The UK Supreme Court recently handed down judgment in Pimlico Plumbers v Smith1, the latest decision on the hot topic of employment status in the “gig economy”, following the Deliveroo and CitySprint cases in 2017. The court dismissed Pimlico's appeal, holding that the employment tribunal was entitled to find that Mr Smith, who was engaged under a contract describing him as a self-employed plumber, was in fact a worker. He may now proceed with claims of disability discrimination and for unlawful deductions and holiday pay.

As a result of the media spotlight on these cases, workers are more familiar with their employment rights and potential claims. Below we explain what secured lenders and insolvency practitioners (IPs) need to know.

Employment status

There are three main types of employment status: self-employed, worker and employee. A number of core employment protection rights apply only to employees (such as unfair dismissal protection and redundancy pay), with workers entitled to more limited protections (such as minimum wage and paid annual leave). The self-employed receive none of these benefits.

Employment category Description Relevant Legislation

An individual who has entered into, or works under, a contract of employment (which includes contracts of service and apprenticeship, whether oral or written).

Employment under a contract of employment, a contract of apprenticeship, or a contract personally to do work.

Employment Rights Act 1996

Equality Act 2010

Worker An individual who has entered into, or works under, a contract of employment (a "limb (a)" worker), or any other contract, whereby the individual undertakes to do, or to perform, work personally for another party which is not the client or customer of a business carried on by the individual (a "limb (b)" worker)

Employment Rights Act 1996 National Minimum Wage Act 1998 Working Time Regulations 1998 Employment Relations Act 1999

Self-employed/ independent contractor An individual who is genuinely in business on their own account.

The decision in Pimlico Plumbers

The key factors leading to the worker status finding in Pimlico Plumbers were that:

  • There was an obligation on Mr Smith to perform work personally
  • The status of Pimlico was not that of a client or customer of Mr Smith

On the first point, the court provided some useful guidance in finding that Mr Smith’s right to provide a substitute (which, crucially, was limited to another Pimlico operative) was not inconsistent with an obligation to perform services personally (as opposed to a situation in which the employer is not interested in the identity of the substitute, provided only that the work gets done).

On the ‘client or customer’ point, a number of factors strongly militated against Pimlico being a client or customer of Mr Smith, including the requirement that he wear a branded uniform, drive a branded van, carry an ID card, and closely follow Pimlico's administrative instructions; and contractual references to "wages", "gross misconduct" and "dismissal".

An individual's employment status - worker, employee or self-employed - is a matter of fact for the employment tribunal. In this decision, the court held that the tribunal had, by a reasonable margin, been entitled to conclude that Mr Smith was worker. As a side note, the case reaffirms that a "self-employed" classification for tax purposes does not automatically mean that the same will follow for employment rights purposes.

Implications for those in the restructuring market

Other than the narrow point on substitution noted above, the Supreme Court's decision is unremarkable in terms of precedent: the legal position regarding employment status is, as it was, a question of fact for the employment tribunal. Whether an individual is a worker, an employee or neither will depend on the particular workplace arrangement and facts.

In other words, when it comes to people working in the gig economy, it will often be impossible to say with certainty what their status is regarding employment rights. The Chartered Institute of Personnel and Development reported in March 2017 that there are approximately 1.3 million people working in the gig economy in the UK.2 Although Pimlico Plumbers does not make it significantly easier for them to establish worker rights, the widespread media attention given to it and a handful of other high-profile employment status cases means that they are more likely to be aware of their potential rights - and claims.

As such, it is imperative that restructuring professionals are aware of the potential for status claims, their potential cost, and where they rank in the statutory insolvency waterfall.

What constitutes a preferential employee claim?

  • Remuneration owed for the four month period before the start of the relevant insolvency proceedings, subject to a maximum overall claim of £800 per employee, including: – Wages or salary – Sick pay, contractual or statutory maternity pay – Guarantee payments, remuneration for suspension on medical or maternity grounds and payments for time off for trade union duties, antenatal care and looking for work – Contractual commission or bonus; o overtime payments, and – Protective awards
  • Accrued holiday pay in respect of any period prior to the start of proceedings (not limited to the £800 cap).
  • Certain contributions into occupational pension schemes and contributions deducted from the employee's pay.

Though the majority of debts owed to employees in an insolvency process are unsecured, ranking penultimate in the statutory waterfall, certain employee claims have preferential status, ranking third in priority and, importantly, ahead of floating charge creditors. These preferential debts consist of “remuneration” (including wages, salary, sick pay, maternity pay and bonuses) to a maximum of £800 per employee, accrued holiday pay and certain pension contributions. Claims in excess of the preferential threshold then rank as unsecured.

These preferential debts are payable not only to employees but also, the wording of schedule 6 to the Insolvency Act 1986 would suggest, to workers (the self-employed cannot claim preferential status).

This brings the potential for both an increased body of preferential creditors (arising from claims based on employment status) and a significantly diluted Prescribed Part (ie the part of the proceeds from realising assets covered by a floating charge that must be set aside and made available to satisfy unsecured debts, ranking fourth in the waterfall).

What does this mean for secured lenders?

Increased leakage from security held.

For example, take a business that employs 1,000 people on similar terms and one successfully obtains judgment that they are a worker, rather than self-employed. If the rest follow suit, that could mean an increase in preferential creditors of over £800,000.

Though an extreme example, this is not completely unrealistic, and illustrates the potential for increased leakage before the secured lender begins to receive any floating charge distributions. Banks and other secured lenders may, therefore, need to re-evaluate their approach to gig-economy customers:

  • Reassess the potential exposure to preferential worker claims when assessing their exit strategy on insolvency
  • Consider the asset classes available when thinking about the funding model (these customers are perhaps also more likely to have mainly floating-charge assets)
  • Focus on fixed charges as far as possible
  • For asset-based lenders and invoice discounters, consider appropriate reserves against funding availability to protect against the prospect of increased leakage from security held

What does this mean for Insolvency Practitioners?

It seems likely that more, not less, individuals will seek to assert worker or employee status, with accompanying claims. As such, IPs can expect an increase in preferential claims, particularly when dealing with companies operating in the gig economy. Often, in the case of a national delivery business or cleaning company, there will be a small number of core employees but hundreds or thousands of potential workers.

Ensuring an accurate estimated outcome statement in insolvency scenarios may necessitate a more detailed consideration of the employment status of a number of parties. IPs should be mindful that more individuals may seek to assert employment rights, equating to up to £800 in remuneration, as well as accrued holiday pay and pension contributions, as preferential creditors.

This could result in both an increase in costs and a reduced return to floating-charge holders. At the same time, however, IPs will need to tread carefully when adjudicating proofs in the context of a person’s employment status: resolving any substantive discrepancy could set a precedent for others to amend their proofs, and any substantive dispute could lead to significantly increased - perhaps disproportionate - costs in seeking the directions of the court.

Impact on pre-pack business sales

Under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE), employee contracts transfer when the undertaking for which they work passes to a new employer. The purchaser (the new employer) is not liable for some pre-existing debts owed to employees, including statutory redundancy payments, up to eight weeks' arrears of pay, and holiday pay. The Secretary of State pays these liabilities from the National Insurance Fund (NIF), up to the statutory weekly limits (currently standing at £508 per week, from April 2018). The NIF then has a subrogated claim – as a preferential creditor – in the insolvent estate of the old employer for the amount paid.

However, the purchaser is liable for debts that are not covered by the NIF or exceed the statutory limits, as well as debts arising after the transfer, such as the basic award in respect of a post-transfer unfair dismissal.

Though it is a slightly grey area that lacks precedent, it appears likely that someone who is classed as a worker for other purposes would fall within the definition of "employee" for the purposes of TUPE.

Now, following Pimlico Plumbers, informed purchasers are likely to be more alive to the potential liabilities owed to persons who successfully assert their employment rights. Again, this could take liabilities from thousands to hundreds upon hundreds of thousands, in the purchase of a “gig economy” business. One issue therefore stands out – price chipping. A commercially savvy purchaser is likely to attempt to reduce the price paid for a business and its assets out of insolvency to reflect the risk of claims from workers. Again, this is likely to impact upon the administrator’s EOS and a reduction in the return to the other creditors, particularly those with floating charge security.

Summing up

Fundamentally, the fact-specific nature of the Pimlico case does not provide a clear line between worker and self-employed status for all purposes. However, the media attention garnered by the case - and similar cases in the press at the moment, as well as Government assurances that this area will be "clarified" - has increased awareness of this issue amongst gig economy workers and potentially increased the likelihood of worker status claims.

If those claims are valid, IPs and secured lenders may need to redo their sums, reassess the security held and reconsider exit strategies.