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Contracting and AWR: trading options for contractors when AWR comes into force

ContractorCalculator and Parasol identify which trading options will allow contractors to legitimately trade as a genuine business undertaking and without the employment rights offered by the Agency Workers Regulations. This is the fifth and final article in a series of articles published by ContractorCalculator in association with Parasol, providing expert guidance for contractors on the Agency Workers Regulations.

Contractors concerned that the Agency Workers Regulations (AWR) could impact negatively on their livelihoods have a number of trading options to choose from. The trading options available can establish contractors’ credentials as a genuine business undertaking or offer an umbrella solution that works alongside the AWR to minimise or eliminate additional costs for clients.

It is these additional costs of implementing AWR that many contractors fear will result in clients simply choosing not to hire UK-based contractors at all, or to send these assignments abroad to lower cost and less well regulated jurisdictions.

Contractors are far from being the vulnerable temporary workers that the AWR is designed to protect. Fortunately there are trading solutions that will not result in increased cost and administration burdens for clients and offer contractors the choice as to whether or not they want to claim the employment rights granted by AWR.

Umbrella company contractor trading solutions

The Guidance from the Department for Business, Innovation and Skills (BIS) is unequivocal about AWR’s treatment of umbrella company contractors: they are in the scope of the regulations. That means clients using umbrella company contractors will be required to offer day one rights and equal pay after 12 weeks, as the regulations demand.

However, an umbrella solutions provider operating compliantly and already putting into place best practice will already be most of the way towards offering a solution that complies with AWR. The two main options for umbrella companies are the:

  • Full employment model, which provides contractors with pay between assignments. In theory, compliant umbrella companies should already be providing pay at National Minimum Wage (NMW) levels between assignments, so full employment is a relatively small step forward for such service providers. This model uses the ‘Swedish Derogation’ to remove contractors from the scope of the equal pay requirements of AWR, although in practice it will offer contractors a better deal of employment rights than is strictly necessary under the Swedish Derogation. The client must also make day one rights available to contractors using this model.
  • ‘Match permanent pay’ model, which, as its name suggests, requires that the contractor enjoys the full benefits of AWR, gaining day one rights and matched pay after 12 weeks. This model is significantly more complex to administer than the full employment model, and will cost clients more after 12 weeks, but it does allow contractors to choose to accept the employment rights granted by AWR.

Not all umbrella companies will be in a position to offer both trading models, particularly as both require a high level of compliance. Contractors should ask their umbrella solution provider what plans it has to ensure that they are trading compliantly after 1 October 2011.

Business undertaking trading solutions

Contractors genuinely in business who want to continue to trade without any AWR compliance issues can effectively continue as before. There are three main trading vehicles for contractors in a profession or business undertaking:

  • Limited company
  • Partnership
  • Sole trader.

Although these are all legitimate trading vehicles for contractors running a business, in practice the overwhelming majority of agencies and clients will insist that contractors use a limited company. By using contractors trading via limited companies, agencies and clients are able to minimise the risk of workers claiming employment rights. That works to both sides’ advantages, because genuine contractors don’t want employment rights.

Contractors genuinely in business who want to continue to trade without any AWR compliance issues can effectively continue as before

The BIS guidance warns that a contractor trading via a limited company can still be in the scope of AWR. But it also makes it clear that contractors genuinely in business on their own account, “in a profession or business undertaking”, and where the client is a customer and not an employer, were never intended to be the targets of AWR.

Contractors choosing to trade via a limited company are recommended to use a specialist contractor accountant. This is because contractor limited companies, although technically no different from any other business that trades via a limited company, have a range of unique features and needs, and are the focus of specific legislation that contractor accountants deal with every day.

Offshore trading solutions

Since the introduction of the Employment Income Through Third Parties legislation in December 2010, also known as the ‘disguised remuneration’ laws, many offshore tax solutions such as Employee Benefit Trusts (EBTs) have closed. Others have developed to offer schemes based on currency arbitrage or other financial mechanisms.

The status of contractors using these schemes will depend on the individual scheme itself and the type of employment model it offers. Some solutions will undoubtedly fall into the exempt categories listed in the Guidance from BIS, but contractors from other solutions may be in AWR’s scope.

Contractors can continue to trade and be out of scope

Until the legislation comes into force on 1 October 2011, and is subsequently tested in employment tribunals and the courts, there will be an element of uncertainty for all contractors, irrespective of how they trade.

However, there are several trading options available that, based on the existing body of knowledge, will allow contractors to operate outside the scope of AWR. As a result, the risk that clients will stop using contractors because of additional costs and compliance is reduced.

Contractors genuinely running a business undertaking should be able to continue to do so after 1 October 2010. And umbrella company contractors will be able to choose between solution providers to find an umbrella trading solution that suits their AWR needs.

This article is the fifth and final part of the series published by ContractorCalculator in association with Parasol to offer guidance to contractors about the Agency Workers Regulations. The series will be separately published and available as a ContractorCalculator white paper.

Published: 02 August 2011

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