Employment agencies and employment businesses regulations affecting contractors

This article was written by Rob Crossland, Service Director Parasol IT Plc - Umbrella Company Solutions for Contractors - www.parasolit.co.uk

Introduction - New Regulations

From April 2004 the Government introduced some new regulations to (on the face of it) increase the regulation in the recruitment industry.

The Government took the view that workers in some sectors were being exploited (E.g. Hotel and Catering) and therefore tighter rules were required.

Apparently the first drafts of these revised rules saw light of day in 1999 and since that time “Europe” and various interested parties have lobbied and counter lobbied to get what we have now.

So why are Agencies asking me to Opt in or Opt Out?

These new regulations were designed to prevent exploitation of workers so began to cover much of these e.g. statutory holidays, salary payments and much more. The regulations then went further to include preventing recruitment agencies from charging temp to perm fees, temp to temp fees and other restrictive covenants.

However, the regulations also seem to cover (legal advice is 70% in favour that they are covered) personal service companies and people working through employee management facilities (E.g. umbrellas).

The regulations also meant that all parties supplying staff to clients (Agencies, Direct and the companies (brolly or personal service) also had to gather far more formal information relating to the person being placed; Entitlement to work data (passports, permits, visas), formal proof of qualifications, references and more Health & Safety assessments.

A fairly sizeable risk and administration overhead was therefore placed on all of the parties concerned. As with most legislation it was deemed as being un-workable for ALL scenarios but still came into force.

Bodies such as the REC, PCG and ATSCO lobbied for a way in which the people they represented could work with these rules. Thus, the “Opt Out / In” clause also came into force to enable the regulations to be sensibly managed.

The PCG at the time will have been concerned with the IR35 implications of the regulations. For a true contractor “in business of my own volition” then it would almost certainly look like they were “employed” by the end client and thus damage the IR35 defence. From certain sectors of the recruitment industry it was also quickly realised that these regulations would create significant commercial risk through increased admin and more worryingly loss of fees in certain scenarios.

The DTI finally agreed to the Opt Out scenario whereby a contractor can choose to Opt Out of the regulations. Thus he or she would not look “employed” from an IR perspective (the PCG concern) and the Agency would have its commercial risks reduced.

What does it mean to me?

You may have already received an Opt Out clause from your Agency. The Agency can ask you to Opt Out but legally you are not obliged to do so.

However, the flip side is that if you Opt In then the Agency has to collect far more information about you and your background. This will inevitably delay the forwarding of your details to the client and may even result in a lower rate given the extra admin needed. Whilst this is all going on the next guy has Opted Out and he has got the contract!

In simple terms the Opt Out allows the status quo to exist and work as we have prior to April 04.

I work via an Umbrella/Composite/Direct, am I affected?

The short answer is yes.

Anyone working as some form of temp/contractor being supplied to an end client either indirectly (Agency), or even direct is somehow touched.

Working through an Employment Management service (shades of brolly) means that the Agency will want the Employment Management Company to opt out. To enable the company to do this then the individual working through this route will have to be asked to Opt Out.

Even a one man company working direct with an end client could be affected. There are IR35 issues to consider in this scenario. If a spouse is employed for instance then technically they could be supplied to the client and thus the regulations may be in force. Substitution clauses in contracts also allude to this and thus even a one man company solely working direct should be aware (at worse) of the regulations.

It’s now June and I have had nothing from my Agency/Brolly, why?

The DTI allowed a grace period until 6th July 2004 for the regulations to take affect. Contracts signed before April 04 are also not bound by the regulations, but expect something on your renewal or new contract offer.

Summary

The regulations are designed to prevent exploitation of workers and to catch disreputable companies. They mainly affect those organisations in the recruitment industry but the Opt Out scenario has created some confusion for contractors to clearly know what they are signing up to.

Legally an Agency must take much more information from the individual if they refuse to Opt Out. For the “knowledge based” industry this means delays, risks (for the Agency) and increased costs. The Opt Out currently provides a mechanism to maintain the current way of working.

These new regulations will only protect vulnerable temporary workers if the DTI is able to enforce them. We would no doubt all prefer this to be the case and reputable companies that provide a genuine service to the temporary worker will survive.

Future

In the summer of 2003 a new EU directive “Temporary (Agency) Workers Directive” stalled from coming into law. This would have replaced the DTI regulations and apparently was even more punitive. It is obvious to assume that this will see the light of day again at some point and who knows if we will be able to Opt Out of that one.

I’m off to the US, anyone coming?