Calling all group companies – do you really know who you are employing?

In an employment relationship, the identity of the employer is usually very clear; however, where an employee works for a group of companies, it can sometimes be trickier to identify which of the group companies is the true employer.  This can sometimes cause issues, particularly from a tax perspective, when it comes to identifying where a cost base sits within the group. 

It is rare for an employee to challenge the identity of their employer at the time they start work but when the relationship ends (which can sometimes be on bad terms) disputes over which Group Company an employee is employed by may arise. It is often very difficult to try and resolve a disagreement such as this after it arises and so it is important for employers with large group structures to consider which entity is the employer before it becomes a problem.

Equally, it is good practice for all businesses to check that their employee paperwork is in order as failing to do so can cause problems with defending tribunal claims and in some cases can lead to additional awards of compensation.

A recent judgment of the Employment Appeal Tribunal sets out vital guidance on how to determine the correct employer where there is a disagreement and stands as a warning to employers.  Employers should be aware that an employment contract may not be definitive and it is possible for a tribunal to look behind the documents and determine a relationship based on the reality of the situation and not just the label that is attached to it. However, as a first step, it will always be relevant to consider any written agreements or contracts of employment to assess whether this reflects the reality for the parties. Is the intention for employee A to work for company B or company C? In complex group structures this position is not always clear cut, as an employee may be required to dedicate time across different entities.

Despite contractual/documentary evidence being important, it is not decisive. The Tribunal will often look beyond what was included in the written agreement and consider the practical reality of the employment relationship between the parties. A good indicator would be which entity pays the employee’s salary and deals with accounting requests. Even this alone could cause issues if the true employer is an entity which, for tax reasons, has no liquid assets. This could become even more complicated where there are international Group Companies.

Our top tips to employers are:

1. Put it in writing – Despite the fact that tribunals may look behind written agreements, it is still extremely important to have a written agreement that identifies the employer. If you have it in writing, signed by both the parties, this is a good indication of the correct identity of the employer even though it is not absolute.

2. Align the reality to the contract – just because a contract states A is employed by B, if the reality is completely different (for example because A spends 95% of their time dedicated to working for C) the Tribunal might hold that C is the true employer. It’s therefore crucial to ensure that the contract accurately reflects the reality of the relationship and, in particular, who the employee is intended to carry out work for. Despite the contract of employment being a good starting point, the Tribunal may find otherwise if this contradicts what happens in reality. It is important to give thought to who the employee thinks their employer is, as this may bear weight in decision making. In addition to identifying the beneficiary of the employee’s service, look at other hallmarks of the employment relationship such as which company will pay the salary and whether supplementary documentation (e.g. a staff handbook) is aligned with the named employer.

3. Keep contracts updated – if the position changes, such as where an employee moves within the group of companies, update the contract to reflect this and ensure that both you and the employee keep a copy of this. If the move is temporary, such as a secondment within the group for a short period, ensure that there is confirmation in writing so that everyone is clear.

If you require advice or assistance with any employment law issues, please contact David Rushmere or one of our expert team of employment lawyers on 01582 514000.