An umbrella company is an employer. Therefore, all umbrella contractors should sign an Over-Arching Contract of Employment, also referred to as a contract of service. This contractual arrangement establishes the rights and obligations in such matters as maternity pay, sick pay and employment protection. Contract and Employment law is complicated! There is a substantial body of case law which provides guidance on what constitutes a contract of service.
Contract of Service
HMRC often cite the case of Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance  as being essential in determining whether a contract of employment exists. Within the judgement in this case three conditions were identified. If fulfilled, would indicate that a contract of service is in place:
The servant agrees that, in consideration of a wage or other remuneration; The servant will provide his own work and skill in the performance of some service for his master.
He agrees, expressly or impliedly, that in the performance of that service; He will be subject to the other’s control in a sufficient degree to make that other master.
The other provisions of the contract are consistent with its being a contract of service.
Tax Relief on Expenses with an Over-Arching Contract of Employment
Any umbrella company should ensure that the Contract of Employment they have in place meets the basic requirements. If they intend to allow tax relief on T&S expenses, they must ensure that there is an over-arching element to the contract. Travel and subsistence expenses are only allowable if the worker is travelling to a temporary location. A worker intending to have only a single assignment has no such entitlement. If the umbrella company operates an over-arching contract of employment this has the effect of linking a series of assignments under a continuous employment. This therefore makes them temporary assignments giving the entitlement to travel and subsistence expenses.
Mutuality of Obligation
The worker agrees to provide their skill and the employer agrees to pay for that skill. This is what is referred to as ‘mutuality of obligation’. This is essential in establishing a contract as, without it, one cannot exist. In an over-arching contract of employment an umbrella company must demonstrate that they have provisions in the contract which relate to mutual obligations in the gaps between assignments. It is not possible to provide a complete list of what would suffice in relation to mutual obligations in the gaps between assignments. However listed below are examples of provisions which may be present in a contract to support continuing obligations on the part of both the employer and the worker:
An obligation by the worker to accept and do work. An obligation on the employer to pay a retainer during such periods when work was not offered;
The guarantee by the employer of a minimum number of hours work over a 12 month period would likely provide an obligation on the part of the employer. This is providing that the worker is remunerated for the hours promised. This is regardless of whether or not they have been worked. However, if an Over-Arching Contract of Employment does not promise a minimum number of hours i.e. a ‘zero hours’ contract, it doesn’t mean that it will not be over-arching. It simply means that the umbrella company would have an obligation to pay the worker a retainer.
A promise by the worker to work exclusively for the employer during the duration of the contract. This means the worker can’t work for anyone else, would be an obligation on the part of the worker.
Gaps between Assignments
It is not sufficient for there to be obligations in the gaps between assignments. This is either only on the part of the worker or only on the part of the employer; there must be subsisting mutual obligations present in the gaps between assignments on both parties.
Clark v Oxfordshire Health Authority
The concept of an over-arching contract of employment has been developed over a considerable period of time. HMRC uses specific case law to support its view of what is and is not acceptable in such a contract. In the case of Clark v Oxfordshire Health Authority, those hearing the evidence disagreed over whether or not an over-arching contract was in place.
A bank nurse had membership of the NHS pension scheme. They were encouraged to join a trade union. However, they were only offered work on a casual basis and had no entitlement to payment when she did not work. Or when she was sick or on holiday; the Court of Appeal finally upheld that there was no ‘global’ contract of service. The reason for this decision was on the basis that there was no mutuality of obligation in the periods when the nurse was not working. So, HMRC’s position is quite clear… In order for an umbrella company to operate an over-arching contract and therefore allow travel and subsistence expenses they must make some provision in their contracts for pay between assignments.
Supervision, Direction & Control
In a recent addition to HMRC guidance on the subject they have also stated there must be a sufficient degree of control exercised over the worker by the employer. With the nature of contracting and contractors it is difficult for any umbrella company to legitimately claim that they have ‘control’ over any of their employees’ working practises. So what they must ensure is that control is exercised in other ways such as enforcing the employment contract notice period, a rigorous expenses policy which demands regular proof that claims are legitimate and a grievance procedure with evidence of implementation in cases of gross misconduct for example. Umbrella companies should also be considering the way in which they deal with holiday pay. This is entitles a worker to holiday pay under the EC Working Time Regulations.
Umbrella companies will not be considered as having met their obligations in the gaps between assignments by paying holiday pay. The entitlement must be calculated on the basis that the worker is employed under a single contract of employment i.e. not on an assignment by assignment basis. It is also not deemed acceptable to pay ‘rolled up’ holiday pay; i.e. work on the assumption that a weekly or monthly salary will have therein an element of holiday pay; it must be shown separately on the payslip at the point at which the employee takes holiday.
Autoclenz v Belcher & Ors
To satisfy HMRC, it is important that the contract the umbrella company has in place with their employee is reflective of what happens in reality. In their guidance manuals they refer to the case of Autoclenz v Belcher & Ors. It was held that a court of tribunal has to consider whether or not the words of the written contract represent the true intentions or expectations of the parties… Not only in the inception of the contract but, if appropriate, as time goes by. Therefore, although important for umbrella companies to have a comprehensive over-arching contract in place, they must also ensure that their internal procedures reflect what is contained therein.