Strictly private, confidential and legally privileged
NOTE TO OPEN WATER MARKETS LIMITED
ON EMPLOYMENT LAW IMPLICATIONS OF STAFFING ARRANGEMENTS
INCLUDING SECONDMENTS, CONSULTANCY AND TUPE
23 MAY 2014
Introduction
At present, Open Water Markets Limited (“OWM”) engages employees of different organisations
(including Ofwat) on informal secondment arrangements. Those individuals continue to be paid by their
employers. In this note we consider the employment implications of the current engagement of
personnel and recommendations on how to mitigate the associated risks.
This note has been prepared for consideration by the board of OWM on the basis of English law. It is
also Scots law compliant.
1.
Past TUPE risk
1.1
There is a risk that the Transfer of Undertakings (Protection of Employment) Regulations 2006
(“TUPE”) applied at the start of OWM taking over the work and engaging the individuals on the
informal secondment arrangements.
1.2
TUPE could have applied at the outset of the informal engagement of the individuals if:
1.2.1
the individual’s employer was originally carrying out the work;
1.2.2
that work transferred to OWM and the employer ceased carrying out the work; and
1.2.3
but for TUPE applying, the individual’s employment would have terminated.
1.3
While it is possible that the first two tests above could be satisfied, the third test is not: informal
secondment arrangements were put in place so that the individuals’ employment did not
terminate, but instead continued and secondment arrangements started. As such, we believe
that the historic TUPE risk is low.
1.4
If TUPE had applied, the employment of the individuals would have already transferred to
OWM, with OWM stepping into the previous employer’s shoes (albeit unknowingly in this case).
There should also have been a period of information and consultation carried out prior to the
TUPE transfer. If TUPE is found to have applied at the outset, this failure to inform and consult
is a technical breach of the TUPE regulations. As this is a historic risk (which either has already
happened or not), we cannot actually minimise it now. However, we can minimise the risk of an
individual asserting that they TUPE transferred to OWM in the past. To do this, we recommend
that the existing relationships are formally documented as explained below.
2.
Existing relationships
Secondment
2.1
Unless OWM wishes to employ people directly we recommend that the current arrangements
are formalised. For the majority of individuals, secondment will be the most suitable
arrangement. In particular, this will be appropriate for individuals that OWM need personal
service from on a weekly basis (similar to a classic employee role) and who are currently
employed by another organisation.
2.2
Secondments can be formalised by putting in place a secondment agreement between OWM
and the employer (a style agreement has been provided by S&W). The secondment agreement
between OWM and the employer can include various protections for OWM such as an
undertaking from the employer that they will take responsibility for the employee at the end of
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the secondment term by redeploying the individual or making any redundancy payment at the
point of termination. Such contractual undertakings would protect OWM if the secondee does
seek to assert that legally, he has become the employee of OWM directly.
2.3
However, the employer may resist these undertakings. The employer may say that if the
secondment ends but OWM continue the work being done by the secondee, that the secondee
should TUPE transfer to OWM rather than return to the employer. Irrespective of the position
adopted between OWM and the employer if the secondment is ended but OWM proposes to
continue the work and the secondee wishes to continue their work with OWM, the secondee
may choose to assert that TUPE applies on termination of the secondment. Please see section
3 for further details.
2.4
A formalised secondment agreement can also include specific protections in respect of
restrictive covenants, confidentiality and intellectual property.
2.5
The employer will be responsible for ensuring that the individual’s contract of employment is
appropriately amended to reflect the secondment arrangement (S&W have also provided a
style letter although the final drafting will be dependent on any existing employment contract
and is the responsibility of the employer).
2.6
The benefit to OWM of a secondment arrangement is that OWM obtains the services of the
individual in a similar manner to what would apply if they were directly employed, but OWM
does not take on the liabilities of an employer in respect of that individual. OWM can set out
clearly the duties that it wants performed by the secondee and the employer company is
responsible for ensuring that the secondee performs those duties. The employer continues to
be responsible for liabilities, including potentially significant costs such as making contributions
to and providing a pension scheme (potentially to a final salary scheme for any secondees from
the public sector) or entitlements to an enhanced redundancy payment.
2.7
If the secondment is formalised, OWM must remember to continue to treat the individual as a
secondee at all times. OWM can do this by ensuring that it remains clear that the individual is a
secondee, the individual does not become fully integrated into the OWM business and the
employer maintains responsibility for day-to-day management of the secondee (in particular in
respect of performance, discipline, grievance and salary review issues).
2.8
Commercially, secondment agreements can continue to include that the full employment cost is
borne by the employing company with no payment being made by OWM to the employer.
Alternatively, OWM may agree to pay for the secondee’s services. Whether the secondment is
paid or unpaid does not change the nature of the legal relationships formed by the
secondment. There may be VAT due in relation to the provisions of services under
secondment.
2.9
From the individual’s perspective, documenting the secondment relationship also gives clarity
on who the employer is, responsibilities during the secondment and potentially (if it can be
agreed) what will happen at conclusion of the secondment. This clarity in itself is likely to
reduce the risk of the secondee asserting that the relationship is other than as documented.
2.10
As noted above and as dealt with in detail in section 3 of this note, what happens at the end of
the secondment will depend on (a) whether OWM continue the work that was done by the
secondee; (b) whether or not OWM wishes to employ the secondee directly; (c) whether or not
the employer wishes to transfer the secondee to OWM, redeploy the secondee or pay
redundancy to the secondee; and (d) the view of the secondee.
2.11
As a result of the various permutations, you may find it easier not to agree what happens at the
end of the secondment when formalising the secondment agreement. You may prefer to
remain silent about the potential operation of TUPE or include only some broad clauses saying
the parties will comply with their legal obligations. However, please note that if at the end of
the secondment there is a “relevant transfer”, then TUPE will apply as a matter of law. The
parties can agree how TUPE related liabilities should be dealt with but they cannot contract out
of TUPE. The individual employee can opt out of a TUPE transfer.
Consultancy
2.12
We understand that you are considering using free consultancy services from your partners
rather than formalising the secondments. If the “consultants” will be the same people who are
currently supplying services to OWM as secondees, and if the consultancy services will be the
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same as those services currently being provided by the secondees, which we understand to be
full-time services, then we see no particular benefit to OWM in taking this labour by way of
consultancy rather than secondment. An employee of, say, Ofwat can agree to be supplied to
OWM as a consultant but this would not prevent that individual from subsequently arguing that
he had been in fact an employee of OWM all along or that he became an employee of OWM
when the consultancy was terminated by virtue of TUPE.
2.13
If the consultants are employees of your partners but are not the people currently supplying
services via the informal secondments, then a potential issue could arise with the current crop
of secondees on the termination of the secondments/commencement of the consultancy if they
are dissatisfied with what this means for them. See section 3 for further details.
2.14
A consultancy might be more appropriate where the person providing the consultancy services
is not employed by a participating partner but is in business on their own account or employed
by a 3rd party provider (although a secondment could also be used to obtain labour from a 3 rd
party provider). If a consultancy is to be entered into this should be documented in a
consultancy agreement (we can supply a style agreement if required). Where the consultant is
in business on his own account he can contract as an individual, or through a service company.
2.15
In considering the consequences of consultancy we must distinguish the two potential types of
consultancy.
Partner’s employee supplied as a consultant
2.16
There is no legal requirement for OWM to pay for the services of these consultants if a different
commercial agreement can be reached provided the consultant is paid as normal by their
employer.
2.17
The consultancy should shield OWM from employment liabilities towards the consultant.
However, the reality is that a consultancy in these circumstances could be scrutinised in exactly
the same way as a secondment to see whether the relationship of consultancy is genuine or
whether the consultant is in fact an employee of OWM. Just like secondment, the consultant is
unlikely to have any cause to argue for the status of an employee of OWM unless the
consultancy is being brought to an end and he is unhappy about that and the options for him on
termination.
3rd party consultant
2.18
The main benefit of engaging a 3rd party consultant rather than employing the individual directly
is that OWM would be free from the statutory obligations and liabilities that govern an
employment relationship. OWM can structure the consultancy arrangement with greater
flexibility to suit its commercial needs. There may also be a cost saving for the entity paying
the consultant due to beneficial tax treatment, although the HMRC are keen to stop “false selfemployment” (i.e. employment dressed up as self-employment).
2.19
However, OWM cannot control the consultant as closely as it would an employee. Consultants
often have flexibility to send a substitute to perform work which helps show that a relationship is
genuine consultancy (but this is not a necessary requirement). Consultants should also have
flexibility in what assignments they accept, and how work is carried out. OWM could negotiate
strict controls in the consultancy agreement (but, in so doing, it increases the risk that the
consultant will be found to be an employee). If it is found that the consultant is an employee,
then not only will OWM have potential employment liabilities towards the employee, but it will
also likely need to account to HMRC for any underpayment of tax and national insurance
contributions and potential penalties for breaching your PAYE obligations.
2.20
From the consultant's perspective, the main benefit of being a consultant is that he may be able
to claim more favourable tax treatment as a self-employed individual (or via a service company)
than is available to employees. This favourable tax treatment is often more attractive to the
consultant than the rights and protections which would be available to him as an employee. He
will also generally have greater flexibility in the way he works, including the ability to work for
multiple businesses at the same time.
2.21
The drawback for the consultant is that he does not benefit from the statutory protections of
employment status. He will also have less security in his earnings, and be exposed to greater
financial liabilities, for which he will commonly need insurance (or to incorporate a service
company in order to limit this liability).
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2.22
The key issue in the immediate term, however, is likely to be what happens to those individuals
who are currently providing the services via the informal secondment? If the work being done
by those individuals continues, and OWM arranges for someone else to do this work, the
former secondee may be aggrieved. If the secondee’s employer can redeploy the secondee
and the secondee is happy to accept redeployment, then no issue arises. If the secondee’s
employer cannot redeploy the secondee but is happy to pay redundancy and the secondee is
happy to accept redundancy, then no issue should arise. However, if the secondee is unhappy
not to continue his work with OWM, the secondee could argue that his employment has, or
should have, transferred to OWM as a result of a TUPE transfer.
3.
Risk that OWM becomes the employer
3.1
If OWM does not want to directly employ labour at this stage in its development, then a key risk
for OWM is that anyone who supplies services to OWM (either a secondee or contractor) could
argue that they are an employee of OWM.
3.2
This is only likely to happen if the individual’s job security is under threat (either because they
were not welcomed back by their employer at the end of the secondment or consultancy, or in
the case of 3rd party consultants, when the consultancy agreement is terminated) and they are
unhappy about the position they find themselves in and believe their interests are best served
by asserting the right to a job with OWM.
3.3
It could also potentially occur if OWM were to start recruiting directly and were to pay direct
recruits more or offer better benefits to direct recruits than the secondee/consultant receives
from their employer and the individual thinks they would be better remunerated if employed
directly by OWM. We suspect this is unlikely to happen anytime soon, if ever.
3.4
If a secondee or consultant was motivated to claim employment with OWM the may do so by
arguing that TUPE applied to transfer their contracts of employment and their continuity of
service to OWM. TUPE would apply only if, as explained above, there is a transfer of work that
those employees are assigned to do from their employer to OWM. If TUPE applies, the effect
is that OWM will step into the shoes of the existing employer as if OWM had always been the
employer. OWM would take on the majority of the liabilities in respect of that/those
employee(s). If TUPE does apply, there will also be information and consultation obligations for
OWM and the employer.
3.5
Separately and additionally, a consultant could assert at any time that he is employed by OWM
by arguing that the relationship is not a genuine consultancy but is in reality an employment
relationship with OWM. He would not need to prove a TUPE transfer – he would just need to
establish the consultancy was really employment. This risk is heightened if the consultant is a
sole-trader (whether incorporated or not) and is reduced significantly if the consultant is
supplied through an established organisation of which he is clearly an employee (whether an
OWM partner or a 3rd party). A secondee could also assert during the secondment that he is no
longer a secondee but is now employed by OWM. We consider this to be unlikely because the
employee will have little incentive to run such an argument. This is because as a secondee, he
will be able to raise any employment related claims against his existing employer. OWM should
put in place a formal secondment agreement with the employer to ensure that the employer is
contractually obliged to remain responsible for the individual. Provided that the original
employer continues to take on that responsibility, the individual is unlikely to have an incentive
to suggest that OWM is the employer during the secondment.
3.6
If a secondee/consultant was to succeed in establishing employment status, then OWM would
become liable as their employer for direct payments to them and managing the PAYE system
and would (in a transfer situation) become liable for accrued redundancy rights and any
employment rights. An occupational pension scheme does not transfer under TUPE although
in the case of transfers between public sector bodies there is still an expectation that the
transferee (the receiving employer) would provide a comparable pension scheme. However,
even if the pension scheme does not transfer, rights to certain benefits under the pension
scheme – for example enhanced early retirement payments on redundancy do transfer. OWM
could therefore inherit quite significant potential liabilities if a secondee/consultant was to
transfer to it under TUPE. Additionally for consultants, OWM would inherit any residual tax
liability that has not been accounted for and possibly interest and penalties. In addition, the
employees would have additional rights to raise claims for discrimination, and, if they have the
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requisite two years’ service (taking into account any period of employment with a pre-TUPE
employer and time on secondment or as a consultant) unfair dismissal.
3.7
Even if the consultant/secondee is not successful in arguing that they have become an
employee of OWM, they may be able to assert that they are a “worker” engaged by OWM
which gives them an entitlement to a more limited range of rights, including whistle-blower
protection, right to minimum wage, entitlements in respect of working time such as holidays and
rest-breaks, and rights not to suffer unlawful deductions from wages.
3.8
To mitigate these risks, the contractual agreements entered into governing the relationship
should include, if possible, protections against such claims and undertakings from the current
employer that it will resume responsibility for the employees at the end of the service term.
Care should also be taken during the relationships to ensure that, the facts on the ground
remain as stated in the secondment/consultancy agreements to minimise the risk of an
individual successfully arguing that they have become an employee (or worker) of OWM over
time.
4.
Conclusion
4.1
The secondments currently in place may remain the best option for OWM and the employees
going forward, although our advice would be to formalise the secondments into written
agreements.
4.2
It is not uncommon for such secondments to remain in place, quite happily, for many years –
particularly when public sector employees are involved. The reason for this is normally quite
simple: pension benefits.
4.3
We anticipate the secondees will be members of their employer’s final salary pension schemes.
They probably appreciate that OWM would not want to, and might be unable to, provide access
to the same or a broadly comparable pension scheme. The secondee therefore is likely to be
content to remain employed by their current employer but to continue their work with OWM.
4.4
If the current arrangements are to be maintained then it does not really matter whether these
are provided by way of formalised secondments or by way of consultancy – the risks broadly
remain the same. As long as the secondee/consultant is content to work for OWM but be
employed by their employer, then the secondee/consultant has no reason to change the
arrangement.
4.5
If the current employer wants to end the arrangement because the current employer no longer
wants to continue to supply labour to OWM (e.g. because it continues to carry responsibilities
for the secondees and ultimately could become liable for redundancy payments if OWM ceases
to do the work the secondee does and the employer has no work for that employee to return
to), then OWM may be forced to take the secondee into direct employment or have to stop
doing the work the secondee does.
4.6
If OWM wants to end the secondment and wants to employ the individual directly and the
individual and the employer are content with this, then such a change could be effected.
However, we suspect the secondee will not want to transfer to OWM for the reason outlined
above.
4.7
We hope this note is helpful.
questions you may have.
We would be happy to address the Board to answer any
Shepherd and Wedderburn LLP
22 May 2014
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