Agency and temporary workers: the nature of an agency contract (applicable up to 5 April 2014)
It is important to appreciate the nature of an agency contract. In the normal, non-agency situation a worker has a contract with the person for whom he or she works and this is either a contract of service (employment) or a contract for services (self-employment).
An agency contract is one where the worker contracts with a third party (which may be, but need not necessarily be, a traditional employment agency) to undertake work for a client of the agency. There is no contract between the client and the worker, so the worker cannot be an employee of the client. Similarly, the contract between the worker and the agency will not usually be a contract of employment. In Construction Industry Training Board v Labour Force Limited  3 AER 220, Cooke J said
“I think there is much to be said for the view that where A contracts with B to render services exclusively to C the contract is not a contract for services, but a contract sui generis*, a different type of contract from either of the familiar two.”
(*Note: ‘sui generis’ - of its own kind, unique)
However, this does not mean that an agency worker can never be an employee of the agency for which he or she works. In Secretary of State for Employment v McMeechan (see ESM7180) the Court of Appeal decided that the contract between the worker and the agency was, in relation to a specific engagement with one client, a contract of employment. The contract contained several ‘employment’ features including the agency’s right to dismiss McMeechan, or to bring any assignment to an end, and the fact that McMeechan had access to a review procedure if his services were terminated and a grievance procedure for other matters. On balance, the Court held that a contract of employment existed in this particular case.
We do not think that many agency contracts will turn out to be contracts of employment but the possibility should not be overlooked. An agency worker who is engaged under a contract of service is an employed earner liable to Class 1 NICs and in receipt of employment income, and PAYE should be operated in the same way as for any other employee. The special agency legislation will not apply.
Prior to 6 April 2014, the existence of an ‘agency contract’ was a qualifying condition that must be satisfied in order for the agency legislation to be applied. However, that condition no longer applies from 6 April 2014 onwards. See ESM2031 onwards.