Payroll Companies

Lord Cryer 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.

[Steve Rotheram (Liverpool, Walton) (Lab)]

I congratulate my hon. Friend on developing some interesting arguments about this largely unknown and certainly unexplored and ignored issue. May I pay tribute to my union, UCATT, which I joined as a young teenager in 1979? Members will say that that year does not sound right, but—

[Steve Rotheram]

Yes, child labour.

I pay tribute to the work that UCATT has carried out in bringing the issue to the attention of a much wider audience. Can my hon. Friend the Member for Leyton and Wanstead (John Cryer) say why, at a time when Liverpool city council, for example, is having 52% of its discretionary budget cut—up to £300 million—the Government are turning a blind eye to payroll companies, which are avoiding paying up to £2 billion into Treasury coffers?

[John Cryer]

I thank my hon. Friend. He makes a good point. The council that largely covers my constituency, Waltham Forest, faces some savage cuts, while we see billions—it is billions, by the way—disappearing down the Swanee, because HMRC is powerless to stop it. HMRC itself is facing cuts and has been for quite some time. It will face more and more cuts; its staff numbers are being reduced, so it is unable to police this behaviour.

I should point out that not all payroll companies behave as Hudson does. When Jamie Elliott began his report, he found companies that said, “We are not going to help you do this. This is inappropriate. We think that you are engaging in bogus self-employment, so we will not help you.” The majority, however, did not say that. The majority said, “Yes, we are more than happy to help you transfer people to”—using my words—“bogus self-employment.”

I have mentioned the more respectable payroll firms, but at the dodgy end of the market things can be even worse. There are cases of workers turning up for work and being told, “Although you have not signed or agreed anything, you are now self-employed. You are not employed by the company.” They are transferred without their knowledge. That may technically be illegal, but under the current circumstances and in such an uncertain industry as construction, many employees will not be keen to complain about an employer, which clearly does not think that much of them if they want to transfer them to being self-employed.

I have described a fairly straightforward sort of scam— I use the word advisedly—but another scam is the use of umbrella companies, which is rather more complicated. Workers remain employed, but by an umbrella company, which is in turn set up by the payroll company. The cost saving is made by a tax dodge that allows tax relief on employees’ travel and subsistence to be used to pay employers’ national insurance. Since employers’ NI runs at 13.8%, we are talking about a considerable saving. That is the incentive that payroll companies have to set up the umbrella companies that allow the dodge to take place.

A final example of the sorts of practice being engaged in is the use of offshore status. For example, International Subcontracting Solutions Ltd employs 24,000 supply teachers across the UK. Because it is based in the Channel Islands and is a payroll company, ISS is not liable to pay employers’ NI, although it does technically employ the teachers. At the same time, the recruitment agencies in the UK that actually find the jobs for the teachers are also not liable to pay employers’ NI. On all the fronts I describe, the Treasury is losing out in a big way—to the tune of billions of pounds.

My final point is in line with the intervention that my hon. Friend the Member for Liverpool, Walton (Steve Rotheram) made. The Elliott report puts the amount of money lost to the Treasury at £1.9 billion, but that only covers construction. It is an estimate, but it is pretty accurate. There have been no detailed reports, which is why I have concentrated on the Elliott report, but from what I can gather, such practices are spreading to other industries. I have received e-mails describing how they are spreading into the hospitality, catering and retail industries.

If we take all those industries together, my suspicion is that billions of pounds are being lost to the Treasury at a time when we are seeing savage cuts to public services left, right and centre. Every Member can cite cuts to services in their constituencies and local authorities used by the people who they represent, and yet all this money seems to be disappearing down the Swanee.

Thousands, certainly tens of thousands, and possibly millions of workers in the long term, will be deprived of basic rights at work, their holiday and sick pay, and their pension and redundancy entitlements. That will do only one thing: fuel a lack of confidence in the economic future of this country.

[Ian Murray (Edinburgh South) (Lab)]

I thank my hon. Friend for giving way just before he concludes his remarks. He has made a powerful speech. It is important to remember that self-employment and freelancing are good, but we are looking to tackle bogus self-employment. Is it incumbent on the Government to launch a full inquiry, through the Department for Business, Innovation and Skills, into this, not only for the sake of the employees and the Treasury, but because of issues in the construction sector such as blacklisting? People who work in the construction sector deserve an awful lot more from this Government. They deserve a full investigation of all the facts around their employment and future.

[John Cryer]

My hon. Friend makes a very good point. It would be a sensible solution for the Department to conduct an inquiry into the various tax dodges, particularly in construction, but in other industries as well; into blacklisting and all those slightly shadowy practices, some of which are straightforwardly illegal, some of which verge on illegality and some of which are straightforwardly legal; and into how it affects people and business and economic confidence.

[Jim Sheridan (Paisley and Renfrewshire North) (Lab)]

Apart from the impact on employees, such an inquiry might cover how much damage is being done to small and medium-sized enterprises in the construction industry, which are suffering seriously during this recession only because they treat their employees fairly and are undermined by such people.

[John Cryer]

That is a very good point. I have met many employers, including in my constituency—I represent two boroughs, Redbridge and Waltham Forest, because it crosses borough boundaries—who have told me exactly that: “We are a legitimate employer. We want to do our best by our employees. We want to protect them. We want to give them decent wages, holiday pay, sick pay, pension entitlements and all that. Sadly, however, we are being undercut by people who are frankly cowboys.”

It would be an excellent idea for BIS, perhaps under the leadership of the Minister, to look into such practices and see exactly what is going on. Those practices are not often brought into public light, partly because people who suffer under them are very nervous about reporting them. People have come to my surgery, as they probably have done to those of many other hon. Members, to tell me about such practices, but as soon as I ask them whether they will go on the record, they say, “Well, no. I can’t go on the record, because I will never work again, at least not in the industry”—for instance, construction—“as I will effectively be blacklisted.”

In conclusion, the two elements—the loss of money to the Treasury, which is very significant, and the loss of rights and pay, the resulting loss of economic confidence and the basic unfairness of some of the practices—should be brought to light and be ended, which is why I am interested to hear the Minister’s response.