Judge rules Apprenticeship Levy was an unlawful deduction

A recent tribunal (Mr A Harman and Cleshar Contract Services) illustrates many different pitfalls in engaging independent workers and should be essential reading for recruitment agencies, umbrellas and workers everywhere.

Engagement mechanism

The case goes back to 2010 when the claimant was engaged by the respondent on a self-employed basis and paid under the Construction Industry Scheme (CIS).  New tax rules to be introduced by HMRC provided that if there was supervision, direction and control over the manner of the work that an operative undertook, the party making the payment to the operative for that work would be liable to make PAYE deductions from their pay. As a result, the respondent decided to change the engagement mechanism of self- employed contractors to ensure that PAYE deductions were made and made at no cost to the respondent. The respondent offered workers a choice:  be engaged as a PAYE employee or offer your services via a limited company.

Affected workers were given information regarding the two options at a presentation. They were also provided with a pack containing details of the changes and a contract of employment. The presentation contained a slide which contained two calculations by way of comparison which showed that the PAYE option would leave the example worker better off than under CIS. However, the information also provided a ‘method of calculation of pay’ which showed that the shift rate was not being offered to workers, rather it would be starting point from which deductions would be made.

Pay rates and holiday

There then followed a classic bit of confusion regarding the pay rate.  The claimant believed that he would receive that same shift rate as before and that costs of employment would not affect that shift rate.  The respondent could not afford the extra costs of engaging the worker via PAYE so decided that these would need to come from the original contract rate.

The claimant’s holiday pay was also “rolled up” into the rate, meaning that he would not receive any additional pay if he wanted to take holiday. However, the shift rate which the worker received when he was self-employed (and not entitled to holiday pay) was not increased to take account of the rolled-up holiday pay. Rather the holiday pay was deemed to be included in the original shift rate which was to be used to calculate wages for the employees.

To cut a long story short, the claimant did not take any holiday at all during this period and the tribunal awarded almost 4 years of holiday pay to him. It found that holiday pay had in fact not been paid as the original shift rate had not been increased.

Unlawful deductions

The claimant also sought reimbursement for unlawful deductions of employers NICs and pension contributions, and the apprenticeship levy.  As the claimant had been informed that the employers NICs and pension contributions would be paid from the contract rate at the outset, (as stated within the pay calculation formula information that the claimant received), the tribunal found determined that the claim for employers NICs and pension contributions could not be awarded.  In addition, given that the claimant had raised no issues in the month that he had the contract of employment before signing it nor raised an issue regarding the level of his wages for over 3 years he was therefore deemed to have agreed to the shift rate he had been paid, i.e. net of those particular deductions made.

Apprenticeship levy

Importantly, as it didn’t exist in 2015 (when the new engagement started), the apprenticeship levy was omitted from the pay calculation formula.  In addition, the contract made no mention of a broader right to make other deductions so the judge found that the apprenticeship levy was an unlawful deduction from the claimant’s income.

The unlawful deductions award hinges on the fact that the apprenticeship levy was not disclosed at the outset, but added later to the costs of employment.  This was not an usual practice at the time the levy was introduced, particularly in sectors where margins were tight and it was impossible for hirers to afford the additional cost.  Time will tell if following this case there are more successful claims for unlawful deduction of the apprenticeship levy from workers who’s income decreased at the time it was introduced.

Employment status

A final point to note is that the tribunal judge found that all the features of the working arrangements were consistent with there being a contract of employment between the claimant and the respondent from 2010 onwards.  In other words the claimant was never genuinely self-employed, and the contractual arrangements did not match the reality of the working practices.  This finding was necessary for the tribunal to consider the claims raised and will have informed the tribunals view in its decision to award holiday pay.

The full tribunal is well worth a read, which you can access here.


In summary, the case illustrates a myriad of different issues and clearly illustrates the need for transparency in how temporary and contract workers are engaged, particularly regarding pay rates, holiday entitlement etc.  This is why Key Information Documents are so important.

The case also shows the importance for workers of reviewing, carefully, any documentation provided to them, of asking questions, taking advice and raising issues promptly to avoid losing the right to make a claim.

Most elements of the case are nothing new.  In particular there is often confusion regarding pay rates due to the additional costs (employers NICs etc) when converting workers from self-employed to a PAYE engagement mechanism.  Indeed, nothing about this case will surprise any umbrellas or recruitment agencies that were around when off-payroll changes came into the public sector in 2017.  If reasonable care is not taken then more such cases will surely be inevitable following the private sector roll out in April 2021.

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