As a result, many more employees will have the right to claim unfair dismissal and the value of unfair dismissal claims has the potential to rise significantly. We have also seen a lot more employees consider themselves capable of bringing proceedings without the cost of a lawyer given the advent of generative AI.
So, now is a very good time for recruitment companies to review and update their terms of business to deal with the potentially very significant unfair dismissal liability umbrella companies will face.
What’s the issue?
Recruitment companies supply agency workers to their clients, generally to work on short, fixed-term assignment or project. Often this is done through an umbrella company arrangement with the umbrella company employing workers under employment contracts as employees, with the employment contract ending when the assignment comes to an end (assuming there is no further assignment for the individual to run through the umbrella company). Umbrella companies often process this dismissal through an implied resignation where the employee is deemed to have resigned if they do not contact the umbrella within say, four weeks, of an assignment ending to start another assignment. It is likely that this approach could be argued to amount to a dismissal, not simply a resignation.
For tax reasons, umbrella companies choose to employ the workers as employees and this is usually the umbrella company’s decision, not the recruitment company’s. Recruitment companies would generally engage agency workers as workers, not employees, when running their own direct payroll. That has the benefit of the workers having fewer rights, with no unfair dismissal protection and no right to a statutory minimum notice period.
The short-term nature of the assignments has meant that to date employees are unlikely to have acquired sufficient service to bring an unfair dismissal claim if their employment terminates at the end of an assignment. With the reduction in the unfair dismissal qualifying period from two years to six months, this will no longer be the case.
The reduction in the unfair dismissal qualifying period could also result in earlier and larger numbers of dismissals, potentially triggering collective redundancy consultation obligations. Currently, collective redundancy consultation obligations are engaged where an employer proposes to dismiss as redundant 20 or more employees at one establishment within a period 90 days or less, but from 2027 there will also be an organisation-wide threshold resulting in collective redundancy obligation being triggered more frequently. A redundancy dismissal is widely defined and is not limited to redundancy dismissals in the traditional sense. It extends to any dismissal for a reason not related to the employee concerned and so would cover most, if not all dismissals by umbrella companies at the end of an assignment.
Failure to comply with collective redundancy consultation obligations can result in a protective award of up to 180 days’ full pay per affected employee. Again, protective award claims can only be made in respect of employees, not workers.
Who is liable for unfair dismissal and protective award claims?
Liability for unfair dismissal claims, protective awards and other employment rights rests with the umbrella company as they are the employer. However, they may seek to pass on the cost of that liability to recruitment companies (or end clients where there is no recruitment company in the chain) through contractual indemnities. Recruitment companies (and end clients where applicable) should resist this as they will have little to no control over the dismissal process (and therefore the timing of dismissals and whether they are conducted fairly). In support of this, they can also argue it was the umbrella company’s choice to use an employment model rather than the less risky worker status model (as mentioned above, workers have fewer rights and do not have the right to claim unfair dismissal).
An existential threat to umbrella companies?
In light of the significant risks coming in 2027 to the current employment model adopted by umbrella companies, and the already increased liability for recruitment companies and end clients resulting from the recent introduction of joint and several liability for PAYE non-compliance under Chapter 11 ITEPA 2003, one has to question is this all too much to bear for the umbrella company industry?
If recruiters and end clients will not foot the bill (and why would they, as the umbrella company chooses the employment, not worker, model), will the margin for umbrellas be enough to mitigate the very real risk of lots of costly employment claims? This is not even to mention the raft of proposed reforms to the recruitment sector in general under current government consultations which will also affect how umbrella companies operate and the compliance costs of doing so.
What should recruitment companies (and end clients) be doing now?
- Check your terms of business and, in particular, any indemnities to see if you could be liable for the cost of unfair dismissal/protective award claims etc. Renegotiate accordingly
- Make sure that new contracts do not introduce new indemnities for unfair dismissal/protective award liabilities or other employment rights
- Consider running your own direct worker status PAYE payrolls in place of using umbrella company arrangements
Please feel free to contact our Head of Recruitment Services, Declan Bradley, for any advice you need.
