Agency Workers Regulations – Are Small Businesses Ready?

Agency workers are vital to many companies and get substantial rights from October in one of the biggest shake-ups of UK employment law in a generation. Frances Lewis of law firm Osborne Clarke, a government adviser on the changes, says many employers wrongly assume they are ready and protected.

Growing reliance on non-permanent staff is a feature of modern working life, and the new Agency Workers Regulations 2010 give them some of the same rights as their permanent colleagues.

This means a potential cost to many users of agency workers from autumn 2011. But perhaps the real cost will be to the many others falsely believing that the regulations will not apply to them.

The changes are designed, broadly, to give agency workers engaged in the same role with the same hirer for 12 weeks the same basic rights enjoyed by directly employed staff.

This means benefits such as equal pay, holiday pay, bonuses, child care, car parking privileges, on-site canteens and annual leave entitlements. There are also rights to notification about job vacancies. However, occupational benefits fall outside the regulations, including contractual sick pay above the statutory minimum, pensions, redundancy pay and maternity pay.

Preparation now matters. There is every reason to suppose that trade unions will want to force test cases, and even class actions, before employment tribunals. Suppliers, such as recruitment agencies, and hirers of agency workers could end up liable for potentially unlimited pay-outs if found to be in breach.

The Swedish Derogation

We know that some hirers, and those agencies from whom they hire, trying to minimise the impact of the regulations are taking comfort from the so-called “Swedish derogation”, an apparent escape clause named after the country which negotiated it at the drafting stage of the EU directive behind the regulations.

This removes the need to offer comparable pay to an agency worker provided they are engaged on a permanent contract of employment which also pays them in between their assignments. However, the Swedish derogation may be a lifeboat with no bottom, and encouraging workers into inappropriate personal service company arrangements which could give rise to serious Managed Service Company tax risk.

The derogation will also be open to interpretation by employment tribunals. We believe that where suppliers and hirers have been instrumental either in helping set up Swedish derogation arrangements, or encouraging their use by, for example, insisting that all workers are engaged using that particular method, this could give rise to some liability if the arrangement turns out not the meet the requirements under the regulations.

Anyone seeking to rely on the Swedish derogation is advised to undertake thorough checks to ensure that the arrangement complies not only with the regulations but also with the intention behind the derogation which was to offer, as an alternative to agency worker rights, a right to ongoing permanent employment with payment during periods when the worker is not working on assignment for a hirer.

In our view, in order to be compliant, a Swedish derogation solution will require (amongst other things) additional funding to cover the pay between assignments requirement. Anything which falls short of this risks challenge and could give rise to substantial claims for compensation.

The latitude given to tribunals under the regulations to make judgments on individual merits and to penalise deliberate attempts by employers to evade the regulations, means that many recruitment agencies and hirers are thinking very carefully before deciding to rely on the derogation for cover.

If a tribunal decides that an arrangement is not compliant with the derogation, then the worker will have rights to equal pay under the regulations.

Furthermore, a tribunal will be required to decide who is responsible for the breach and therefore liable under the regulations. In a complex supply chain this could mean that one or more agency or umbrella companies and even the hirer are liable. If a hirer has encouraged its suppliers and agency workers to work through a Swedish derogation arrangement which turns out to be non-compliant then it is possible that liability will be shared throughout the supply chain. A large class action could push an agency or umbrella company into insolvency leaving agencies higher up the chain and possibly the hirer without any indemnity protection. There is currently no insurance against the effects of the regulations available to a Swedish derogation supplier, which makes assurances from suppliers an uncertain guarantee should compensation for an individual, or group, be awarded.

Channelling individuals into personal service company or sole trader arrangements to provide their services for what are, in reality, tasks heavily supervised by the hirer will also do little to take them out of scope.

We know that many hirers and agencies are assuming that limited company contractors, interims working through their own company, sole traders and freelancers will not fall within the range of the regulations.

Sometimes this will be the case, but only if they are genuinely in business on their own account, are not agreeing to provide their services personally and will not be working under the supervision and direction of the hirer. In some cases they are not.

October 2011

What should hirers do as they prepare for October? Initially they must establish who on their staff are or could be agency workers. That may not be as obvious as it sounds. In addition to personal service company complications making it unclear who is an agency worker, there will be some service contracts which in reality are supplies of staff rather than service deliverables and which will give rise to agency worker obligations. Many large financial institutions, for example, move people around and not everybody is aware that, for example, a bundle of workers in one function are, in fact, no on the full time staff. Organisations are advised to check the terms of service contracts, particularly where the service provided is personnel intensive, to ensure that the service provider is responsible for the staff who work on the service, not the user organisation. This will be a matter of both contract and practice.

It is also crucial that hirers minimise the supervision and direction given to contractors who work through their own personal service companies. Supplying agencies need to work with hirers to ensure that contracts spell out that the agreement is for the supply of independent contractor services rather than supervised staff.

Hirers and agencies should avoid using personal service company arrangements and the like in an attempt to place workers outside the scope of the regulations. The more workers are channelled into personal service companies, the less credible the model will become. Such practices could also expose suppliers to serious tax liabilities under the Managed Service Company tax legislation (PDF). Generally speaking roles involving the services of lower paid and lower skilled workers will not be suitable for personal service company contracting or other types of non-PAYE solutions such as use of sole trader or offshore payment intermediaries.

There is no one-size-fits-all solution to dealing with the regulations. The best approach is to be open to adopting different approaches for different types of supply. Many of our agency clients, for example, are building a suite of supply models.

The key to these will be due diligence, ongoing spot checks, and not relying on apparent opt-outs, such as the Swedish derogation, or encouraging people into the doubtful harbour of operating as personal service companies. It needs to be crystal clear to all parties throughout the supply chain, by contract, where responsibilities and liabilities lie and what happens if something goes wrong.

There is a balancing point between risk and cost that hirers and suppliers of agency workers will need to find with the Agency Worker Regulation. This point is likely to change over time as decisions start to come through from case law decisions but not searching for it could lead to greater cost and reputational damage than anticipated.

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