An HM Revenue & Customs (HMRC) contractor has successfully claimed for unpaid holiday pay after the HMRC determined that she was an employee.

The landmark case could impact public sector contractors who have been put on agency payroll and umbrella arrangements following the public sector IR35 reforms in 2017.

Earlier this year, marketing and business development consultant, Susan Winchester, launched an employment claim in the Central London Employment Tribunal against HMRC, the agency Kinect Recruitment Ltd and three other parties in the contractual chain. The claim was for £4,200 in unpaid holiday pay under the Agency Workers Regulations.

Winchester’s company, SJW Marketing Solutions Ltd, was originally engaged by HMRC in September 2016 to provide marketing services.  With the changes to off-payroll rules in the public sector about to come into force at the time (April 2017), HMRC ran the engagement through its Check Employment Status for Tax (CEST) tool and determined that IR35 applied.

HMRC then required Winchester to go onto an agency payroll, a decision that could not be challenged.

Winchester claimed that as she was then effectively an agency worker under the regulations, she was therefore entitled to a clear, transparent amount of holiday pay and to the same holiday entitlement as employees of HMRC.

On the morning the tribunal was due to start, the parties agreed to settle the case for the full amount being claimed (£4,200).

After the payout, Winchester said she “just couldn’t understand why somebody could make some arbitrary decision about my tax and employment status on a brief, over-simplified questionnaire that I had no input in and seemingly no right to challenge.”

Chris Bryce, CEO of the Association of Independent Professionals and the Self-Employed (IPSE), which backed Wincher’s case, commented, “Susan’s case sends a very clear message to clients, that if you are going to treat contractors like workers, then you’ve got to give them worker entitlements. You can’t just decide someone is inside IR35, shunt them onto an agency payroll and expect someone further down the line to pick up the tab for your obligations like holiday pay.”

Bryce also commented on plans to extend the IR35 rules into the private sector, “Therefore, with Brexit hanging over the country, IPSE’s response to the Government’s consultation on extending the changes to the private sector is clear: abandon this disastrous proposal. We appeal to the Government to harness the talent provided by the freelance community and stop hounding them!”

Julia Kermode, chief executive of The Freelancer & Contractor Services Association, commented, “This landmark case illustrates just how complex employment status is and how unfair it is to tax contractors as employees without providing them with any of the accompanying rights and benefits that come with employment.”

“If HMRC does not understand its own policy and cannot implement it how can it expect any other public sector body or private firm to get it right,” Kermode said. “This case is just the tip of the iceberg and we are likely to see more fallout as contractors stand up for their rights. I hope this sends a clear message to policymakers that they need to reconsider any move to roll out the reforms into the private sector or risk bringing the country to its knees.”

Dave Chaplin, CEO and founder of contracting authority ContractorCalculator, commented, “This case is a game-changer for public sector contractors who may be eligible for similar substantial pay-outs, having been forced by their public sector clients into umbrella and agency arrangements following the introduction of the Off-Payroll tax.”

“Given the amount of public sector contractors who have been bundled into these types of arrangements, we expect that this settlement will give rise to a number of similar challenges. Inevitably, this will create financial difficulties for the non-compliant intermediaries, which will hopefully help stamp out this malpractice,” Chaplin said.

 Seb Maley, Qdos Contractor CEO, also commented, “This case sets a huge precedent, showing that individuals taxed as workers and not as contractors deserve employment rights. It could well be the catalyst for many more cases like this.”