The employment status of agency and other temporary staff is due to change
dramatically in the next year or so. Richard Lister surveys the legal landscape
Most employers use temporary staff, whether engaged directly or through an
employment agency. The use of temporary staff provides an effective means of
readily varying the size of the workforce in response to the needs of the
business. For example, temporary staff can be hired to cover staff absences –
maternity, sickness, holidays and so on – to meet specific skills shortages,
such as for IT projects, or to cope with fluctuating demands such as seasonal
Since 1990, there has been a marked increase in the incidence of temporary
work. The latest official statistics show that the proportion of temporary
employees reached 7.1 per cent of all employees in 1996, compared with about
5.5 per cent during the mid-to- late 1980s (Labour Market Trends, September
1997). Temporary jobs have accounted for at least a third of new engagements
The growth of temporary or "casual" employment forms part of a
broader trend towards employment practices other than those involving permanent
staff doing a standard working week. A "peripheral" workforce is
represented by individuals working under non-traditional arrangements such as
self-employment, flexitime working, teleworking, annual hours and zero-hours
Problems of employment status
How is employment law responding to these fast-developing and increasingly
fragmented working patterns? One particularly contentious aspect is the
restriction of most statutory employment rights to "employees"
working under a common law contract of employment.
In order for there to be a contract of employment, there must be
"mutuality of obligation" between the parties – that is, an obligation
on the employer to provide work and a corresponding obligation on the employee
to accept the work offered. This creates problems for many temporary staff,
since a key characteristic of "casual" labour is that in theory the
employer can hire as and when it chooses and the worker is free to work when he
or she wishes.
In the recent case of Carmichael and another v National Power, 2000, IRLR
43, the House of Lords overturned the Court of Appeal’s decision that power
station tour guides who worked on a "casual as required" basis were
in fact employed under contracts of employment. Their Lordships concluded that,
on the facts, the applicants’ case "foundered on the rock of absence of
mutuality". The employment tribunal had been entitled to infer that, when
work was available, the tour guides were free to undertake it or not as they
chose. The arrangement turned on mutual convenience and goodwill, and the
flexibility suited both sides.
Similarly, in O’Kelly and others v Trusthouse Forte, 1983, ICR 728, wine
waiters in a hotel were known as "regular" or "permanent"
casuals. Notwithstanding that they had no other work, and were given preference
over other casual staff in work rotas, the Court of Appeal held that they were
engaged under successive contracts for services rather than contracts of
The finding that there was no "mutuality of obligations" was
fatal. The waiters had the right to decide whether or not to accept the work,
and were free to work elsewhere. Equally, although the employer regularly
provided work, there was no contractual requirement for it to do so.
In some cases, it may be possible for a temporary worker to establish the
existence of a "global" or "umbrella" contract of
employment overriding the relationship between the parties, although this has
proved difficult in practice. Such a contract may be implied where there is a
relationship of such a long-standing nature that, even though work is done on a
"casual" basis, the reality of the situation is that there are mutual
obligations to provide and accept work (as in, for example, Saltire Press and
others v Convy and others, IRLB 615, April 1999).
An alternative route for a worker to gain statutory employment protection,
where he or she has worked under a succession of short-term engagements, is to
show that they were in fact employed under a series of separate contracts of
employment. If successful, the difficulty may then be for the employee to
"bridge the gaps" between the various contracts to establish the requisite
period of continuity of service to qualify for statutory employment rights
under the Employment Rights Act 1996. In particular, it may be possible to show
that periods of absence from work were on account of a "temporary
cessation of work" so that continuity was preserved (section 212(3) of the
The prospects of temporary employees gaining the right to claim unfair
dismissal have been enhanced by the reduction of the qualifying period from two
years to one. If it was made clear to an individual at the outset of the
engagement that he or she was being employed on a temporary basis, the
employer’s refusal to renew the contract will probably amount to "some
other substantial reason" for dismissal within section 98(1)(b) of the ERA
(Fay v North Yorkshire County Council, 1986, ICR 133).
But such a dismissal is not necessarily fair. The employment tribunal would
consider whether the employer acted reasonably in all the circumstances of the
case. Employers should therefore give adequate warning to temporary staff that
their employment is coming to an end and consult with them as appropriate.
Where there is a redundancy situation and the employee has two or more years’
service, he or she will be entitled to a redundancy payment.
Hiring temporary staff through employment agencies is an increasingly
popular recruitment practice. This gives rise to a triangular relationship
between the employment agency, the worker and the client organisation.
Within that format, various different kinds of arrangements are possible.
For example, the agency may simply introduce the worker to the hiring company
and then drop out of the picture. The worker will then become an employee or a
self-employed contractor of the hiring organisation, depending on the terms
Alternatively, the agency may take the worker into its own employment and
supply his or her services to the hiring organisation. Or the worker may be put
on the agency’s books under general terms of engagement between the worker and
the agency, with the worker’s services being supplied on a temporary basis to
one or more clients.
The third type of arrangement can give rise to difficult issues of
employment status. The traditional analysis is that the contract between the
employment agency and the worker is "of its own kind" – that is, a
unique type of contract falling somewhere between a contract of employment and
a contract for services (Wickens v Champion Employment, 1984, ICR 305). On that
basis, employment agency workers have generally failed to establish
In McMeechan v Secretary of State for Employment, 1997, IRLR 353, however,
the Court of Appeal held that workers may be employees of an employment agency
in respect of a particular assignment, even if they do not have such status
under their general terms of engagement with the agency. The court was prepared
to conclude that the applicant was an employee in respect of the specific
engagement under consideration, despite the fact that his contract with the
agency described him as a "self-employed worker".
McMeechan was, however, an unusual case in that the applicant was claiming
he was entitled to be treated as an employee only for the purposes of a
specific contract for which he was owed money. It was therefore unnecessary for
the court to decide whether he was to be treated as an employee under the
general terms of engagement with the agency.
Note that the Inland Revenue treats workers supplied by employment agencies
as if they are employees for income tax purposes (section 134 of the Income and
Corporation Taxes Act 1988). Agencies are therefore required to deduct tax and
National Insurance contributions regardless of whether or not a worker is an
Protection to be extended
The position regarding the employment status of agency and other temporary
staff, as outlined above, is due to change dramatically in the next year or so.
Under section 23 of the Employment Relations Act 1999, the Secretary of State
now has the power to order the extension of statutory employment rights to
individuals who do not currently enjoy them. The Government has explained that
it envisages using this power to ensure that all workers other than the
"genuinely self-employed" enjoy minimum employment protection
standards and that none are excluded by virtue of technicalities relating to
the type of contract or other arrangement under which they are engaged.
A full public consultation on the detail of the proposed reforms is to take
place during the course of this year, with the changes expected to be implemented
in spring 2001. The probable outcome of this process will be the demise of the
concept of "employee" status in favour of a radical extension of
employment rights such as unfair dismissal and redundancy pay to all
"workers". A definition of "worker" similar to that used in
recent legislation such as the Working Time regulations 1998, the National
Minimum Wage Act 1998 and the Public Interest Disclosure Act 1998 is likely to
This definition includes not only those working under a contract of
employment but also people working under other contracts for personal services.
Professional people and people genuinely running their own businesses are,
however, excluded. Research published by the Department of Trade and Industry
indicates that about 80 per cent of people in work would be covered by such a
definition. That would include the great majority of people in temporary jobs.
So far as employment agency workers are concerned, they will often fall
within the general definition of "worker". But even where that
definition does not apply, there are special provisions – in, for example, the
Working Time regulations and the National Minimum Wage legislation – to ensure
that agency workers are protected. In such circumstances, the agency worker is
treated as being employed by whichever of the agency and the hiring
organisation is responsible for paying him or her or, if neither is
responsible, by whichever in fact pays the worker.
It remains to be seen whether this type of approach towards agency employees
will be maintained when the Government publishes it proposals on employment
status later this year. The issue is complicated by the fact that the DTI is
simultaneously rationalising and reforming the legislation governing the
operation of employment agencies, under new powers introduced by the Employment
Relations Act 1999. The draft Conduct of Employment Agencies Employment
Business regulations were published for consultation last May and, subject to
Parliamentary approval, are expected to take effect this summer.
Under the new rules, a worker’s contractual relationship – however that
might be regarded in law – is treated as being with the employment agency and
not the organisation to which his or her services are provided. The draft
regulations also contain detailed restrictions on the terms on which workers
can enter into relationships with agencies. For example, restraint clauses
designed to prevent workers from terminating an agreement with an agency and
seeking work elsewhere will, in general, be prohibited.
About half of temporary staff work on a fixed-term basis. Under the
Employment Rights Act 1996, an employee is treated as dismissed for unfair dismissal
and redundancy payment purposes if their fixed-term contract is allowed to
expire without being renewed. But employers are allowed to include waiver
clauses in such contracts, whereby staff agree to sign away their right to a
statutory redundancy payment in the event that their employment terminates on
expiry of the contract.
Until recently, it was permissible to exclude the right to claim unfair
dismissal by the same method. With effect from 25 October 1999, however, the
Employment Relations Act 1999 has prohibited waiving unfair dismissal rights in
fixed-term contracts, although existing waivers in contracts entered into or
renewed before that date continue to be effective.
Temporary staff employed on a series of fixed-term contracts sometimes face
acute problems in establishing enough continuity of employment to qualify for
employment protection rights. For example, in Booth v United States of America,
1999, IRLR 16, the Employment Appeal Tribunal upheld an employment tribunal’s
decision that employees did not have the requisite period of continuous service
for claiming unfair dismissal and redundancy pay where they had been employed
under a succession of fixed-term contracts with a break of two weeks between
each contract. That was held to be the correct result, despite the fact that
the employer’s deliberate purpose in creating the breaks was to prevent the
employees from obtaining statutory rights.
This may be one area where the new EC Fixed-Term Work directive will
ultimately lead to changes in the law. The directive was adopted last summer
and has to be implemented in UK law by 28 June 2001.
Its purpose is to establish the principle of non-discrimination between
workers on fixed-term contracts and those on "permanent" open-ended
contracts, and to prevent abuse arising from the use of successive fixed-term
contracts. Detrimental treatment of fixed-term workers in relation to their
employment conditions will be unlawful unless justified on objective grounds.
Among other things, the directive will require EU member states to introduce
one or more of the following measures:
– Objective reasons justifying the renewal of fixed-term contracts.
– A maximum total duration of successive fixed-term contracts.
– The number of renewals of such contracts.
The potential impact of the directive is difficult to gauge and much will
depend on the way the Government decides to implement its provisions in the
context of the existing legislation on fixed-term contracts. One thing seems
clear: the law on employment of temporary staff will continue to be in a state
of flux for some time to come.
Richard Lister works in the employment law department of Lewis Silkin