Hewlett Packard Ltd v O'Murphy [2002] IRLR 4 EAT
Professional Contractors Group and Others v Commissioners for Inland Revenue [2001] EWCA Civ. 1945, Court of Appeal

Individual contractors who hire out their services are in a no-win situation when it comes to deciding what their status is for employment and tax purposes. Two recent cases show that these groups of workers continue to receive a raw deal gaining neither the tax benefits associated with self-employed status nor the employment rights of an employee.

In Hewlett Packard the question for the Tribunal was whether an independent contractor who was hired out by an employment agency to a third party was an employee of the third party.

Under the Employment Rights Act 1996 (ERA) the ability to claim unfair dismissal very much depends on being able to establish that they are an employee. Section 230 of the ERA defines an employee as someone who works under a contract of employment. 
Mr O'Murphy was a computer specialist who formed a limited company, Circle Technology. Mr O'Murphy described himself as an employee of that company. Circle Technology then entered into a contract with an employment agency, Eaglecliff Ltd. who then entered into a contract with Hewlett Packard to provide computer services. The contractual arrangements were that Hewlett Packard paid a fee with VAT added to Eaglecliff who, in turn employed Circle Technology to carry the work for a fee. Mr O'Murphy received payment for the work as an employee of Circle Technology.

In practice Mr O'Murphy essentially worked for Hewlett Packard as a contract systems manager at their premises in Bracknell from June 1994. At the end of October 2000 Hewlett Packard informed Eaglecliff that they were terminating the contract for Mr O'Murphy's assignment with immediate effect as they were unhappy with his performance.

The Tribunal found that there were certain factors in the relationship between Mr O'Murphy and Hewlett Packard which indicated that he was under their control and that there was a mutuality of obligations. As such, they held him to be an employee.

Hewlett Packard appealed. In upholding the appeal the Employment Appeal Tribunal considered that the tribunal had failed to ascertain whether there was a contract of any kind between Mr O'Murphy and Hewlett Packard. They considered that there were in fact two contracts: one between the agency (Eaglecliff) and the contractor (Hewlett Packard) and another between the agency and the applicant (Mr O'Murphy) but there was no contract between Mr O'Murphy and the contractors.

So, if there was no contract there was no claim because the individual could not show that they worked under a contract of employment as per section 230 of the ERA.

In reaching their decision the Employment Appeal Tribunal commented on the financial benefits for both the individual who hires themselves out through an agency and the third party who is content to have the work provided the individual is not a permanent employee.

It is now more difficult to see what financial advantage there is for the individual contractor. In April 2000 the Government, in its desire to clamp down on tax evaders introduced legislation, known as IR35, to eliminate tax and national insurance avoidance by individuals who contract out their services via a company. The effect of these provisions is that remuneration paid by the client company to the contractor is treated as salary rather than company revenue so that the full income is subject to Schedule E income tax and Class 1 National Insurance contributions. A recent challenge to the IR35 legislation as being contrary to European law taken by the Professional Contractors group failed, leaving independent contractors without any tax benefits and no guarantee of employment rights.