Can a limited company contractor be in scope of the Agency Workers Regulations?

Posted on Oct 25th, 2017 | Employment law

Although many commentators believe that the Agency Workers Regulations (AWR) weren’t intended to apply to ‘professionals’ with their own limited company, it’s certainly possible.

In specific circumstances, limited company contractors, working through a recruitment agency, may be in scope of the AWR and have the right to ‘equal’ basic terms and conditions with any ‘comparable’ permanent employees at the end-clients company (where they actually work).

Here, we’ll look at limited company contractors offering their services to an end-client through a contract with a recruitment agency in more detail. This article doesn’t cover contractors providing services through an umbrella company.

What the guidance tells us

Up until now, we don’t believe the question of whether a limited company contractor can fall within the scope of the AWR has been tested at Employment Tribunal. The only AWR cases to reach Tribunal that’ve been reported so far are related to the Swedish Derogation model (limiting equal pay), redundancy consultation and other pay issues that we covered in another article.

The government’s original guidance on the AWR said that the definition of an ‘agency worker’ excludes:

  • Individuals who are in a ‘profession or business undertaking carried out by the individual’ where the hirer is a client or customer of the individual
  • Arrangements where the user has the status of a client or customer of the limited company or self-employed contractor.

In other words, where a genuine business relationship exists, and the contractor isn’t under the direct supervision and control of the end-client, individuals are excluded from the AWR.

Limited company contractors who are truly in business on their own account should be out of scope, although contractors aren’t automatically excluded just by virtue of working through a limited company.

It’s generally felt that personal service company contractors are likely to think twice about jeopardising their tax status by asserting agency worker rights.

The Department for Business, Innovation and Skills guidance gives the example of an IT contractor who supplies his services through a limited company:

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“An individual has set up his own limited company through which he provides IT services. He has a contract with a TWA and is supplied to work on a specific project with an anticipated duration of 12 months. The individual has no fixed working pattern and can determine how and when he performs the services; he can also send a substitute to perform the services at any time or payment is made on specific deliverable or on a fixed price and not simply on an hour, daily or weekly rate. However, he is subject to the hirer’s reasonable and lawful instructions. Given the absence of personal service and mutuality of obligation, the company is a client or customer of the individual, therefore the individual is out of scope. This must be a true reflection of the reality of the relationships between the parties involved and not simply a reflection of the contractual terms.”

Recruitment Agency clauses

Since the AWR was introduced in October 2011, Recruitment Agencies have been inserting clauses into contractual agreements that are related to the AWR and strengthen a contractor’s case for being seen as in business on their own account. Such clauses include (not verbatim):

  • “The contractor warrants that it operates on a business-to-business basis”
  • “The contractor is operating a business undertaking”
  • “Services are performed by an independent consultant”
  • “The contractor is not directed or supervised by the client”
  • “The services are provided to [the agency] and the client as customers of the contractor’s business”
  • “The contractor shall indemnify [the agency] against any losses arising… from any claim that the contractor is entitled to rights according to the AWR”.

These clauses are designed also to give the agency and client comfort that the contractor isn’t in scope of the AWR. However, if a contractor believes they are, they’d need to dispute their employment ‘status’ at an Employment Tribunal.

The Employment Tribunal will consider if the description of the arrangement in the contract reflects the reality of the relationship.

The focus will fall on the relationship which exists between the limited company, the end user client and/or the agency; the Tribunal will also have to weigh whether they’re in business on their own account or not (and have a business-to-business with the end-client). There’ll no doubt be a debate about what exactly a ‘business undertaking’ is and what a ‘business-to-business’ relationship actually means.

The courts have devised a number of tests which examine the individual’s circumstances and consider all aspects of the ‘employment’ relationship, including their conduct, what a contract does and doesn’t say and the expectations of the parties involved, to establish the reality of the relationship.

In assessing the (self-) employed status of an individual, an Employment Tribunal is likely to examine the following:

  • The express terms agreed between the parties in both the upper and lower contracts (the contracts between you and the agency and the agency and the client)
  • The degree of autonomy that the contractor has in determining how the work is undertaken
  • The degree of supervision, if any, that the end user client exercises over the contractor
  • Whether the contractor (or their accountant) prepares and submits his own accounts to HMRC
  • Whether the contractor is entitled to be paid during periods where no work is being carried out
  • The level and degree of financial risk which the contractor is exposed to under the contract(s) and the extent to which the contractor is able to increase his own profit
  • Whether there’s a contractual requirement for the contractor to provide services personally (although the fact that this requirement exists won’t in itself rule out that the hirer or agency are clients or customers of the contractor’s company)
  • Whether the contractor supplies tools, equipment, materials for the purpose of the assignment
  • Whether the individual is obliged to work exclusively for one client or whether they can in fact work for more than one client at a time
  • Whether the individual has fixed hours of work or whether they can choose when they work.

If the contractual arrangements don’t reflect the reality of the relationship (e.g. despite the wording of a contract, the actual reality is that the individual isn’t in business on their own account, and they work under the supervision and direction of the hirer), individuals are likely to fall into scope of the regulations.

A number of important cases where tribunals have looked at ‘employment status’ and whether the contractual arrangements reflect the reality of the arrangement, are worth further reading:

So, in certain circumstances, it could be possible that a limited company contractor could be in scope of the AWR. We wait to see if a case comes to Tribunal.

You’ll notice this article doesn’t mention IR35 – an IR35 and the AWR are different pieces of legislation and being ‘inside’ of one doesn’t necessarily mean you’re ‘inside’ the other.

If you are an Employer and need ongoing professional help with any staff/freelance issues then talk to us at The HR Kiosk (click here) – a Human Resources Consultancy for small businesses – you can retain us for as much time as you need.

Please note that the advice given on this website and by our Advisors is guidance only and cannot be taken as an authoritative or current interpretation of the law. It can also not be seen as specific advice for individual cases. Please also note that there are differences in legislation in Northern Ireland.

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