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Court looks behind ‘Personal Service Company’ arrangement to find employment

September 5, 2018
Employment Law

We don’t normally pay too much attention to High Court disputes over the ownership of intellectual property rights.  However, the recent case of Sprint Electric Ltd v Buyer's Dream Ltd and another indirectly makes some interesting findings on the employment status of people who provide their services via a ‘personal service company’.

The facts

As you probably know, a ‘personal service company’ is a limited company set up by an individual, often for the purpose of providing their services to a particular ‘client’.  In the Sprint case, a man called Dr Potamianos was required to incorporate a company (called Buyer’s Dreams Ltd), through which he then provided his computer programming services to Sprint Electric.  A contract for services was put in place between the two companies, which purported to create an arm’s length commercial relationship.  The whole arrangement was motivated by a desire to reduce their tax bill.

When relations between the parties broke down, a dispute arose as to who owned the source code previously developed by Dr P.  Normally, in an employment relationship, the intellectual property rights would automatically vest in the employer.  However, Dr P seemingly provided his services via a ‘personal service company’.  As a result, it appeared as if he was not Spring Electric’s employee.

The decision

Despite the terms of the written contracts and the apparent structure put in place by the parties, the High Court found that Dr P was effectively contracted personally to provide his services to Sprint Electric.  As a result, he was found to be an employee of the company.  In turn, this meant that the source code belonged to Sprint Electric and Dr P was under an implied obligation to provide it to the company on request.

So what?

This case illustrates the court’s ongoing ability (and willingness) to look behind the written contracts and identify the true nature of the relationship between businesses and individuals.  For some time now, we have been mindful of the risk of ‘personal service company’ arrangements being challenged from a tax point of view (under the infamous IR35 regime).  However, the risks don’t end there.  Whilst on this occasion it was in Spring Electric’s interests for the court to be prepared to look behind the ‘personal service company’ arrangement, in other cases the situation could be very different.  What if Dr P was the one asserting an employment relationship, in support of a claim of unfair dismissal?

If you are considering using ‘personal service companies’ or are otherwise reviewing some of the more ‘unusual’ arrangements already in place within your business, please get in touch.  We would be happy to help you assess the risks and devise a strategy for achieving your objectives.

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