Payroll Companies

Bill Esterson Excerpts

Wednesday 16th January 2013 Westminster Hall

[John Cryer (Leyton and Wanstead) (Lab)]

It is a pleasure to speak under your chairmanship, Mr Hollobone. I thank Mr Speaker for allowing this debate to go ahead. It essentially comes down to a simple issue—the division between people who are employed and people who are self-employed. That division traditionally was quite firm; there was a definite line between the two, but in recent years it has become blurred. Certain disreputable employers have had a very strong interest in blurring that line, on the basis that they can divest themselves of responsibilities if they transfer their work force into self-employment. For instance, they do not have to pay employers’ national insurance, holiday pay, sick pay and redundancy pay. They do not have to pay into a pension scheme. Also, the workers are relieved of many if not all of the rights that people have at work.

What we have seen in the recent past—this is a comparatively recent development—is the advent of what are now called payroll companies. Those companies will say to employers, “You give us the responsibility for your payroll and the responsibility for the relationship with the work force, and we will make sure that you don’t have to pay tax, national insurance”—and all the other things that I have mentioned. In some cases, they also say, “Do a deal with us and we’ll get Her Majesty’s Revenue and Customs off your back for good.” I will say more about that later.

Payroll companies seem to be active in all industries, and trade unions and other bodies have long raised objections to their activities. However, the building union UCATT—the Union of Construction, Allied Trades and Technicians—recently commissioned a report by Jamie Elliott, a freelance investigative journalist, which has brought some extremely interesting and worrying developments to light. To launch the investigation, UCATT set up a fake building company called Fairbrother Builders. Jamie Elliott then approached a number of payroll companies. The biggest of these was Hudson Contract.

I should point out that the report makes it very clear that the majority of the payroll companies agreed to help to shift workers from being employed to what I would regard as bogus self-employment. Some did not, but the majority did. The biggest one, and the biggest one in the country, is called Hudson Contract. It made no attempt to conceal what it wanted to offer. It wrote in an introductory letter to Fairbrother Builders:

“We can save you money, 20% of your labour costs, by reclassifying PAYE staff, paying them through CIS.”

For hon. Members who do not know what the CIS is, it is the self-employed scheme in the construction industry; it stands for Construction Industry Scheme. The letter continued:

“Self Employed operatives, paid under CIS deduction through Hudson are not entitled to holiday pay, redundancy or notice. We are helping companies to move their PAYE labour over to CIS…Last year this saved our clients over £25M in Employers NIC, placing tax and employment law liabilities with us.”

That seems pretty disreputable to me, but what then happens, if the employer decides to go down the route of using a payroll company to transfer the work force into self-employment, is that the work force are asked to sign a contract with the payroll company. That is often sweetened slightly by a small rise in pay, but that will never compensate for all the other benefits and rights at work that in the meantime have been lost. It is particularly the pension rights that spring to mind, because pensions are so crucial in all industries, but particularly in the construction industry.

Once the contract is signed, the former employee no longer has a relationship with the original company but only with the payroll company. But of course on the ground, in the workplace, the payroll company has absolutely nothing to do with the direction of operations —in this case, in construction. The client company—by that I mean the building firm—issues directions and engages with the work force, who in all practical ways remain employed but technically are not. That is a perverse situation. The contract used by Hudson states that the worker

“has no contract of any type whatsoever with the client”

and

“he neither has nor shall make any contractual claim of any type against the client”.

Yet the contract also makes it clear that the new relationship between the freelance operative—I am using its words—and the client has little to do with the way that work is agreed on the ground. In practice, it has nothing to do with the way the work is carried out and agreed on the ground. The contract continues:

“The terms upon which that labour shall be supplied shall be negotiated directly between the freelance operative and the client...upon the conclusion of those negotiations, Hudson will step into the shoes of the client and contract with the freelance operative on the terms negotiated.”

Reading that, I have just noticed that Hudson do not know the difference between a verb and a noun, but that is by the by.

The Hudson website also makes very bold claims as to Her Majesty’s Revenue and Customs:

“Say goodbye to HMRC status issues and employment tribunal challenges.”

It is a bold statement, but to a large extent, Hudson is justified in making that claim. HMRC challenged Hudson in 2007—when I say challenge, I mean a legal challenge—and took the case to the High Court. HMRC argued that, despite what the contract stated, there was an implied relationship between the construction company and the freelance operative because of the reality of the relationship between the company and the operative, which is denied by the contract and the services offered by Hudson and other such companies. It makes perfect sense; there is an employer, which employs people to do a certain job, and that job and that relationship do not change, and yet people are told, “You are now self-employed. Despite the fact that you work for the same people and despite the fact that you do the same job, you are now technically self-employed.”

Incredibly, the High Court rejected the argument, and on top of that rejection, the past three years have seen the number of employer compliance reviews conducted by HMRC fall dramatically. The cumulative effect is that firms in all industries, not only construction—this has spread to other industries as well—have little to fear from Government agencies, because HMRC is powerless to do anything.

[Bill Esterson (Sefton Central) (Lab)]

I congratulate my hon. Friend on securing an important debate for all Members’ constituents affected by the worrying trend of payroll companies in many sectors. Does he agree that it is about time the Government looked at the practice, certainly to benefit the workers who are losing out, but also because it affects workers’ confidence to spend money and therefore the wider economy? That is why the Government need to look at this in detail.

[John Cryer]

I thank my hon. Friend for that intervention. He makes an important point. Creating economic uncertainty—and there is enough of that about anyway—and payroll companies spreading it around by making people self-employed so that they do not have rights at work or confidence in the future, is hardly an incentive to spend money. If people are not spending money, there will be even less economic confidence or confidence in other areas.