Last Minute Special Offers

Below are some reduced price courses only available to our newsletter readers:

*Prices exclude VAT.

Telephone: 01295 225500

News Items – at 24th May 2007

Agency Workers and Employment Status

EAT decides some agency workers have employment rights

In a significant decision, the London Employment Appeal Tribunal (EAT) has ruled that a group of Polish workers, provided with work by a UK employment agency, are employees of the agency and, as a result, entitled to all of the employment rights available to employees.  The case was brought by the T&G section of Unite, the trade union formed on 1 May 2007 by the merger of the Transport and General Workers’ Union and Amicus, which was representing a number of Polish nationals who lost their jobs and their living accommodation in 2005 after joining the trade union.

In his decision in the case Consistent Group Ltd v Mrs. K. Kalwak and others and Welsh Country Foods Ltd on 18 May 2007, Mr. Justice Elias, President of the EAT, upheld the decision of an employment tribunal, that the agency had entered into contracts of employment with the workers.  His decision is highly critical of the agency’s treatment of the workers, agreeing with the employment tribunal that the terms of their contracts were a “sham”.

The workers are Polish nationals, most of whom speak little English.  The agency, Consistent, supplies staff to work in hotels and food processing factories.  They were offered work while still in Poland and came to England in May 2005 and lived in a hostel provided by the agency.  The client to which they were supplied was Welsh Country Foods.  The agency deducted money from their earnings for accommodation and cleaning charges amounting to some £56.40 per week.  The workers claimed that they were discouraged from joining the union and were subsequently dismissed.

The contract under which they worked is described as a “self-employed sub-contractor’s contract for services”.  Among the terms on the contract were:

• a requirement for the subcontractor to provide services on an ad hoc casual basis as required by the agency, but without any obligation on the agency to provide work or the subcontractor to accept the work
• a statement that the subcontractor is not an employee of Consistent and is not entitled to any fringe benefits such as sick pay, holiday pay or pension rights
• a requirement to perform the services personally but, if unable to do, by another suitably skilled person
• permission for a worker to work elsewhere if that work does not conflict with the subcontractor’s ability to provide services to the agency or a client of the agency.

The chairman of the original employment tribunal had compared these contract terms with the actual practice of the agency and described them as a “sham”.  To quote the tribunal:

"There were parts of the written contract that indeed set out the actual terms under which the claimants worker – those, for instance, as to wages or, indeed, the obligation to work. But I noted the frequency with which the first respondents in the documents sought to emphasize the absence of rights – holiday pay, fringe benefits, the right to complain of unfair dismissal. These were their real concern. They in practice retained a firm measure of effective control over the claimants' working lives. They told them when and where they had to work, they might deny them days off, they provided them with transport and accommodation (taken away, as it proved, without notice). They ensured further economy in the claimants' employment by charging them for domestic services that were not provided. Here were seekers after work who could not adequately speak English, newly arrived here, for whom any purported freedom to work or not work, to work for more than one employer, were unreal. They were discouraged from union membership. The first respondents wanted to constrain them so as to retain them as compliant people through whom they could meet the demands of their clients. But they did not want people with expensive and troublesome rights. The provisions as to the right not to accept work or to work for other employers were a sham inserted into the documents to give the appearance of relieving the first respondents from the burdens of being employers, not seriously to reflect the actual relationship between the parties. The respondents, in effect, wanted employees, but did not want to pay the necessary price."

The President of the EAT decided that the tribunal had been entitled, on the evidence, to take this view, stating:

“If the reality of the situation is that no-one seriously expects that a worker will seek to provide a substitute, or refuse the work offered, the fact that the contract expressly provides for these unrealistic possibilities will not alter the true nature of the relationship. But if these clauses genuinely reflect what might realistically be expected to occur, the fact tha t the rights conferred have not in fact been exercised will not render the right meaningless.

Applying this principle here, in my judgment the Tribunal was entitled to say that that this was a situation where there was no realistic possibility that these claimants, as heavily dependent as they were on the economic power of the agency, would be free to accept work as and when offered, nor to work for someone else whilst the contract they had signed remained in place. They had come from Poland expecting to work for the agency, their continued accommodation depended on doing such work, and there was no realistic chance of their working elsewhere, at least whilst the agency needed their services. On these matters the formal document bore no relationship to reality. Tribunals should take a sensible and robust view of these matters in order to prevent form undermining substance, and this is precisely what this Chairman did.”

The issue of control was critical in both the tribunal’s and the EAT’s decision that the workers were, in fact, employees of the agency.  Established case law requires two key factors to be present in the working relationship for a contract of employment to exist, namely “control” and “mutuality of obligation”.  When similar cases have been considered, the decision has almost always been that agency workers are neither

• employees of the agency, because the agency does not control the way in which the work is performed for the client, nor
• employees of the client, because the client’s obligation is to pay the agency for the work performed, not the worker.

The EAT President took the view that the fact that it is the client and not the agency that exercises control over the actual operation of the work does not, as a matter of law, prevent a contract of employment arising between the agency and the employee, although it would be an exceptional case where such a finding can properly be made.  In many cases, the agency simply places staff registered on their books with clients and has relatively limited contact with them.  In this case, however, not only were the claimants effectively obliged personally to do the work offered, but they were recruited in Poland, transport and accommodation was provided in circumstances where they were not in reality in a position to refuse them, and there were severe practical and legal limits placed on their working elsewhere whilst the contract with the agency was maintained.

The decision must not be taken to indicate a change in the established status of agency workers.  The EAT President stated:

“This is an exceptional case where the nature of the relationship justified a finding that there was a contract of employment between the agency and the workers.”

However, the decision could impact on the employment of thousands of workers from EU member states who are engaged by agencies to work in the UK under similar circumstances. 

Further information:
Consistent Group Ltd v Mrs. K. Kalwak and others and Welsh Country Foods Ltd http://www.bailii.org/uk/cases/UKEAT/2007/0535_06_1805.html

National Minimum Wage Enforcement

DTI consultation on new approaches to paying arrears and penalising employers

The Department of Trade and Industry has published a detailed consultation document entitled National Minimum Wage and Employment Agency Standards Enforcement.  It suggests various ways to

• improve the calculation of arrears for employees who have been paid below the NMW, and 
• strengthen the penalties imposed on employers for paying below the NMW.

The document also proposes changes to how the rules governing employment agencies are enforced but these are not reviewed in this article.

Payment of arrears
Workers who are paid below the NMW are entitled, under current legislation, to receive arrears.  The arrears are not punitive; they are simply the shortfall between what was paid and what should have been paid.  The government sees two problems with this arrangement:

1. there is no incentive on employers to pay the correct rate at the right time, and
2. the arrears payment does not reflect inflation and therefore is worth less to the employee when it is paid than if it had been paid correctly at the time.

The proposal is to pay “fair arrears” and three possible approaches are suggested.

1. calculate and pay interest on the arrears
2. calculate and pay the arrears at the current NMW rate
3. calculate the adjustment by applying a fixed percentage or fixed amounts for certain bands of arrears.

Each of the three methods have advantages and disadvantages and the document seeks views on which approach is preferred and how the adjustment to the arrears should be calculated.

Strengthening penalties for underpayment
Under current rules, employers that have underpaid employees can simply pay the arrears without attracting a penalty notice.  Only about 5% of employers that have underpaid the NMW pay a penalty and they do so only if they ignore an enforcement notice.  The current penalty is twice the NMW hourly amount in force on the date of the penalty notice for each worker who has been underpaid.  The current minimum penalty is £224.70 (i.e. 21 days × £5.35 × 2).

The government believes that the penalty regime should act as a deterrent from underpaying in the first place and should, therefore, apply to any employer found to be underpaying the NMW, whether the underpayment is due to ignorance or design.  The penalty should also escalate if arrears are not paid or the penalty is ignored.  The four options considered in the document are:

1. a fixed penalty, irrespective of the amount of the underpayment or the number of employees affected, but escalating if ignored
2. a fixed penalty related to the number of employees affected but not to the amount underpaid, but escalating if ignored
3. a penalty that is in proportion to the amount underpaid, not to the number of employees affected, but escalating if ignored
4. a fixed penalty related to the band of total arrears involved, not related to the number of employees, but escalating if ignored.

Each of these approaches has its pros and cons and interested parties are invited to comment on the value or otherwise of each option and suggest the level at which the penalty should set and how it should escalate.
The closing date for responses is 8 August 2007.

Further information:
National Minimum Wage and Employment Agency Standards Enforcement – A Consultation Document  http://www.dti.gov.uk/files/file39439.pdf

Additional Paternity Leave and Pay

Public consultation of the administration of the new rights

Qualifying fathers and adoptive parents currently have the right to one or two  weeks “ordinary” paternity leave and pay at or shortly after the birth or placement for adoption.  Likely from April 2009, the government is to introduce a new right to up to 26 weeks “additional” paternity leave and pay where the other parent returns to work early from maternity or adoption leave.  It will coincide with the increase in the period of maternity and adoption pay from 39 weeks to 52 weeks.

The Department of Trade Industry is consulting on the administrative arrangements that employers will have to apply when additional paternity leave and pay are introduced.  The consultation document, entitled Additional Paternity Leave and Pay Administration Consultation, provides a clearer picture of how the scheme will operate.  There will be another consultation at a future date about the wording of the secondary legislation.

The proposals are intended to make the administration as simple and straightforward as possible.  Neither HMRC nor the employer of the person taking maternity or adoption leave will be involved in the process.  The proposal is for the mother and father to jointly certify to the father’s employer that the father is eligible for additional paternity leave and pay.  (References here and below to the “mother and father” include the mother and the mother’s partner or civil partner, and, in the case of adoptions, both adoptive parents.

The consultation document sets out how the process would work in practice and identifies what is required of the father, the mother and the father’s employer.  Views are sought on the practicalities of the process, the notification period for a father’s employer to confirm the employee’s entitlement, the form that may be used for self-certification and the use of a checklist to help employers.

Potential for fraud
The earlier consultation raised concerns from employers about fraudulent claims and employers being held liable for wrongful payments of additional statutory paternity pay (ASPP).  These issues have been taken into consideration in preparing the latest proposals.  Employers will not be penalised for making a genuine mistake or making a payment in good faith.  HMRC regards the risk of fraud by employees and employers as relatively low, with minimal consequences for taxpayers’ funds.  The DTI proposes to tackle the issue in a proportionate way, with HMRC conducting compliance checks on some employees and employers, with sanctions in the form of financial penalties for those who abuse the system.

Self-certification procedures
The DTI’s preferred approach is a relatively simple self-certification by both mother and father that will confirm the father’s eligibility to additional paternity leave and pay to the father’s employer.  The father will have to give eight weeks notice of his intention to take additional paternity leave.  Responsibility for meeting the set timescales will fall on the father and mother alone.  The father’s employer will not have to check any details with the mother’s employer.

Other options have been considered but ruled out.  The potential for fraud could be reduced if the mother’s employer were involved in every case.  The mother would give the completed self-certificate, or part of it, to her employer.  That employer would certify the accuracy of the information and return it to the mother for the father to pass on his employer.  However, this would not necessarily reduce the risk of abuse as either parent could manipulate the form before the father’s employer receives it.

Another option would be for the mother’s employer to pass the completed form to the father’s employer after confirming the contents.  This would reduce the risk of fraud but would increase the potential for delays and communication failures.  However, to involve the mother’s employer in the procedure is seen as placing an unnecessary burden on a third party who is not, in most cases, the father’s employer and not involved in handling any aspects of the father’s paternity leave and pay.

The existing rules for ordinary paternity leave require the father’s request to take leave to be put in writing if the employer asks for it, although some personal information must be provided on the SC3 self-certificate, or an equivalent substitute, in order to claim ordinary paternity pay.  As further self-certified information will be a mandatory requirement for additional paternity leave, it is proposed to design a new SC3 self-certificate to provide the necessary information for both ordinary and additional paternity leave and pay.  An equivalent substitute would be acceptable but, as a mandatory form, the employer would have to retain it for three years in case HMRC undertakes a compliance check.

If a father has two or more employments, there would be entitlement to additional paternity leave and pay in any of them in which the necessary conditions are met.  A separate self-certificate would be required for each employer.

The consultation document includes a draft version of the proposed new SC3 self-certificate.  

Responsibilities of the father’s employer
If the father has already taken “ordinary” paternity leave, i.e. the one or two week’s leave at the time of the baby’s birth, the father’s employer, on receiving the self-certificate, should not need to make any further entitlement checks.  If the father was entitled to ordinary paternity leave, he is also entitled to additional paternity leave.
However, if the father did not request to take ordinary paternity leave, his eligibility will have to be checked by confirming that he had six month’s employment and the necessary average earnings at the mother’s qualifying week.  If the father is not entitled to additional paternity leave, the employer will have to give written reasons and the existing SPP1 exclusion form is likely to be amended for this purpose.

It is proposed that, after receiving notice from the father of his intention to take additional paternity leave, the employer will have to confirm entitlement with 28 days.

The consultation document includes a draft “checklist” that could be used to assist the employer in determining a father’s entitlement to ASPP.  Views are sought on whether or not completion of the checklist should be mandatory in order for the employer to be able to demonstrate that reasonable care had been taken in granting additional paternity leave and pay.  The checklist would confirm that:

• the employee has notified within 8 weeks before the intended start date
• the employee has necessary length of service
• the employee has the necessary average weekly earnings
• the employee has made a declaration of family commitment
• the mother is receiving SMP, SAP or Maternity Allowance and provide the relevant start and intended stop dates
• the baby will be at least 20 weeks old when the employee starts additional leave
• the baby will be less than one year old when the employee ends additional leave
• the employee’s period of leave will not exceed 26 weeks.

If the mother dies
A father will be able to start additional paternity leave earlier than 20 weeks after the baby’s birth if the mother dies during childbirth or later – as early as the date of death.  The period of leave in this situation could be for all of the mother’s remaining maternity leave – up to a full year.

Although the father will still be required to complete and SC3 certificate and the employer to confirm entitlement, the father’s  8-week notice period and the employer’s 28-day confirmation period will not apply.  Separate guidance is to be provided to help both employers and employees.

Outstanding issues
There are a number of potential situations that could arise that could create difficulties for the father’s employer.  The father may wish to

• change the intended start date, or
• change the intended return date, or
• cancel taking the leave altogether.

These situations could occur simply due to a change of mind about taking leave or because the mother has decided to delay her return from leave.  Because the father’s employer is likely to have arranged cover for the father’s absence, the consultation document proposes that the father be required to give notice of any changes.  Comments are requested on how much notice would have to be given.  If notice is not given and the father no longer wishes to take leave, the employer may have to require the father to take the leave anyway and, if the mother has not returned to work, that leave would have to be without pay because he is no longer entitled to ASPP.

Timeline for additional paternity leave and pay
The following Table demonstrates, step-by-step, how additional paternity leave and pay and self-certification are likely to operate in practice.  In the example, the expected date of childbirth is 15 September 2010.

Responding to the consultation document
The consultation document discusses each of the subjects described above and asks for feedback on ten specific questions.  Reponses are sought by a deadline of 3 August 2007.

Further information:
Additional Paternity Leave and Pay Administration Consultation  http://www.dti.gov.uk/files/file39396.pdf
Partial Regulatory Impact Assessment  http://www.dti.gov.uk/files/file39397.pdf

Payroll deadlines during the next month

May 28 – The date after which non-receipt by the HMRC of year-end returns P14s, P35 and P38A will result in late-filing penalties.

May 31 – This is the deadline for issuing P60s to qualifying employees.

June 5 – This is the final day of tax month 2.  Tax and NICs etc for payments made in the tax month to June 5 are due for payment to the Accounts Office by June 19, or by June 22 if paid electronically.

June 19 – For employers required to pay tax and NICs etc to the Accounts Office monthly, this is the deadline for payment to be received by the Accounts Office, unless made electronically.

Payroll FAQ's

Compensation for Loss of Earnings

What are the tax and NICs implications when an employee repays sick pay from a compensation award?

When an employee is absent from work as a result of an accident, the employer may pay to the employee either

• SSP and, in some cases, occupational sick pay, or
• an advance of an amount equivalent to sick pay.

The employee’s contract may require the employee to make a claim for damages and, when a compensation award for loss of earnings is eventually paid out, reimburse the employer an amount from the award that covers some or all of the sick pay or advance.

This situation has both PAYE tax and NICs implications.  In all cases, it is advisable for the employer to discuss the appropriate procedure with the employer’s tax inspector.

PAYE implications
The payments that are made to the employer, whether they are sick pay or an advance, must be added to gross pay and taxed accordingly. 

When damages are received and the employee has paid the appropriate amount to the employer, a repayment of tax may be due to the employee and/or the employer.  How this is done depends on whether the employee refunds

• the gross amount paid by the employer, i.e. before the deduction of tax, or
• the net amount paid by the employer, i.e. after the deduction of tax.

Gross advance refunded: If the refund is made in the same tax year as the advance, the employer should adjust the employee’s payroll record by reducing the “total pay to date” (i.e. column 3 of form P11) by the amount that has been refunded to the employer and on which the employee has already paid tax.  The tax refund generated should be paid to the employee on the next payday.

If the refund is made in a later tax year, the employee must complete a self-assessment return or R40 Tax Repayment Form (see further information, below) and claim a refund of tax, taking figures from the employee’s P60 for the tax year(s) in which the tax was deducted and entering

• the total pay for the year, less the amount of the refund, and
• the total tax deducted for the year, without any adjustment.

Net advance refunded: In this situation, the employer’s tax inspector should always be consulted and will ask for the following information:

1. the dates on which the sickness absence started and ended
2. from the payroll records, the total amount of the advances and the total tax deducted in respect of the sickness absence, separated into tax years if necessary
3. the gross amount of compensation paid to the employee
4. the amount paid from the compensation by the employee to the employer, and the date of the payment
5. if the compensation paid to the employee was not the full amount claimed, the percentage that the amount paid is to the amount claimed.

If the refund is made in the same tax year as the advance, the employer should

• recover the tax deducted from the advance from the next payment made to the employer’s Accounts Office, and
• adjust the employee’s payroll record by
  • reducing the employee’s “total pay to date” (i.e. column 3 of form P11) by the gross amount of the advance on which the employee has paid tax
  • reducing the “total tax due to date” (i.e. column 6 of form P11) by the tax deducted from the advance.

If the refund is made in a later tax year, the tax inspector will arrange for the tax deducted from the advance to be repaid to the employer by the Accounts Office.  If the employee only receives a percentage of the damages claimed and refunds the same percentage of the advance to the employer, the amount of tax repaid to the employer will also be reduced to that percentage.

In addition, the employee must complete a self-assessment return or R40 Tax Repayment Form (see further information, below) and claim a refund of tax, taking figures from the employee’s P60 for the tax year(s) in which the tax was deducted, and entering

• the total pay for the year, less the gross amount of the advance (giving the net refund plus tax)
• the total tax deducted for the year, less the tax repaid by the Accounts Office to the employer.

Note that, if the contractual arrangements are such that the employee keeps all of the sick pay paid during the absence and simply hands over the compensation to the employer, i.e. the compensation is not offset against the sick pay, none of the procedures above apply.  The sick pay has been correctly taxed and no repayment of tax is due to either the employee or the employer.

NICs implications
If an employee is not required to repay the employer, all payments made to the employee, whether they consist of sick pay or an advance, must be added to gross pay for Class 1 NICs. 

If, however, the employee is required to repay the employer, even if the claim for damages is not successful and no compensation is ultimately paid, the payments are not added to gross pay for NICs purposes.  If, at a later date, the employer decides to write-off the payments so that the employee no longer has to repay them, the amount written-off must be added to any other earnings received by the employee in the earnings period in which the employer makes the decision to write-off the payments and Class 1 NICs assessed accordingly.

Further information:
R40 Tax Repayment Form  
R40 Guidance Notes 

ISLE OF MAN

Paying ITIP and National Insurance

Online payments facility introduced for employers

The Income Tax Division of Treasury has announced the introduction of an online payments facility for employers, contractors and third party payers.  It allows clients to make payments of Income Tax Instalment Payments (ITIP) and National Insurance, payments of contractors' deductions and payments of tax deducted from non-residents by credit and debit card.

It also allows clients to make nil remittances, making it possible to reduce significantly the amount of correspondence sent between the Income Tax Division and clients.

The remittance cards that clients usually send to the Division with their cheques no longer need to be sent by post because all the information can be submitted online.

Clients need to register first with Online Services and then enrol for the relevant Tax Service.

Further information
Online Payments for Employers, Contractors and Third Party Payers  http://www.gov.im/treasury/incometax/viewnews.gov?page=lib/news/
treasury/incometax/onlinepaymentsfo.xml&menuid=

Readers Newsletter Forum

If you have any HR or payroll related questions that you think other people who receive this newsletter will be able to answer, please email us and we will add your question to our newsletter.

An area dedicated to readers of the newsletter to enable you to:

• share your comments or views on anything in the newsletter
• to ask a question of other readers, or the tutor team
• to relate a humorous event or story related to HR or payroll
• to provide a useful tip, or seek advice on a software problem
• or maybe to simply provide recruitment information

contact: daniel.ruffle@hrdps.co.uk or reg@hrdps.co.uk

Click Here if you wish to unsubscribe