Contractors inside IR35 may be able to claim employment rights after a landmark ruling

Date: July 15, 2009

A recent Employment Tribunal ruling has found contractor Andrew Tilson to be an employee of end client, Alstom Transport, despite receiving payments through his Limited Company. The ruling allows him to claim for unfair dismissal.

Tilson had been working at the company through an agency and had invoiced for work completed on an hourly basis. He has been working at Alstom as a full-time contractor since 2004. In November 2006, his contract was terminated without explanation and with only one week's notice. The ruling that Tilson should be considered an employee of the company enables the contractor to claim unfair dismissal.

The case was also subject to an appeal hearing at which Alston unsuccessfully tried to join both the Agency and the Contractor's Limited Company as appellants to the case. This appeal was refused on the basis that neither the Agency nor the Contractor's Limited Company had a mutuality of obligations with the Contractor. In fact, it is clear that the ruling did not consider the Contractor's Limited Company as anything else but a "mechanism through which the claimant was paid".

The Judgment from a hearing that took place in March contains some interesting points:

1. Tilson claimed unfair dismissal from Alstom who disputed he was an employee.

2. Tilson provided his services through Silversun Solutions Ltd which contracted with Morson Human Resources Ltd. Silversun deducted 3% from the gross amount received for Tilson's services and did not deduct Tax or National Insurance before passing the remaining funds to Tilson. There was no contract between Silversun, Tilson was not a Director or Shareholder.

3. Tilson received training from Alstom and was fully integrated within the organisation, his work being under the supervision of a Line Manager at Alstom. Tilson had employees working for him, he recruited staff, he was authorised to discipline and dismiss permanent employees, he signed time sheets and ordered materials for Alstom. Tilson also had to ask before taking annual leave, and had a company phone, computer and network access. He was not at liberty to supply a substitute.

4. Tilson was terminated summarily by Morsons on the instruction of Alstom.

5. The contract between Morson and Silversun contained the sort of industry standard clauses you would expect that confirmed that Tilson had no employee rights and was not an employee, and that Alstom would not be entitled to seek or exercise any supervision, direction or control over Tilson.

6. Tilson was not party to the contract between Silversun and Morson.

7. Morson had indemnified Alstom against the costs of unfair, constructive or wrongful dismissal.

The Judge decided that it was clear from the evidence that Tilson wanted to be a contractor and perceived that there was tax advantages in doing so, in fact even refusing to change his contract status at one point.

Judge Smail concluded that:-

1. The contract documentation was not genuine, and Tilson was not party to it anyway. In particular the contract between Morson and Silversun was not a genuine reflection of the relationship of the parties.
2. Regardless of any contract documentation Tilson was subject to direction, supervision and control by Alstom. "It is senseless to describe Silversun as 'the Contractor' when all that the company did was to sign the contract and pass on payment less a 3% service charge".

1. The fact that Tilson wanted to be a contractor was for tax reasons and "might be an issue for the tax authorities"
2. Tilson was employed by Alstom and therefore the termination of the employment becomes a dismissal, and as there was no pretence of any procedure, there is judgement for unfair dismissal.

The decision made at the tribunal; confirming that Tilson should receive the relevant rights as an employee of the company, comes as the first of its kind since the James V Greenwich case in 2004. In this case, Ms James attempted to claim employment rights for a temporary job at Greenwich Council after being replaced whilst taking time off. James claimed that a contract excited between herself and the council as opposed to her agency. The court found a valid agency contract to be in place and therefore ruled that it was not necessary for a contract between contractor and end-client to exist. James was therefore unable to claim employment rights from Greenwich Council, as they were not deemed her employer.

It had been thought that the 2004 case had confirmed the situation of employment rights for IR35 contractors. This latest ruling, however, has brought the case to light once more, and has the potential to change the outlook for contractors stuck within IR35. Although it now appears possible for contractors to claim employment rights, it is important to remember that each case must be carefully analysed and considered as Tilson's success does not necessarily imply imminent success for other similar cases.

Graham Fisher, Managing Director of OrangeGenie, commenting on the ruling said "this case just proves what most of the industry realise. If you use an umbrella company that offers full employment rights to its contractors using an approved overarching contract, this problem cannot exist."

For further information please contact Julian Ward, Sales Director:

Tel: 07725 563005

Email: Julian.Ward@orangegenie.com