1999, 1
WLR 2042 emphasised that without mutuality of obligation, there was no contract
of employment, and that all of the circumstances of the relationship (and not
just the documents) should be looked at to determine whether such mutuality
existed. In this case, the workers (tour guides) were found not to be employees
on the facts.

Recent cases have further clarified the rights of contractors and temps.

Can a temp have employment rights against the staffing company?

The judgment in Dacas v (1) Brook Street and (2) Wandsworth Borough Council
(EAT) 2002 WL 31947451 last December confirmed that while Dacas, a temp, might
not have general employment rights she could exercise against the end-user (see
Montgomery), she might have such rights against the staffing company, with whom
she did have a contract.

The EAT decided, among other things, that staffing companies may have
sufficient control over workers to be considered their employers. Although in
this case day-to-day control was exercised by the end-user, it was exercised
because of a right in the staffing company’s contract with the worker, which
the end-user exercised as an agent for the staffing company.

Is a contract necessary for a temp to establish employment rights against
the end-user?

The well-known case of Motorola v Davidson caused an outcry by holding that
an employment relationship existed between the end-user and a worker who had
been employed under a contract for services through an employment agency,
despite the fact that there was no contract between them (the worker was being
supplied via an intermediary staffing company). The decision seemed to expose
end-users to employment claims from temps, and possibly also from contractors
working through personal service companies.

In Stephenson v Delphi Diesel Systems Ltd (EAT), 2002, WL 31962063 however,
the position was clarified and the Motorola decision was marginalised. The temp
was deemed not to be an employee because he had not entered into, or intended
to enter into, any direct contractual relationship with the end-user. It seems
that a direct contractual nexus is now required to establish employee status.

The position seemed, therefore, to be that where the contractual link
between a company and worker was broken by an agency or a personal limited
company, there was no contract of employment, and therefore no possibility of a
claim of employment rights – whether or not control or other employment
indicators are present.

Can an employment contract between temp and end-user be implied?

At first sight, the recent case of Franks v (1) Reuters Ltd (2) First Resort
Employment Ltd (Court of Appeal) seems again to expose end-users to employment
claims from temps, and possibly also from contractors working through personal
service companies. Franks worked for several years at Reuters as a temp via
First Resort, providing driving and helpdesk services.

His appointment was terminated and he claimed unfair dismissal, redundancy
pay and breach of contract against the end user (Reuters). The tribunal and EAT
both held that because Franks had no contract with Reuters (there being no
formal contractual link between them, with Franks being paid by, and having a
written contract with, First Resort), Reuters owed Franks no employment rights.

The Court of Appeal handed down its judgment last month and unanimously held
that the tribunal and EAT should have looked more carefully at whether, on a
consideration of all the relevant evidence (including what was said and done,
as well as any relevant documents), there was an implied contract of service
between Franks and Reuters. If there was not, Franks was not an employee of
Reuters. If there was, it was necessary to consider the merits of his
employment rights claims.

The court also said it might be relevant to look at length of service as a
factor pointing towards the existence of an implied contract. It might be
relevant in the context of someone who sought a temporary placement through an
employment business, but was then allowed to stay working in the same place for
the same end-user for over five years, during which period he was redeployed.
Franks seems effectively to have been treated as a member of the end-user’s
workforce for the purposes of resourcing tasks.

Therefore, dealings between parties over a period of years, as distinct from
the weeks or months typical of temporary or casual work, are capable of
generating an implied contractual relationship.

In cases where temps have been held to have general employment rights
against end-users it is interesting that the workers seem to have been treated
unfairly and had for various technical and practical reasons no right of
redress against their staffing companies. This could indicate a judicial
tendency to find for a worker (especially where they are not relatively highly
paid) a right of redress somewhere – this has certainly been a feature in
health and safety claims in the construction sector.

Kevin Barrow is a partner at Tarlo Lyons

Guide to terms used

Terminology can be confusing in this
sector. This article categorises workers as follows:

– ‘Contractor’ is used to describe someone who provides
services via a personal services company (often in the form of an ‘umbrella’
company through which more than one contractor operates), which then usually
contracts with a staffing company, which in turn contracts with the end-user

– An ‘agency worker’ or ‘temp’ is used to describe someone who
provides services via an "employment business" which then contracts
with the end-user. Usually the employment business pays the temp net of PAYE
and NICs.

How to minimise the risk of claims

– Worry about The Temporary (Agency)
Workers Directive if and when it happens, and note that use of contractors may
be unaffected

– Always engage temps and contractors via a reputable staffing
company with sound finances and membership of a trade association like ATSCo or
REC: they are less likely to go bust leaving temps looking for someone else to

– Ask the staffing company what steps it will take to help
minimise the risk of claims: will it help police your recruitment practices to
ensure no acts of discrimination? What types of risk will it indemnify you
against? Bear in mind staffing companies cannot easily insure against all risks
and so passing all risk to them may not be practicable

– Channel all dealings with contractors through the staffing
company – do not move temps and contractors from job to job within your
organisation, do not allow them access to general employee benefits or, for
example, fill in their mortgage application forms

– Consider appointing one of the several services and staffing
companies supplying "managed services" in this sector. This can
reduce risks and save money.

Find out more…

on the Temporary (Agency) Workers Directive at


on the Conduct Regulations at


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