Employment Agency Regulations
by Barry Roback at 11:27 09/07/04 (Ask-Legal-Accounting)
This is a copy of an answer to a question from a freelancer posted on the Shout99 website.It is written by Barry Roback, the Managing Director of JSA which is one of the leading freelancer "umbrella companies".
The freelance had asked whether it was correct that if he "opted in" to the EAA Regulations it might jeopardise his position with regard to IR35.
Barry answered: "The regulations are designed to protect the worker from (unscrupulous) agencies and are written from that stance. If you are a business, then to seek protection given to workers does, in my view, undermine your argument with the Revenue over IR35 status.
You may find JSA's guidance notes on this issue helpful:
Conduct of Employment Agencies and Employment Businesses Regulations 2003 (Agency Regs).
Brief History
Perhaps surprisingly, these regulations are not new. First drafted in May 1999 they were deemed to be unworkable and were swiftly withdrawn for further revision. A second draft was presented in February 2001 and a third in July 2002, but even after 3 attempts, they were still considered defective.
At the same time, the European Commission were working on the Temporary Workers Directive, which covered much of the same ground and so the British Government decided to hold back their Agency Regs so as not to cause conflict. However, when the European legislation became stalled the British Government decided to press ahead.
The Regulations
The Agency Regs were passed by Parliament on 17th December 2003 and came into effect on April 6th 2004, except for Regulations 26(7) and 32 which relate to Limited Company workers, which becomes effective on 6th July 2004.
In 4 parts 33 sections and 6 schedules, these weighty regulations are designed to regulate the way in which Agencies - who were largely unregulated following the abolition of registration for agencies under the previous Government - conduct themselves when dealing with workers. Although considered by some lawyers to still be flawed, the Regs apply to any "employment agency or business" providing "work finding services" to a "work seeker".
In addition to the new trading restrictions placed on them, the Regs place a heavy burden on agencies to gather certain information, document and properly screen and vet their candidates. In particular, agencies are required to properly check candidate qualifications and references.
Important Provisions
Although largely administrative and procedural, there are couple of notable provisions which have gained much of the publicity surrounding their introduction.
Regulation 10
(So called "Temp to Perm" and "Temp to Temp" provisions)
Temporary employment agencies have little substance other than the value of the revenue potential of the temporary workers (contractors) that they supply. They have therefore been eager in the past to protect this asset by including certain "restrictive covenants" or clauses within their contracts to either prevent a contractor from taking up direct employment with an end user client, usually for the duration of the contract plus an extended period after termination (often 6 months), or which imposes a hefty fee if they do. The Courts have long grappled with the question of whether such "restrictive covenants" are fair and reasonable.
On the other hand, the Governments both in the UK and the EU have been keen to allow workers to seek employment wherever they choose, without restriction. Recognising the importance that Temporary Employment Agencies play within an expanding economy, Regulation 10 is somewhat of a compromise.
Where a temporary contract contains provisions to charge fees in a "Temp to Perm" (or "Temp to Temp") situation, it must now also provide the option of an "extended period of hire" where the end user client (or replacement agency) continues to pay the agency margin while engaging the worker directly (or through another agency).
Where there are provisions for the payment of a fee and/or an extended hire period, the Regulations state that they are unenforceable beyond 8 weeks from the termination of the contract (or, if longer, 14 weeks form the start of the contract).
So effectively we are now left with the situation where an end user client who wishes to employ a contractor directly (or transfer the contractor to another agency) will have 3 options:
1. Pay the transfer fee.
2. Pay the extended hire fee.
3. Terminate the contract (presumably with due notice) and wait for the "quarantine" 8 or 14 week period to end.
Regulation 12
Regulation 12 effectively prohibits an agency from withholding payment to a contractor for certain reasons. These include:
1. The absence of a signed Time Sheet.
2. The absence of payment by the end user client.
3. If the contractor has failed to perform work at times other than the period to which the payment relates.
However, there is nothing to stop an agency from including the requirement for a contractor to produce a signed time sheet within the terms and conditions of the contract, which will then allow the agency to terminate the contract or sue for a breach of contract if time sheets fail to materialise. Agencies are also allowed to delay payment while they investigate whether the hours claimed have actually been worked.
Regulation 32
(So called Limited Company Opt Out)
In their original form, these Regs were designed to apply to all workers, be they PAYE employed by the agency or employed via a Personal Service or Managed Service company, making no distinction at all between such types of worker. However, after persistent lobbying from many diverse parties such as the Professional Contractors Group (PCG) and the Association of Technology Staffing Companies (ATSCo), the Government relented and added Regulation 32 to their final draft which effectively gives contractors "supplied" through a Limited Company the opportunity to Opt Out of the Regulation in their entirety.
For the Opt Out to be effective, the following conditions must be satisfied:
1. The Opt Out must come from BOTH the Limited Company and the worker.
2. The Opt Out must be in writing, which can take the form of an email.
3. The Opt Out must be made BEFORE the worker is introduced to the client.
In addition:
4. An Opt Out cannot be withdrawn once the work commences.
5. But, an Opt Out CAN be withdrawn before the work commences.
This conjures up the prospect of what some commentators have referred to as the "Hokey-Cokey" contractor who opts out before being introduced to the end user client and then decides to opt back in again before the work actually starts. How real this prospect turns out to be remains to be seen.
As Regulation 32 appears to be added as an afterthought, the Regulations as a whole do not appear to have been drawn up with an opt out in mind. Consequently, there are no transitional provisions within the regulations to account for opting out of the then current assignments when the regulations come into force for Limited Company contractors on 6th July. Therefore, legally it would appear that the Regs will apply to all Limited Company contractors as at 6th July since in theory, an Opt Out cannot take place once the work has commenced. Only when the current contract at 6th July has ended (or terminated by agreement and re-issued) will contractors be able to (legally) Opt Out.
However, these Regulations are clearly designed to protect workers who are "abused" by unscrupulous agencies, particularly within the low paid menial labour sectors such as cleaners etc. Where no material breach has taken place and it is clear that all parties are willing and happy for the regulations to NOT apply, it is unlikely that the Government will wish to waste time enforcing them. As a consequence, many Agencies are seeking an Opt Out from contractors as at 6th July, even though there is no sound legal effect of such an Opt Out. We at JSA are happy to go along with this action.
Other issues relating to Opt Out worth noting include:
1. An agency cannot force a worker to Opt Out, although there is nothing to prevent an agency from financially rewarding a contractor who does. Agencies will be prevented from offering work only to contractors who Opt Out. As a consequence, we can expect to see different contract rates being offered for the same assignment, dependant on the opt out status of the contractor.
2. However, End User client are permitted to insist on only Opted Out contractors. The reason for this may be because the End User wishes to impose certain restrictions on their contract workers to prevent them from also working for any of their competitors during the term of the contract, presumably for reasons of confidentiality. Such restrictions are not permitted under the Regs and so an Opt Out will be mandatory for such End User clients.
3. Limited Companies (and their workers) CANNOT Opt Out of an assignment that involves working with any person who is under the age of 18, or who, "by reason of age or infirmity, is in need of care or attention".
Why would a Contract wish to Opt Out?
Although the Regulations do provide certain added protection to contractors, there are several reasons why contractors may wish to Opt Out of the Regulations. On balance and for the reasons give below, JSA believes that our clients would be better off outside of the regulations. These reasons include:
1. Many of the abuses that the Regs seek to outlaw are not practiced by the more reputable and professional agencies that dominate the higher end professional market, e.g. to only be paid when the agency receive payment from the End User client.
2. The Regs place a considerable burden on agencies in terms of added administration and delay in presenting a candidate to an End User. Agencies will therefore naturally favour contractors who have opted out.
3. The Regs create a type of "master and servant" relationship between agency and worker, giving the "worker" certain protection and rights. Such a relationship will undermine any attempt to argue that a contract subject to the Regs is not caught by IR35.
4. It is expected that many of the higher paid contracts will only be offered to "contracted out" candidates as End Users will wish to impose certain restrictions to protect their creative intellect. Such restrictions can only be made where an Opt Out is in force.
5. The PCG - the official mouthpiece of the professional contracting community - recommend their members to Opt Out of the Regs.
6. In time, a better selection of higher paid contracts is likely to be available to Opted Out contractors.
Although this is by no means a comprehensive list, contractors are encouraged to appreciate both the advantages and disadvantages of Opting Out and to then make their own decision on Opt Out.
If they wish to be guided, then JSA recommend Opt Out to support the advice given by the PCG, the recognised mouthpiece of professional contractors.
Barry Roback,
JSA Group.