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Your contractors might be employees – even when you have a written agreement that says otherwise. That is the effect of a ruling last month which bestowed upon a telecoms specialist, contracted as an agent, all the rights of an employee.

With seemingly never-ending rights for employees and increasingly complex obligations for employers, many companies favour agency workers and independent contractors over the recruitment of staff. But in a ruling against Cable & Wireless (C&W) last month, the Court of Appeal said a contract of employment can be implied in such arrangements.

The case concerned telecoms specialist Mr P Muscat. He had been employed by a company called Exodus Internet. In 2001, Exodus was preparing for a sale and wanted to reduce its staff count. It dismissed Muscat, agreeing to rehire him as a contractor through the vehicle of his personal service company, E-Nuff.

C&W bought Exodus and told Muscat he must deal with the company through an agency. The agency contract with E-Nuff stated that nothing in it should be construed as constituting or establishing a relationship of employee and employer between the parties.

Thereafter (at C&W's request), the agency terminated the contract with E-Nuff and, in response, Muscat filed a claim of unfair dismissal. He argued that he had actually been an employee of C&W and as such had been unfairly dismissed.

Mr Muscat went to an employment tribunal hearing. In 2004, another case on similar issues had been heard by the Court of Appeal. It had to decide whether a cleaner, Patricia Dacas, was an employee of an employment agency Brook Street Bureau. It ruled against Mrs Dacas, saying an employment relationship can potentially be implied between an agency supplied worker and an end user and that, in deciding the true employment status of a worker, employment tribunals should consider not just the written contract governing the arrangement, but also all the evidence as to the factual reality of the arrangement.

Muscat's employment tribunal considered this guidance and ruled there was an implied contract of employment between him and C&W despite the fact that there was a quadrangular relationship among Muscat, his personal service company E-Nuff, the agency and C&W.

The Court of Appeal upheld that ruling. It said the guidance in Mrs Dacas's case did not mean that employment tribunals were bound to reach any particular conclusion in this type of situation, only that employment tribunals should consider the possibility than an implied contract of employment might exist.

C&W argued that to call Muscat an employee of C&W amounted to a change in law by "judicial creativity". The Court of Appeal disagreed. It said that in cases such as these there are a number of different possibilities as regards the reality of the employment situation: an employment relationship might be capable of being implied between the individual worker and the end user or even the agency.

Robyn McIlroy, an employment law specialist with Pinsent Masons, the law firm behind OUT-LAW.COM, commented: "Rather unhelpfully, the Court of Appeal was reluctant to give any further guidance." So the question of whether a worker is in fact an employee will, as ever, turn on the facts of each case.

McIlroy says the case sends a warning to any company that uses agency workers or personal service companies to avoid employment liabilities. "Having a written contract that expressly denies the existence of an employment relationship is no longer enough in itself," she says. "Consider now how to minimise the risk of creation of an implied contract of employment."

Suggestions include keeping assignments short, preventing workers from being integrated into the workforce, ensuring there is no obligation to provide work, and reducing day to day control and direction of the worker.

"Perhaps one of the best ways to manage this kind of risk is to negotiate comprehensive warranties and indemnities in the contractual documentation, whether between the agency which supplies the worker or the independent contractor directly," McIlroy said. "When in doubt, spending some time and money seeking legal advice on appropriate drafting and management of potential risks at the beginning of the arrangement could save thousands of pounds in the long run."

Copyright © 2006, OUT-LAW.com

OUT-LAW.COM is part of international law firm Pinsent Masons.

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