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It is a finance directors role, amongst other things, to find ways of reducing overhead. Costs actually saved without affecting performance is the ideal. Attributing costs to one type of overhead instead of another can also have benefits, allowing budgetary targets to be met.
Traditionally one method for larger organisations to reduce and/or reallocate cost has been to reduce headcount amongst employees. Laying off staff removes the entire overhead but loses the resource, and thus can affect performance. Converting staff from being employees to being self employed however has enabled savings to be made without necessarily affecting performance, and historically has provided the added bonus of achieving hiring flexibility. Non employed staff do not need statutory notice to end the contract, and do not have the right to claim unfair dismissal or redundancy (or for that matter other pure employment rights) - and so such staff can be fired at will. In addition employer’s national insurance need not be paid, providing a saving of 12.8% on “salary” overhead.
The same benefits traditionally have applied when new staff are hired on contracts that are not employment contracts.
To achieve these savings an employment relationship must be avoided. To avoid employment a hirer will ensure that the worker signs a temporary contract for services. A more prudent hirer may well use an agency to resource and supply new workers the agency, on the face of it taking over responsibility for entering into contracts with staff subject to headcount reduction. Sometimes staff are asked to operate through limited companies in an attempt to further push away any semblance of an employment relationship. Having taken these steps a finance director may feel content to allocate the overhead away from “salary or wages”, and safely bag the 12.8% saving – job done.
However things are now no longer as simple as that. In a recent Court of Appeal ruling (Cable and Wireless v Muscat) guidance in an earlier case (Brook Street Bureau v Dacas) has been unambiguously upheld. In Dacas the Court of Appeal laid down clear guidelines requiring any Tribunal to consider in every case whether a worker is an employee of the hirer, largely regardless of any written agency contracts.
The result is that non employed staff that are treated as employees by the hirer may well now have full employment rights, and, if they do, they are in fact employees for all purposes. This in turn means that all of the benefits, the flexibility, the exclusion of rights to claim unfair dismissal and so on, are lost. This applies to all categories of temp staff including interim managers.
Temp staff can make claims to employment tribunals for enforcement of employment rights including unfair dismissal, and are likely to succeed if the criteria is met. If they do succeed not only will orders for payment of awards have to be met, but the Revenue will have to be reckoned with. The Revenue is no longer shy in coming forward to claim employment tax and national insurance if it considers there is an employment relationship that has not been disclosed. In addition, wasted management time will be irrecoverable from any source.
There are steps that can be taken to avoid such staff being treated as employees. However there is no silver bullet solution and each organisation will have different issues that should be confronted. It is possible to arrange affairs so that a good degree of flexibility is still retained without the risks. Some staffing agencies, even those purporting to offer a managed service in this area, simply do not have the expertise or process in place to provide real security in this area. It would make sense therefore to obtain specialist independent advice, to identify the risk not only relating to the worker, but also which could be engendered by an unaware agency, and to devise a strategy for dealing with it. This could restore the benefits of using temp workers. However to ignore this issue following the ruling in Muscat would be to court disaster on a number of levels.
May '06
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