Pitfalls for Agencies and Users of Contract Workers

Tanner De Witt Legal Update, October 2004

The UK Court of Appeal’s decision in Patricia Dacas v Brook Street Bureau Limited (2004 AWCA 217) has clarified important issue as to the employment status of agency workers and in particular:

• Whether agency workers enjoy the status of an employee and the benefits which attach to having status as an employee; and
• Who is or can be deemed to be the employer of such agency workers.

The case is a UK case but is very likely to be followed and applied in Hong Kong.

Facts

Mrs. Dacas signed a “contract for services” as a private contractor with an employment agency – Brook Street Bureau (the “Agency”) who posted her to work exclusively for their client, Wandsworth Local Council (the “End User”). Mrs. Dacas worked exclusively for the End User as a cleaner in one of its hostels, for over 4 years. She had no contract with the End User but was required, under her contract with the Agency, to follow the End Users instructions.

As is common where agency workers are provided, the Agency was responsible for paying Mrs. Dacas as well as having the right to terminate her engagement under the contract. The contract did not oblige them to provide her with work and did not oblige her to accept any. The only mutual obligation with Mrs. Dacas was that she was to be paid by the Agency for work she accepted, and did. The Agency in turn, contracted with the End User for whom Mrs. Dacas worked. It was the End User which provided her with all of her cleaning materials and other equipment and directed her work.

The End User asked to withdraw from the contract in relation to Mrs Dacas as there was no further work for her. Mrs. Dacas commenced proceedings against the Agency for compensation for unfair dismissal on the basis that she was in fact an employee of the Agency.

The Court’s decision

The Court summarised the position and decided that:

1. Each case depended upon its own facts and the Court had to look at the contractual arrangements and how they were operating in each case to determine the real status of the parties;
2. Generally where there was no mutual obligation to give or accept work and these obligations were split between the obligation to pay and the entitlement to exercise control over work, agency workers were not employees of the agency. This is because there is insufficient mutuality of obligation to satisfy the minimum necessary requirements for a contract of employment; and
3. There could however, depending upon the facts, be an implied employment contract between the End User and the agency worker, making the “agency worker” in fact an employee of the End User.

The Court stated:

“there must be an irreducible minimum of mutual obligation necessary for a contract of service [i.e. a contract of employment] which is an obligation to provide work and an obligation to perform it, with the presence of control…in the absence of a contract, or a contract having no mutuality, the [agency worker] cannot qualify as an employee of the agency”

“The [agency] was not under an obligation to provide Mrs Dacas with work. She was not under an obligation to accept any work offered by the agency to her. It did not exercise any relevant day-to-day control over her or her work. That control was exercised by the [End User] which supplied her clothing and materials when she did the work. The fact that [the agency] agreed to do some things that an employer would normally do (payment) does not make them the employer.”

As indicated above, the Court did state that there was a possibility of a contract of employment being implied between the agency worker and the End User client. The Court said:

“[in these situations, the Court] should at least consider the possibility of an implied contract of service. The result of the consideration will depend on the evidence in the case about the relationship between the [agency worker] and the end user and how that fits into the other triangular arrangements.”

“The [end user client] in fact exercised the relevant control over her work and over her. Mutuality of obligation – the end users was under an obligation to pay for the work which she did and she received payment in respect of such work from the agency. The agency worker was under an obligation to do what she is told and to attend punctually at stated times…in general it would be surprising if in a case like this, the end user did not have powers of control or direction over such a person in such a working environment. The end user is the ultimate pay master. The arrangements were set up and operated on the basis that the end user would pay the agency. What was the end user paying for if not the work done, under its direction and for its benefit?”

Implications

The case clarifies and highlights various issues for employment agencies involved in providing contract staff and for their clients, and for employers who use “contract” or “agency” workers, in particular:

• The terms of the contractual arrangements between the agency and the worker should be carefully considered. Provided there is not the element of mutual obligation necessary for an employment contract, in particular to provide and to accept work, it is likely that such workers will be considered as contract workers and not as employees of the agency.
• Depending upon the nature of arrangements, the level of control, exclusivity and the period of the engagement, the end user client may be deemed to be the employer of a worker they had engaged as contract staff through an agency. This would render them liable for all benefits and entitlements of an employee including:

• Employment protection / severance pay
• Sick leave, maternity leave and annual holiday entitlements
• MPF contributions
• Statutory employees compensation
• Implied notice periods for termination
• Other statutory benefits
• It would also mean that the end user has defaulted under its legal obligations to enrol those deemed employees in MPF funds and to provide for mandatory employee’s compensation insurance.
• Depending on the terms of the contract between the agency and the end user client, the agency may be expressly or impliedly liable to reimburse to the end user client the additional costs of being deemed the employer of the worker. This is because the contract between them was for the provision of an agency worker rather than an employee.

In light of this, agencies and their clients need to carefully consider the situations and positions in which they engage contract staff, keep under review the nature and basis of the arrangement and carefully consider the terms of the relevant contracts between all three of the parties.