Engaging via a personal service company
Gannons advised a commodities trading company based in the UK on whether to engage its trading staff through personal service companies.
Our UK client was the subsidiary of a multinational commodities company. This company provided trading services to other, offshore group companies. Our client engaged individual traders based in the UK as self-employed consultants. The group’s overseas in-house counsel instructed us to review these traders’ contracts. In addition, they wanted our advice concerning one trader’s proposal. This was whether to engage him through his own personal service company.
This was a complex case, requiring us to use many aspects of our expertise. We used our knowledge of employment status, tax liability, the application of IR35, and the incorporation and enforceability of both restrictive covenants and confidentiality provisions, in order to help our client.
We also reviewed the existing contracts and working arrangements. The contracts were inadequate and didn’t protect our client’s interests.
The dealers enjoyed daily contact with important clients. The business depended upon these relationships. In addition, the dealers could access commercially sensitive information.
However, there were no covenants restricting dealers from poaching clients. Nor were there practical provisions to protect trade sensitive information. For example, our client did not expressly forbid workers to take confidential documents off the business’ premises. We reviewed these working arrangements and implemented new contracts.
Employment status can be complex to determine. Reviewing employees’ normal working practices can reveal whether HMRC and employment tribunals will see workers as employees, and not self-employed people working on their own account.
In summary, there was a significant risk for our client that HMRC or employment tribunals could deem all their traders as employees in light of employment legislation.
Determining employment status
There were many reasons for determining that HMRC and employment tribunals would see the traders as being employees of our client.
Firstly, our client contracted the dealers directly to turn up to work from 9-5, Monday to Friday. These dealers worked solely for our client on a continuous, rather than ad-hoc basis. The work that they did for our client was also solely their responsibility – as in no other employees of the company could and would perform their duties. They had also worked on this basis for some time and become an integral part of our client’s organisation.
The most compelling reason though, was the remuneration that the dealers received for performing their duties. Whilst the contracts entitled the dealers to a commission, part of this was set out as a “guaranteed advance commission.” This amounted to fixed monthly payments which could not be recouped after payment, i.e. a salary. An entitlement to a salary is seen as a clear indicator of employment, rather than self-employment.
This meant that, in this instance, there was a significant risk of our client being liable as the dealers’ employer.
Personal service company to engage workers
In these circumstances, we could only recommend our client accommodated the broker who wished to be engaged through his own personal service company. We advise our client to likewise engage his colleagues on this same basis.
Engaging the workers through an intermediary company in which they have a material interest, protected our client’s tax liabilities from IR35 legislation. So, if an employment relationship was deemed to exist between our client and a worker, the intermediary company would be liable for PAYE and NI, not our client.
In addition, where there is a contract in place between our client and a worker’s company, a court is less likely to consider there to be a direct employment contract between our client and any workers. This thereby limited our client’s liability under employment protection legislation.
We negotiated an agreement for our client to engage the traders through their own personal service companies. Such arrangements can be mutually beneficial.
The broker who first asked to be engaged through his own personal service company would gain beneficial tax advantages. Even after incorporation and administrative costs, there was a net financial benefit. The other consultants reached the same conclusion. They agreed to enter the proposed arrangement, subject to the terms of the relevant contracts.
Personal service company contracts
The contracts between our client and the personal service companies required careful drafting. We needed to strike a balance. In order to limit their liability for tax and employment protection, our client needed to avoid a contractual relationship which could be interpreted as them having their workers as employees.
However, the contracts needed to be sufficiently binding. Important contract provisions, such as restrictive covenants and confidentiality obligations needed to bind the workers. If such provisions only bound the worker’s personal service companies then the provisions risk being ineffective. The individual worker may well be able to circumvent them.
In general, the contracts needed to be for the supply of services. They should not be for the supply of personnel, particularly to avoid liability under the Agency Workers Regulations. They also needed to avoid provisions which could indicate an employment relationship, such as the fixed remuneration provisions that they previously contained. However, they should include provisions to indicate a commercial, rather than an employment relationship. For instance, the workers’ companies should have, and bear the expense of, professional indemnity insurance.
Ultimately, both we and our client believed that our contract documentation properly reflected the commercial arrangement that the parties agreed to. Furthermore, it limited our client’s liability, in particular their liability for tax and employment protection. This protected our client’s legitimate business interests.