Contract for Services and holiday pay

Since the case of  Harpur Trust v Brazel  which we reported on in our article here, umbrella companies have been concerned about holiday pay accruing during periods when their employee contractors are in between assignments. Where do the funds come from to meet the cost?

Some umbrellas are now opting to use a contract for services as the method of engaging the worker/contractor instead of the traditional overarching employment model which maintains employment in between assignments. By using a contract for services, the contractors are not employees of the umbrella company but are workers who don’t have the same employment rights as employees and who generally don’t accrue holiday entitlement in between assignments.

There is no disadvantage to an agency working with an umbrella using contracts for services so long as the contract it has with the umbrella properly reflects the arrangements and the umbrella continues to pay the worker by way of employment income, namely subject to PAYE. However, where an umbrella has historically paid travel and subsistence expenses on a gross basis it will no longer be able to do so since one requirement for applying the tax relief to qualifying expenses is that the worker is engaged on an overarching employment contract. The dilemma for such umbrellas will be whether to retain an overarching employment contract and keep the tax relief option for expenses which will then attract holiday entitlement in between assignments, or switch to a contract for services which loses the expenses relief yet avoids the holiday pay issue.

There are other factors arising from a switch to a contract for services. Contractors relying on being able to demonstrate continuous employment, for example for mortgage purposes, may lose that benefit. Switching existing contracts away from employment could amount to an employment dismissal and may give rise to a range of contractual and statutory problems for the umbrella, with risk of fallout in the supply chain.

The umbrella employment model remains viable unless the umbrella continues to pay expenses gross, so requiring an overarching employment contract, in which event questions may need to be asked about where the money for inter assignment holiday pay is coming from. This is particularly important for agencies opting for a joint employment model with a joint employer provider. Here there are specific risks. Due to the employment arrangement, liability to a worker for all underpaid employment amounts including holiday pay will probably fall to the agency on a joint and several liability basis regardless of any arrangements in place with the joint umbrella employer.

As with all umbrella arrangements, having the appropriate protective contract in place with the umbrella company whatever the circumstances is critical to avoid potential problems from accruing.

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