UK Employment Law Coffee Break: Irretrievable breakdown in the employment relationship, guaranteed hours rights for agency workers, and our immigration podcasts

Dyslexic employee was fairly dismissed due to an irretrievable breakdown in the employment relationship 

The Employment Appeal Tribunal has found that an employee was fairly dismissed for "some other substantial reason" where the employment relationship had irretrievably broken down. 

The employee and two other employees of the respondent were the subject of a restructuring exercise where three posts were being replaced with two new posts for which the three of them would apply and undergo competitive interview. The employee was unsuccessful in the interview. She had dyslexia and she raised a grievance about the interview process saying that she should have been provided with the questions 24 hours in advance. She rejected the outcome of the grievance (which offered her a new interview and for the questions to be provided 15 minutes in advance) and appealed. She also rejected the outcome of the appeal (which provided that she should be re-interviewed, the interview extended by 15 to 30 minutes and be provided with question headings and a summary of competencies 24 hours in advance) and wrote numerous emails to the decision-maker and the chairman of the respondent and no resolution could be found to her complaints. 

The employee was called to a meeting to discuss whether her continued employment was tenable. There were four primary concerns: (i) her perceived unmanageability; (ii) her rehearsing of complaints that had already been dealt with and her inability to accept the grievance outcome; (iii) her actions were causing an unsustainable demand on HR and management, including executive time and resources; and (iv) the belief that relations, trust and confidence between her and the respondent had irretrievably broken down. 

The decision-maker decided, based on these events, that she had shown she had no confidence in her employer and that the relationship had irretrievably broken down. The employee was dismissed with notice for "some other substantial reason". The Employment Tribunal rejected her claim of unfair dismissal. 

The employee appealed on the grounds that no sufficient consideration had been given to her length of service or an alternative to dismissal. The EAT dismissed the appeal because, given the decision-maker’s finding that the relationship had irretrievably broken down there was no alternative to dismissal and length of service was not relevant. An employer can only be obliged to consider length of service if it is relevant to the decision to dismiss. 

Employers should consider reasonable adjustments to internal processes for interviews for promotions where an employee is neurodivergent and may require extra time or information in a different format. Here the employer accepted during the process that amendments to the interview process were required but could not reach an agreement with the employee on the extent of the adjustments. 

The ET found that the employee's response to the grievance appeal recommendations showed that she would not accept any outcome "which did not meet her unreasonable demands" and that she "would continue to challenge decisions by her managers and that the restructuring process would be held up". It was this that constituted some other substantial reason enabling the employer to fairly dismiss her. 

While this decision will be welcomed by employers faced with an employee who is unwilling to accept a different outcome to that which they desire, it should be remembered that establishing an irretrievable breakdown in a relationship is always a high hurdle to overcome. Where an employee is requesting an accommodation either as a result of a disability or, for example, a parental or caring responsibility, employers must be particularly careful to consider all reasonable adjustments/accommodations that could be provided. However, they will not be required to accept every demand by an employee where it is not reasonable to do so. 

Will new guaranteed hours rights for agency workers lead to more tax risk for end users and suppliers? 

Much has been written about the impact of the Employment Rights Bill (ERB) on employers, but less about how zero hours contracts and day one unfair dismissal rights will apply to agency workers. 

The zero hours measures in the ERB apply only to employees and workers who are directly engaged by "employer" organisations – not to "agency" workers. A consultation on the application of zero hours measures to agency workers closed on 2 December, but it is far from clear how the provision of guaranteed hours contracts can be made to work without either rendering the end user organisation the legal employer of the agency worker or requiring agencies to offer guaranteed hours without the information or funds to deliver such commitments. Either way, history suggests that any change leading to increased costs will result in increased use of self-employed engagements, often operated by unscrupulous payment intermediaries, parading as PAYE umbrella companies.

Agency worker supplies typically involve several links – in many cases agency workers are engaged by umbrella companies, not the agency who supplies them. The difficulty for agencies is to know which umbrella companies are operating within the law, and which are not. 

Tax non-compliance in staffing supply chains in not a new thing. HMRC published revised guidance in May 2021 which flags staffing supply chains as high risk due to the potential for reliance on unlawful tax avoidance schemes. It urges both user organisations and supplier agencies to carry out due diligence on all links to ensure they know how workers are engaged, who pays them and that payments are tax compliant. Due diligence is advised because liability for underpayment of tax and national insurance contributions (NICs) can move along the supply chain to the agency or even, in certain cases, the end user. 

End users may face criminal liability and unlimited fines if they fail to prevent their employees and associated persons facilitating tax evasion by third parties. Importantly, in the case of staffing supplies, this can involve arrangements via agencies with umbrella companies operating tax evasion schemes – the fact that the end user or the agency is not aware of them is no defence if they do not have reasonable procedures in place to prevent such facilitation from happening. 

Users and suppliers of contractors engaged via personal service companies (PSCs) are also at risk. A number of large end users have already received off-payroll compliance enquiries from HMRC, and it is expected to ramp up enforcement of the off-payroll rules as the four-year deadline to raise tax assessments for 2021/22 approaches. 

Although end users are generally aware of the need to carry out IR35 status determinations in relation to PSC contractors they know about, there is still a risk where workers who they assume are engaged on a PAYE basis are, in fact, engaged via PSCs, because they will not have done status determinations in relation to those engagements and will be liable as the taxpayer if HMRC assesses those engagements as being inside IR35. Contractual indemnities may not be enough to protect against this type and level of liability, so it is important for end users to carry out supply chain due diligence. 

As regards umbrella companies, the government announced in its October 2024 Budget the introduction of new legislation effective from April 2026, aimed at making agencies liable for tax non-compliance of umbrella companies. This will undoubtedly make agencies more cautious about relying on umbrella companies and may prompt some to take agency worker payrolls back in-house. However, unless this legislation is considered as part of the government's broader objective of moving to a single status of worker and to introduce a statutory definition of self-employment, it may lead to an increased use of bogus self-employment arrangements. It is therefore essential that measures flowing from the ERB which affect agency workers and new legislation aimed at clamping down on umbrella company non-compliance are considered both from an employment status and a tax status point of view. 

Contingent worker supply chains are already being targeted by HMRC and any increase in use of self-employment models will only increase this scrutiny. The specific allocation of the extra £555m annual funding to HMRC by the government is earmarked for certain areas, in particular the recruitment of an additional 5000 HMRC compliance officers. While it will take some time for this recruitment to have any effect, it is a signal of intent to close the tax gap and provide the government with much-needed resources. 

Users and suppliers or all types of contingent worker, whether they be agency workers, PSC contractors or gig worker platform freelancers, should do effective due diligence on their staffing supply chains and keep an eye on developments in this area. 

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