What is the true cost of using self-employed individuals to work for you following the decision in Pimlico Plumbers by the Supreme Court?

You may roll your eyes now but in true legal style the response to that is that “well, it depends on your specific circumstances and arrangements”. The fact that a contract may appear to set out a self-employed arrangement does not necessarily mean that the reality reflects this document. It is for this reason that the courts are willing to step in and come to a different conclusion. We appreciate that this may not be helpful to business but the latest decision in the widely reported case of Pimlico Plumbers v Smith by the Supreme Court does not really change anything at all. The outcome of this case was widely predicted and expected by many. But what this case does do is underline the direction of travel by the courts when dealing with cases which are brought by an increasing number of individuals who are engaged under ‘self-employed’ contracts. Most cases involve statutory holiday rights and national minimum wage claims but can (and did in the Pimlico Plumbers case) also involve more expensive claims involving discrimination.

So, what’s the issue here?

If an individual is self-employed they have no rights to any of the statutory protections which exist in UK and European law for workers or employees. For this reason it can be very attractive to businesses to engage individuals in this way. It means that the cost and risk of engaging with them is far lower than would otherwise be the case for workers or employees.

The benefit to the individual is that they have greater freedom to determine the way in which they work and there are often benefits in relation to tax and the opportunity to earn more than would otherwise be the case if they were salaried.

The growth in the use of self-employment as a business model has been largely as a result of the need to be more competitive and reduce costs. The introduction of the Agency Worker Regulations in 2010 (which provide for equal terms for agency workers after 12 weeks) has made the use of agency workers to flex up and down the size of the workforce in reaction to demand, a more expensive (and sometimes prohibitive) way of resourcing the business. It is for this reason that we have also seen significant growth in the use of zero hours contracts in many sectors of the economy.

This isn’t necessarily all about the “gig-economy” as these cases often get referred to – as it so aptly demonstrated by Mr Smith working for Pimlico Plumbers in a very traditional activity.

What are all these different categories of engagement?

Before getting into the detail of the Pimlico case we thought it would be helpful to briefly explain the structure of the law. The current legal structure categorises individuals as either:

Self-employed
A worker
An employee

A number of key employment rights such as unfair dismissal, maternity leave and redundancy pay are only provided to individuals who are regarded in law as ’employees’. But ‘workers’ still have a significant level of protections such as:

discrimination
whistleblowing
paid holiday
the national minimum wage
unlawful deductions from wages
the right to be accompanied
working hours
part-time working
certain rights relating to trade union membership
pension auto-enrolment

An employee is defined in section 230(1) of the Employment Rights Act 1996. Employees have more rights than workers. All the recent litigation has been about getting access to these.

The Pimlico Plumbers case

This is the most important case in this quickly developing area of the law. It addressed whether a self-employed plumber was in fact an employee, a worker or neither.

Gary Smith worked for Pimlico Plumbers between 2005 and 2011. All contractual arrangements were made on the understanding that Mr Smith was self-employed. He only worked for Pimlico Plumbers but could reject jobs and could make a decision about when to go home on a working day. He decided his own working hours and provided his own tools and materials. Pimlico had no obligation to provide him with work and if there was not enough work he would not be paid. Mr Smith was responsible for his own tax and NI and was VAT registered. He wore Pimlico’s uniform and drove their branded vans.

His Pimlico Plumbers branded van (which he hired from them) was removed from him after he requested to reduce his working days from 5-days per week to 3-days a week to account to his inability to work 5-days because of his heart attack.

Mr Smith has now succeeded with his claim at the Employment Tribunal, EAT, Court of Appeal and now the Supreme Court during the litigation which has lasted for 6 years. What the Supreme Court (and the Court of Appeal) have said is that when considering whether someone is an employee / worker / self-employed a court should look at the entire relationship and the degree of integration between the individual and the company they are working for. Key to this was the level of personal obligation placed upon Mr Smith in relation to carrying out the work including whether there was a right for him to substitute his services with those of someone else.

What is our exposure if someone is a worker?

One of the most significant impacts of the Pimlico Plumbers case is not in that case itself but rather the case of King v The Sash Window Workshop which was reported at the back end of 2017 and is a judgment from the European Court of Justice.

This case concerned a worker’s entitlement to 5.6 weeks paid holiday every year. Mr King was a ‘self-employed, commission-only’ salesman who worked for The Sash Window Workshop from 1999 until 2012 when he retired. He brought a number of claims relating to his dismissal and also a claim for holiday pay on the basis that he had never been paid for, or in fact had the opportunity to take paid holidays.

What the court said in that case was that:

he was a worker because he personally provided the work to the Sash Window Company; and
because he was a worker he was entitled to 5.6 weeks paid holiday every year; and
that he was entitled to claim back pay all the way back to when he started with the company (13 years previously in 1999) for his unpaid holiday. A total of £9,936.73 was awarded.

This is where the status of being a worker financially bites for companies. And given that this is an ECJ case there is little room for manoeuvre on this outcome.

Companies are therefore wise to make an assessment about their potentially liability for holiday for their self-employed workforce and analyse the risk of them being workers under the current contractual and practical arrangements that they have in place.

If you engage with any self-employed individuals and need some advice on how to assess the level of risk (if any) that you are exposed to as a result of your contractual and practical arrangements, then please call contact our Employment Partners at:

Matthew Huggett

matthew.huggett@carbonlawpartners.com | 07496 126266

Rachel Clayfield

rachel.clayfield@carbonlawpartners.com | 07570 972425