Whilst there are sometimes, particularly where IR35 is to be considered, two contracts in the tax relationship (1) between engager and intermediary and (2) between intermediary and engaged individual, employment legal rights status looks primarily at the contractual relationship between the engaged individual and the end user client. It does that both according to the written contract terms but, more importantly, in the reality of the operation of the relationship. The engaged individual’s employer for legal rights purposes is usually the intermediary because there is rarely a direct written contract between them and the end user or client. However, there can be circumstances where the engaged individual’s integration into the end user’s business can be so extensive that they meet the threshold for legal rights employee or, more likely, worker status with the end user. We have already seen this in a case involving a GP providing out of hours medical services. Industries vulnerable to this view may well be those where heavy regulation requires a higher degree of control over an engaged individual, for example, in the financial services or the medical sectors with end users responsible for that regulatory compliance throughout both their employed and more loosely engaged workforce.
Care should also be taken where there is a planned relabelling of an existing engaged relationship by reason of the private sector IR35 reforms. If it is decided to confer both employee legal rights status alongside deemed employee working status for tax, past time served in the same “employment” by that end user may need to be aggregated to assess it for continuous employment earned rights. Since legal rights employee status is unlikely where there is a corporate intermediary, this risk ought to be low. However new legal working rights status should only be adopted with a clear cost and risk assessment.
Many organisations seeing the changes to IR35 from 6 April 2020 are severing their relationships with the intermediaries supplying their long term engaged individuals by 31 March 2020 since the new IR35 rules attach to any payment made from 6 April 2020 even if the work was untaken before then. Apart from the fact finding challenge of establishing which suppliers are PSCs, care is also needed before blanket terminations with intermediary PSCs are undertaken.
First, termination rights under the contract with the intermediary need to be effectively exercised. Secondly, if there is a prospect that the engaged individual may have employee status with the end user due to extensive integration, control, mutuality of obligation or otherwise, there will need to be given due statutory notice of termination to the engaged individual by the end user, probably served without prejudice to an assertion that there is no such employee status.
Alternatively, there may well need to be consideration of the rights which the engaged individual may have accumulated to date if they are a worker in legal rights terms for the end user client to secure clarity that, for example, holiday rights and holiday pay (including the correct pay components and based on the correct reference period (which is also changing in April 2020)) are met. Settlement Agreements in statutory required form may be needed to achieve clean break certainty.
When the arrangements with an engaged individual are ended either due to the risk of deemed employee status for tax on the changes to the IR35 rules or actual legal rights worker status or both, a new outsourced arrangement may be established meeting the IR35-excluded contracted out services test. Then an assessment must be made as to whether that change is a TUPE transfer in legal rights terms meaning that employees in the PSC transfer across with their employment contract terms preserved.
If employee status does exist for legal rights purposes between an end user and the engaged individual provided by the intermediary, a careful legal rights risk assessment is needed before varying or terminating the arrangement.
Designing the post new IR35 workforce solution should not be looked at in tax isolation in order that an end user properly manages their risks.
Instead the often-pervasive employment legal rights already in existence and likely to be created or transferred must be assessed and managed effectively to avoid future claims risk.
A joint cohesive workforce structuring solution to the IR35 tax changes sitting alongside a full employment legal rights understanding will be sought by the wise business leader.
What’s the employment legal rights status of any engaged individual working in your business via a PSC intermediary?
Is an engaged individual an employee of their PSC?
What’s the impact for employment legal rights purposes of deemed employee status determinations?
What employment legal rights risks are there by ending your agreement with a PSC?
Are you free to make a new direct agreement with an engaged individual or do they already have employment legal protections?
How can you manage any existing employment legal rights on an IR35 workforce restructuring?
Contact Carolyn Brown for more information on how you can prepare.