Increasing numbers of individuals are engaged to work indirectly, via employment agencies and/or service companies. The question is, are these individuals employees and if so of whom?
In this article, I’ll use the following terminology:
- “individual” is the individual doing the work;
- “end user” is the person for whom, day to day, the individual is working;
- “agency” is the intermediary between the individual and the end user, and may be an employment agency or a service company;
- “service company” is usually a one-man company, nominally owned by the individual and with the individual as its sole director, set up by the individual at the end user’s behest.
The typical situation is one where:
- there is written contract between end user and agency whereby the agency will provide the end user with individuals – sometimes with a specific individual;
- there is written contract between the agency and the individual under which the agency offers to provide individuals with opportunities for work, which the individuals can take up or not as they wish;
- there is no written contract between the individual and the end-user, such that if there is a contract between them, it must be an implied contract.
The orthodox answer to the question posed in the first paragraph of this article is that the individual is not an employee of anyone. He cannot be an employee of the agency: as the agency does not exercise any control over his work, indeed often has virtually nothing to do with him beyond paying him, and; as (in most cases), there is no “mutuality of obligation” with the agency – no obligation to provide work in return for an obligation to do work. He cannot be an employee of the end-user since it does not pay him directly (the end-user pays the agency, which takes its ‘cut’ before paying the worker) and has no contract with him. Because of the lack of a contract with the end-user, he is not even the end-user’s “worker” (ERA s. 230(3)): see, e.g. Douglas v Birmingham City Council & others  All ER (D) 329 (Jul). The fact that he is not an employee means that the he lacks many employment rights, including the right to bring an unfair dismissal claim.
Apparently dissatisfied with orthodox answers, the Courts have come up with different ones. In McMeechan v Secretary of State for Employment  IRLR 353, the Court of Appeal decided that the agency is the individual’s employer, so far as any particular assignment is concerned, so that every time the individual accepts a particular assignment with a single end-user, he will be the agency’s employee for the duration of that assignment. From a purely legal point of view, McMeechan is a difficult decision to understand. It is now, in my view, one confined to its own facts. Subsequent to McMeechan, in Franks v Reuters Ltd  IRLR 423, the Court of Appeal suggested that, in certain circumstances, an implied contract will arise between the individual and the end-user. This was seized upon by the majority of a differently constituted Court of Appeal in Dacas v Brook Street Bureau (UK) Ltd  IRLR 358, who decided (in effect) that in most cases where the individual has been engaged through an agency for more than one year, he will be the end-user’s employee and will not be the agency’s employee.
Dacas is rather a difficult case: the two members of the Court of Appeal who made up the majority – Sedley and Mummery LJJ – gave very different reasons for their decision; Sedley LJ’s reasoning is somewhat opaque; Mrs Dacas had failed to appeal the decision that she was not the end-user’s employee and was arguing before the Court of Appeal that she was the agency’s employee. This meant that the end-user’s involvement in the appeal (at the Court’s request) was unusual, to say the least, and that the Court’s decision that she was the end-user’s employee was arguably obiter; the Court failed, as did the Court deciding Franks, to mention or deal with previous Court of Appeal authority (The Aramis  1 Lloyd’s Rep 213; Baird Textile Holding v Marks & Spencer plc  1 All ER (Comm) 737) to the effect that contracts should only be implied where it is absolutely necessary to do so.
Since Dacas was decided, end-users have been arguing in ETs that it was decided per incuriam and should not be followed. I was involved in just such a case early in 2005. The point at issue is an important one. Individuals retained through agencies make up a significant proportion of the workforce. One of the reasons for the popularity of agency workers is that end-users believe such workers lack employment rights. Presumably, the additional cost of retaining someone through an agency – the agency’s ‘cut’ – is a price worth paying to avoid one’s workers having such rights. This isn’t simply a one-way street, with dastardly companies taking advantage of a ‘loophole’ in the law the deny rights to those who work for them, although no doubt this is precisely what is happening in many cases. Many individuals welcome the freedom, flexibility and (sometimes) extra money that comes with working through an agency. If those who work through agencies turn out to have a full set of employment rights after all then the agency sector will contract as end-users return to traditional employer / employee relationships with those who work for them. There would then be less opportunities for individuals to do agency work.
In Cable and Wireless plc v Muscat  All ER (D) 412 (Feb) (“Muscat”), the EAT held that Dacas was not decided per incuriam and that ETs and the EAT are bound by it. The decision is a long one and the background facts relatively complicated, involving a TUPE transfer, two service companies and an agency. The EAT’s decision boils down to this: whether or not Dacas was correctly decided, it is binding. The EAT interpreted Dacas (which, because of the differences in the speeches of Mummery LJ and Sedley LJ is open to different interpretations) as all but requiring employment tribunals to find that individuals working in a ‘classic’ individual/agency/end-user relationship for more than a year with a single end-user are employees of the end-user.
The EAT in Muscat was clearly troubled by the fact that the Court of Appeal in Dacas had failed to refer to any of the authorities on the implication of contracts. The EAT noted that, “the Court of Appeal seem to us to have taken a conscious decision to extend radically the circumstances in which a contract of employment might be implied.” They went on to say, “we must … leave it to the Court of Appeal to determine whether [Dacas] was decided per incuriam.”
Two further significant decisions in this area have been handed down since Muscat.
First, in Astbury v Gist Ltd, Unreported (EAT 14/4/05), the EAT (chaired by a different judge from the judge who chaired the appeal in Muscat) allowed, in an almost peremptory fashion, an appeal brought by the individual against an ET’s decision that he was not the end-user’s employee. Unhelpfully, no mention whatsoever of Muscat was made in the Judgment. The most noteworthy aspect of Astbury is the EAT’s statement (paragraph 16 of the decision) that “it is … highly desirable that all three parties should be involved” whenever an employment tribunal is called on to determine the legal consequences of an individual/agency/end-user relationship. It would seem to follow that the claimant has to claim both against the agency and against the end-user even if (as will almost always be the case) the claimant’s legal advisers believe the end-user to have been the employer and the agency definitely not to have been the employer.
The second important post-Muscat decision is Bunce v Postworth Limited, Unreported,  EWCA Civ 490 (CA 4/5/05), in which the Court of Appeal (on my interpretation of the Judgment) confirmed that McMeechan is now an irrelevance and that the individual will practically never be an employee of the agency.
Muscat is apparently going to the Court of Appeal. Before considering whether Dacas is right, what might happen in Muscat in the Court of Appeal (and the House of Lords, if the decision goes that far) and how employment lawyers should deal with cases in this area in the meantime, it may be worth noting that Muscat is not the ideal case to take to appeal. First, as mentioned above, it has a complicated factual matrix. From a ‘neutrals’ perspective, what is needed is a clear statement of the law on a simple, classic individual/agency/end-user set of facts. Further, the more complicated the facts, the more scope there always is for distinguishing any decision on those facts. Secondly, in Muscat, the ET found that, at an early stage, the individual was an employee and that he TUPE-transferred so as to be end user’s employee. There was no appeal to the EAT against those findings of the ET. This failure to appeal may come back to haunt the end-user in the Court of Appeal and/or House of Lords.
The question, “is Dacas correct?” is a more than merely academic one. Sooner or later, the Court of Appeal and House of Lords are going to be asked to answer it. Employment lawyers therefore have to take a stab at it if we are to advise our clients properly in the meantime. My view is that it is not correct. It’s a legal rather than a moral or social view that I’m expressing. I think the legal position is clear and that if it is thought, generally, to be desirable for these individuals to be employees, this is a matter for Parliament and not for the Courts. The main reasons why I take the view that Dacas is wrong are:
- the Court of Appeal re-wrote the law of contract, in that they found there was, or might be, an implied contract between the end-user and the individual in circumstances where there was no need (see above) to imply one in order to account for the parties’ actions. In virtually any given individual/agency/end-user relationship, the parties’ behaviour can be explained by reference to the two contracts that definitely do exist – that between the individual and the agency and that between the agency and the end-user;
- the Court of Appeal gave no consideration to the practical problems created in relation to the payment of wages. The terms of payment between the end-user to the agency are almost always different and separate from the terms of payment as between the agency and the individual. In the implied contract that, according to Dacas, exists between the end-user and the individual, what are the terms of payment? If Dacas is right then presumably the individual can sue the end user for unpaid wages. The end-user could easily find itself embroiled in a dispute between the agency and the individual that really has nothing to do with it and about which it knows nothing. What if the agency goes bust after it’s been paid by end-user? What if the agency is having to pay individual more than it’s being paid by the end-user [this does happen, e.g. where the agency has a long contract, entered into on the back of a tender that failed adequately to account for prospective increases in the minimum wage];
- the Court of Appeal perhaps over-estimated the problems that arise in practice in personal injury cases, relating to vicarious liability, where an agency is involved. The fact that nearly all of the authorities in this area seem to be employment rather than personal injury cases to me speaks volumes. I know of no recent case where an injured claimant was left with no claim against an insured defendant because the individual who negligently caused his injuries was retained through an agency. (An interesting example of a recent personal injury case involving questions of whether or not someone was an employee at the relevant time is Hawley v Luminar Leisure PLC  All ER (D) 02 (Jan).)
Whilst we’re all waiting for a definitive decision from the Court of Appeal and/or House of Lords in this area, I have the following practical suggestions to make:
- if claiming, claim against the end user and the agency (see Astbury);
- if claiming, press for a quick decision as tribunals are bound at present to follow Dacas and the EAT’s decisions in Muscat;
- if responding on behalf of the end-user, consider applying for a stay pending the Court of Appeal’s / House of Lords’ decision in Muscat, particularly if an argument that the individual is not an employee is the only real point the end-user has in its favour;
- if responding, don’t make non-essential concessions (you never know what the law is going to do next – the House of Lords might even decide that McMeechan was right all along and that individuals are employed by agencies);
- whether claiming or responding, don’t unnecessarily limit the scope of any appeal: see Dacas and Muscat for examples of appellants who, arguably, did just that;
- if acting for the end-user at the stage of drawing-up contracts, one should warn one’s client of the impossibility of avoiding the risk that it will find itself the individual’s “employer” and try to build into the contract with the agency provisions dealing expressly with what should happen if the individual decides to sue, for example an indemnity from the agency or an agreement with agency relating to apportionment.
Before concluding, it may be helpful to say a brief word on service agreements, that is the contracts that are put in place where the agency is a service company rather than an employment agency.
If Dacas is upheld then service agreements, as a means of avoiding the ambit of employment protection legislation, are finished. However, on the basis that Dacas will or may not be upheld, if asked to advise in relation to service agreements on behalf of end-user, it would be as well suggest that the individual (who is often quite high up in the end-user’s organisation) does the first draft of agreement between him and ‘his’ service company. If the agreement is drafted by the individual then, arguably, “the terms on which he is .. engaged to do the work are .. in practice substantially determined … by him” – ERA, s.43K(1)(a)(ii) – and thus he is not a “worker” even under the extended definition given to that term in relation to public interest disclosure cases and he thus has no right to bring even a public interest disclosure unfair dismissal claim, let alone an ‘ordinary’ unfair dismissal claim. I note that whilst this argument has succeeded in the employment tribunal, it has yet to be tested in an appellate court.
Barristers are often accused of sitting on the fence, so I shall end this article by making a bold prediction: whether in Muscat or in a later case, the Court of Appeal will uphold Dacas, on the basis that employment contracts are sui generis, but the House of Lords (by a 3 to 2 majority) will overturn it and reassert orthodoxy. You read it here first!