Legal update: Employment Agency Arrangements and Zero Hours

In 2004 the UK Court of Appeal handed down the decision Patricia Dacas v Brook Street Bureau Limited [2004] EWCA Civ 217 stating that, under the employment agency arrangements an implied contract of employment may exist between the worker and the end user.  The law has developed since then.  In 2008 the same judge (Lord Justice Mummery) sitting in the Court of Appeal in Ms Merana James v London Borough of Greenwich [2008] EWCA Civ 35 upheld the Dacas decision, and applied a more stringent “necessity” test in establishing the implied contractual relationship.

As the employment agency arrangements are commonly adopted in Hong Kong, the law in this area has significant implications on the workers who would otherwise be protected by the Employment Ordinance, and the end users who might be held liable to the workers’ statutory entitlements if an implied contract of employment is found by the Court.

This is of current interest given the recent and controversial use of zero hour contracts both generally and under such employment agency arrangements.

Ms Merana James v London Borough of Greenwich [2008] EWCA Civ 35

Facts

Ms James (the “Worker”) worked for the Greenwich Council (the “End User”) through an employment agency for 2 years and then switched to another agency (the “Agency”).  During the 3 years of work she was subject to a degree of control by the End User (e.g. the End User arranged all her instructions, orders and her working conditions, provided the materials used in her work and organised the procedures), but she was paid by the Agency on the basis of weekly time sheets.  However there was no obligation to provide work, merely an obligation to pay for hours actively worked, i.e. a “zero hours” arrangement.

The Worker was later absent from work for 2 months due to sickness.  She did not notify the End User of her absence, nor did she receive any sick pay.  Upon return to work the Worker found that the Agency had sent a replacement to cover her shift.  The Worker filed a claim against the End User for unfair dismissal, which was rejected by both the Employment Tribunal and the Employment Appeal Tribunal.

Ruling of the Court of Appeal

(i)    “Necessity” test

The Court of Appeal (“CA”) held that the real issue was whether, in the absence of any express contract of employment, an implied contract of employment between the Worker and the End User might be deduced from the conduct of the parties and from the work done.  In order to imply a contract to give business reality to what was happening, the question was whether it was necessary to  do so, the test being that laid down by Bingham LJ in The Aramis [1989] 1 Lloyd’s Rep 213 at 224:

‘… necessary… in order to give business reality to a transaction and to create enforceable obligations between parties who are dealing with one another in circumstances in which one would expect that business reality and those enforceable obligations to exist.’

CA further approved the guidance laid down by the Tribunal that:

“when the arrangements are genuine and when implemented accurately represented the actual relationship between the parties, it will be a rare case where there will be evidence entitling the Tribunal to imply a contract between the Worker and the End User.  If any such a contract is to be inferred, there must subsequent to the relationship commencing be some words or conduct which entitle the Tribunal to conclude that the agency arrangements no longer dictate or adequately reflect how the work is actually being performed, and that the reality of the relationship is only consistent with the implication of the contract”.

(ii)     Application

CA upheld the conclusion reached by the Tribunal on the basis that:

(a)    The Worker’s only express contractual relationship was with the Agency, as she recognised when she changed agencies rather than employer in order to obtain a higher wage.  The End User’s only express contractual relationship was also with the Agency.  There were no grounds for questioning the validity of these contracts.

(b)    The mere passage of time did not of itself establish any mutual undertaking of legal obligations between the Worker and the End User; it is not necessary to imply a contract to explain the length of the relationship.

(c)    The provision of work by the End User, its payment to the Agency and the performance of work by the Worker were all explained by their respective express contracts between the Worker and the Agency, and between the End User and the Agency, so that it was not necessary to imply the existence of another contract to give business reality to the relationship between the parties.

Whilst Dacas was correct that certain circumstances can justify the inference of an implied employment contract between a contract Worker and the End User, the Tribunal was fully entitled to find that the implied contractual relationship did not exist if it was not necessary in the circumstances.  Time can no longer justify such implication as a matter of necessity.  Something more is required to establish that the Agency arrangements do not hold good.

Implications

In light of the UK authorities Dacas and James v London Borough of Greenwich, it is plain that an implied contract of employment could exist between the Worker and the End User in a tripartite situation.  In determining whether it is necessary to imply such a relationship with the End User, the Court will look at factors such as the employment arrangements, how the arrangements operated in practice, the work done by the Worker and the conduct of the End User.  If there is a mutual obligation (i.e. an obligation to provide work and an obligation to perform it, coupled with the presence of control) the implied contractual relationship is more likely to be established.

The following are practical examples of employment arrangements which the Court will take into account when establishing the implied contractual relationship:

• End user giving direct instructions to the workers
• End user purporting to change the terms and conditions of the workers’ contracts
• Granting of direct benefits such as medical and dental care to the workers
• Providing interest-free loans to the workers
• Offering free membership
• Allowing free access to the company’s facilities
• Providing all the materials needed by the workers to carry out the duties
• Workers providing services to the same end user for many years
• Direct payments

If the implied contractual relationship is established, the End User will be deemed as the employer of the Worker and hence be held liable for all the benefits and entitlements of the worker/ employee including under the Employment Ordinance and other legislation, including potentially:

• Severance payment/ long service payment
• Maternity leave
• Rest days entitlement
• Paid annual leave
• Sick leave and sickness allowance
• MPF contributions
• Implied notice period for termination
• Statutory employees compensation
• Employees’ protection under the Discrimination Ordinances
• Vicarious liability and statutory duties of care under the common law

This area of law has not been fully explored in Hong Kong and no case law is founded yet.  As such, companies intending to enter into employment agency arrangements for agency workers should be aware of the potential legal liabilities and should seek legal advice when there is any concern in order to properly structure and operate such relationships and in order to minimize any associated risks.

For further information, please contact:
Russell Bennett
Partner | Email

Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.