The Employment Appeal Tribunal (EAT) has affirmed that a worker’s employment status was correct based on contractual reality rather than in relation to whom the services were rendered.
Facts:
The appellant is an IT professional who was recruited by a company called Cathcart (a recruitment agency) to work on a temporary IT project that Waracle was carrying out for a bank. The appellant had a written “employment contract” with the second respondent, Paystream, an umbrella company used to employ and manage payroll for temporary workers.
This arrangement was effected through a complex and circular series of contracts: Cathcart contracted with Waracle to supply the appellant’s services; while Cathcart contracted with Paystream for Paystream to employ and pay the appellant; and the appellant signed the contract with Paystream, effective from July 2021.
The appellant’s work on the Waracle project lasted for approximately two months before it was terminated. He subsequently brought a claim in the Employment Tribunal (ET) against Waracle and Paystream for notice pay, unfair dismissal (later struck out), disability discrimination and harassment.
A preliminary issue arose as to who the appellant’s true employer was. The appellant contended that it was Waracle, while both respondents maintained that it was Paystream, citing the written contract. The ET concluded that the appellant was, in fact, an employee of Paystream and not Waracle. The appellant appealed.
Decision:
The EAT dismissed the appeal and held that the ET did not err in law when it concluded that the appellant’s employer was the umbrella company, Paystream, and not the end client business, Waracle. The EAT agreed with the ET that the appellant’s assertion that the Paystream contract was a “fraudulent sham” was not substantiated. The arrangement was viewed as a common practice in the industry, as it is often used for IR35 compliance and freely entered into by the experienced IT professional, who had alternatives.
Citing James and Tilson, the EAT upheld the finding that it was unnecessary to imply a contract of employment between the appellant and Waracle as the appellant already had a valid, express contract of employment with Paystream. The fact that the appellant was integrated into Waracle’s business and subject to its control was insufficient to displace the clear contractual arrangements establishing an agency relationship.
The arrangement was distinguished from true “sham” contracts because it did preserve several statutory protections, including a minimum wage, holiday pay, and protection under the Equality Act 2010, meaning the purpose was not simply to evade employment legislation.
The EAT pointed out that any contractual provision that in effect operates to remove the right to statutory notice is likely to be struck down by Section 86(3) of the Employment Rights Act (ERA) 1996.
Implications:
This case confirms that in a typical, non-fraudulent umbrella company structure, the umbrella company is the worker’s genuine employer, rather than the end client. This reinforces that courts will respect the contractual reality where an express contract of employment exists, provided it was entered into freely and is not a “sham” designed to evade statutory protections.
The ruling maintains the considerable legal hurdle to be negotiated when implying that an employment contract exists directly with the end client. Even when a worker is heavily integrated into the end client’s business and subject to its control, the existence of a valid agency/umbrella arrangement means an implied contract is usually deemed unnecessary to give the arrangement “business reality”.
