Some employment agencies that have been engaging their temps directly as employees have put in place overarching contracts of employment to ensure that such contracts are legal. So what are the benefits of these types of contract?

Traditionally, when engaging temporary workers to place with end-user clients, employment agencies have preferred to use a model whereby the temporary worker is engaged on a self-employed basis under a contract for services (to be contrasted with a contract of service which is a contract of employment). The advantage of such an engagement for the employment agency and for the end-user client is that it reduces the risk of either agency or client being held liable for employment rights and allows greater flexibility for client and agency in the placing of temporary workers.

However, in recent years some agencies have started to engage their temporary workers directly as employees. There are a number of reasons for this:

• Offering employment rights may enable agencies to attract workers with the ‘benefit’ of employment rights

• A concern that the law (at both UK and European level) is moving in favour of giving employment rights to temporary workers, so agencies may as well recognise that fact now

• Engaging temporary workers as employees may allow the individual to claim travel and subsistence expenses that could not otherwise be claimed by a temporary worker

For an agency worker to be genuinely the employee of the agency they must be engaged under a contract of employment that fulfils certain legal requirements. Firstly, there must be an obligation on the employer to provide a minimum level of work or pay and an obligation on the part of the employee to carry out the work. This ‘mutuality of obligation’ is a key component of any employment relationship. Without it there can be no employment. Secondly, the work of the employee must be subject to some control by the employer. Finally, the rest of the relationship must be consistent with what one would expect from a contract of employment.

To ensure that any contract of employment is genuine some agencies have put in place overarching contracts of employment that meet the three criteria above. Such contracts will provide an element of control and are otherwise consistent with true employment (eg by providing for holiday pay, statutory sick pay, access to a stakeholder pension scheme, disciplinary and grievance procedures etc).

These contracts will also provide either a minimum guarantee of the amount of pay or work that the employee will be offered. Typically a minimum guarantee of at least a day a week will be required (at least in the eyes of Her Majesty’s Revenue & Customs [HMRC]) to establish sufficient mutuality of obligation on the part of the employer. In return, of course, the employee is obliged to accept offers of work from the agency. These contracts are called ‘overarching contracts of employment’ as they provide for employment that will ‘overarch’ any number of assignments. Accordingly, the end of an assignment is not the end of the employment.

One advantage of these contracts is that it allows the employee the opportunity in appropriate cases to claim travel and subsistence expenses in relation to their individual assignments. If the agency obtains a dispensation from HMRC for payment of such expenses on a scale rate basis this can effectively be used to increase the amount of money the employee takes home.

It would appear, however, that HMRC are concerned at what they see as the possible abuse of these arrangements by some agencies and by umbrella companies who also adopt overarching contracts of employment. HMRC has published a consultation document entitled ‘Tax relief for travel expenses: temporary workers and overarching employment contracts’. HMRC are seeking views from the industry.

If HMRC do decide to take action it is likely that they will do so quite quickly and possibly with effect from April next year. The irony is that if they do remove the entitlement to tax relief that may discourage some agencies from providing the benefit of employment status to their workers.