NEWS & INSIGHTS

PSC contractor was actually a “worker” of the recruitment agency (deduction of Employer’s NI was unlawful)

Brabners LLP

In the recent case of Appiah v Tripod Partners Ltd and Home Office, the employment tribunal addressed the issue of unlawful deductions of Employer’s National Insurance Contributions for an inside IR35 assignment.

Facts of the case

Michelle Appiah (“the Claimant”) is an independent social worker providing services to the Home Office through an employment business, Tripod Partners Ltd (“Tripod”). The Home Office, as the end-hirer in the supply chain, assessed the Claimant’s employment status for tax via HMRC’s CEST (“Check Employment Status for Tax”) tool, which resulted in an ‘inside IR35’ outcome.

The Claimant had previously undertaken assignments with the Home Office via Tripod through an umbrella company. Following the Home Office’s inside IR35 assessment, Tripod advised the Claimant that she had the options of undertaking this assignment on a PAYE basis, forming her own personal service company (“PSC”) or being employed again through an umbrella company.

Tripod provided the Claimant with a Key Information Document (“KID”) for all 3 options, telling her in an email that “Effectively all options should provide the same take home, but there are small differences”. Tripod also told the Claimant that if she opted for the PSC route, since the assignment was inside IR35, “…we deduct all employment taxes before transferring the monies”.

The PSC KID stated that there would be deductions required by law and specified those deductions as income tax and Employee’s National Insurance (“E’ee NICs”). It gave a worked example of income based on the Claimant’s hourly rate, with deductions. Neither the text nor the example referenced Employer’s National Insurance (“E’er NICs”).

The Claimant decided to continue her assignment by operating through a PSC.  The assignment schedule referred to a “Contractor fee” of £58 p/h, plus Tripod charged an additional £5 margin.

Tripod took its margin and then deducted income tax, E’ee NICs and E’er NICs from the “Contractor fee” (i.e the Claimant’s pay). The Claimant accepted that the first two sums were validly deductible, but she argued that the deduction of E’er NICs from her pay was unlawful.

The employment tribunal found, firstly, that despite the fact that the Claimant had contracted with Tripod through a PSC, she was actually a worker. This is not surprising given that she had previously carried out the assignment via an umbrella company (as an employee) and nothing had changed in practical terms when she began operating through a PSC. The fact that Tripod had given the Claimant the option of being a PAYE worker, an umbrella company employee or a PSC contractor in respect of the same assignment, demonstrated that there was no material difference between the arrangements and they were simply the vehicle through which the Claimant would be paid, rather than determining her employment status. The tribunal also considered the fact that the Claimant submitted timesheets, rather than invoices; she worked full time on her assignment with the Home Office; she performed her services personally and she was subject to the Home Office’s supervision, direction and control.

Secondly, the employment tribunal agreed that Tripod’s deduction of E’er NICs was unauthorised and contrary to Section 13 of the Employment Rights Act. Section 13 stipulates that an employer shall not make a deduction from a worker’s wages unless the deduction is authorised by a statutory provision, a term in the worker’s contract, or through the worker’s written consent.

It should be noted that as a starting point, an employer cannot make a deduction from pay to meet E’er NICs as this is a cost to the employer of employing the worker. The employment tribunal determined that Tripod should not have deducted E’er NICs from the Claimant’s wages because:

  • the contract between Tripod and the Claimant did not authorise deductions of E’er NICs from the Claimant’s pay (more on this below);
  • statute did not require Tripod to deduct E’er NICs from the Claimant’s wages (rather, statute required Tripod to pay E’er NICs to HMRC); and
  • the Claimant had not consented in writing to the deduction.

Specifically, the Claimant’s contract with Tripod stated:

“Where Off-Payroll applies to Assignment and where required in accordance with Off-Payroll, Contractor acknowledges and agrees that Employment Business shall deduct sums in respect of PAYE Income Tax and National Insurance Contributions Employment Business calculated in accordance with Off-Payroll prior to payment of Contractor’s invoice. Employment Business shall remit such sums deducted under this clause 7.2 and Employer’s NICs to HM Revenue and Customs to comply with its statutory duty” (emphasis added)

The word “and” in this clause indicated that E’er NICs was not a sum which Tripod was entitled to deduct under the clause, but that E’er NICs would nevertheless be paid to HMRC by Tripod in accordance with its PAYE obligations.

As a result, Tripod had unlawfully deducted £36,798.40 in E’er NICs (and £38.25 in Apprenticeship Levy) which created a total of £36,817,65 of unlawful deductions owed to the Claimant.

Implications of the case

This case is an interesting example of a Claimant opting to be paid though a PSC despite the fact that the assignment had been determined to be inside IR35. It is unclear from the judgment whether Tripod had explained to the Claimant that she would not get the employment law benefits afforded to employees by operating through a PSC, even though she would be taxed as an employee.

Secondly, whilst this case relates to IR35, the same principles apply to a traditional umbrella employment relationship, insofar as Tripod fell down because they did not make a clear distinction in their documentation and illustrations between the rate payable to Tripod by the client (the assignment or contract rate) and the rate payable to the worker. As a result, they were deemed to have deducted their E’er NICs from the Claimant’s gross pay.

This case serves as a reminder that it is crucially important for both agencies and umbrella companies to accurately and transparently explain and illustrate the calculation an individual’s take-home pay, including the difference between the assignment rate and the individual’s gross wages.

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