Is your payroll company leaving you exposed?

by | May 10, 2022

In February 2022, an employment tribunal ordered a contractor to pay substantial costs to a ‘self-employed’ subcontractor they worked with via a payroll company.

Here is a breakdown of what the contractor was instructed to pay:  

  • For unfair dismissal: £10,647.50.
  • For breach of contract relating to unpaid wages: £900
  • For breach of contract relating to the unpaid bonus: £2,556.25
  • For breach of contract relating to unpaid notice: £2,700
  • For unpaid annual leave under the Working Time Regulations: £12,000

That’s a pretty hefty bill considering the subbie wasn’t an employee. Surely, the fact the contract was with the payroll company, not the contractor, makes the payroll company liable, doesn’t it?

Turns out it doesn’t. The judge ruled that the contract with the payroll company was pretty much a sham and did not reflect the true working relationship.

Judges are no longer simply accepting the contractual relationship; they take what apparently happens on paper and compare it to the real world. And if those things don’t match up, you could be leaving yourself exposed.

This isn’t limited to courtroom judges and employment tribunals. If HMRC opens an enquiry into the employment status of your subbies, they will also compare the contractual relationship with the day to day reality.

Ultimately, what happens contractually has to happen in the real world.

Let’s look at a couple of examples of where this particular contractor went wrong…

Mutuality of obligation (MOO)

Is there an obligation for the employer or contractor to provide work, and is there an obligation for the employee or subcontractor to accept it?

In the case outlined above, the judge determined MOO between the contractor and the subcontractor, despite the contract being with the payroll company.   

One of the main reasons for this was the contractor sent out paperwork to clients naming the subbie as the person who would be carrying out the work. The judge’s decision was as follows:

“I find that the claimant, having signed the paperwork with [the payroll company], was in fact expected to be available to the respondent who relied on him as a named individual in its own contracts with contractors. They provided him with work, and he was expected to attend to carry out that work. There was mutuality of obligation directly between the respondent and the claimant.”

Level of control

Another key issue in this particular case was the issue of control.

The contract between the subbie and the payroll company stated the subbie would: not be subject to any control by anyone as to the manner in which the services are provided, and the respondent will not exercise supervision…’

However, the judge found plenty of evidence that the subbie was receiving direction and supervision from the contractor:

“I have found that, again contrary to the express terms of the contract, the respondent exercised full control over the claimant, determining when he did the work, where he did the work, how he did the work and the tools he used.”

Personal service

One of the factors the law considers when assessing whether an individual is genuinely self-employed is whether the individual must personally perform work. In other words, does it have to be them, or can they send a substitute?

In this case, the judge determined that the contractor expected the subbie to personally carry out the work despite what the contract said:

“The claimant was expected to attend jobs personally and was indeed written into key core contractor contracts. I conclude that the right of substitution was a sham. I also conclude from these facts that there was mutuality of obligation, the respondent would not have been satisfied with anybody else turning up but expected the claimant to do so.”

Lessons to be learned

The key lesson we can learn from this case is that using a payroll company to work with your subbies long-term doesn’t always protect you. How you pay your subbies is irrelevant.

In this case, and in others, the judge is looking at the true nature of the working relationship, regardless of what is written in the contract.

From the judge’s perspective, it was clear that the use of the payroll company was for the sake of appearance only. On paper, the subcontractor was contracted by the payroll company, but in reality, he had no communication with them.

“I have found that this is a contract of personal service, there was mutual obligation, control was exercised over the claimant, he was provided with all the tools necessary to do his work, he was held harmless from any loss his actions caused, and he was integrated into the business. For those reasons, I conclude that he was, in fact, an employee.”

The contractor wanted an employer-employee relationship with that particular subcontractor without employing him. They wrongly assumed that paying him through a payroll company would allow them to get away with it.

That’s not to say that you can’t use a payroll company to work with subbies. But ask yourself this: who is the subbie working for, you or the payroll company?

If the answer is you, then why not put your own contract in place with the subcontractor? Why bother with a sham contract?

Put a contract in place between you and your subbies that truly reflects the working relationship, and you’ll remove the risk of something like this happening to you.

And if you’d like help putting a bespoke, watertight contract in place, get in touch with HardHats. We’re the only company in the UK to offer an insurance-backed self-employed subcontractor guarantee specifically for construction firms. In other words, we take on your risk so you can get on with running your business.

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