A recent employment tribunal has shown how recruitment firms working with limited company contractors could be at risk of being drawn into costly legal proceedings.

Last year, an agency worker operating through an umbrella firm was assigned a day’s work at a company and had agreed with the agency that he would opt out of the IR35 tax stipulations.

However, the client refused to grant him security clearance, so he lost a day’s pay. The contractor therefore decided to sue the client for compensation on the basis that he had an employment contract with them and had not been given sufficient notice of termination.

Since the umbrella company had not signed the contract, this meant the contractor could claim that he was ‘employed’ by the client. Usually, opting out of IR35, which he had originally intended to do, means the contractor can not be considered an employee of either the agency or the client.

The recruitment agency which signed up the contractor was consequently drafted into the employment tribunal, despite pleas by both the agency and the client for the case to be thrown out.

The tribunal went to a final hearing, which ultimately found against the worker. But the cost to the agency was considerable.

Adrian Marlowe (pictured), managing director of Lawspeed, the company representing the agency, said that all this trouble and expense could have been avoided if they had ensured the umbrella company had signed the contract. “When dealing with umbrellas or limited company contractors, get them to agree terms,” he advised. “If not, you run the risk of making the situation worse in the event of a dispute.”