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Contracting service provider calls for industry consensus over AWR implementation

Contractors are still awaiting guidance from the Department of Business, Innovation and Skills (BIS) on how the Agency Workers Regulations (AWR) will be implemented when they come into force in October 2011, and at that time all stakeholders in the flexible workforce must work together to ensure the regulations do not stifle the flexibility of UK PLC.

This is according to Rob Crossland, chief executive of umbrella solutions provider Parasol. He explains: “If there is no consensus on how the AWR is implemented, then we could see a proliferation of models applied. This could create a very real danger of dragging many innocent businesses, and workers, unnecessarily into the scope of the legislation. At worst, it could cripple the UK’s flexible workforce and damage competitiveness.”

The Agency Workers Regulations arose from the Agency Workers Directive adopted by the UK government in May 2008 after a last-minute deal between unions, government and the Confederation of British Industry (CBI). Designed to protect vulnerable agency workers, the AWR will give equal pay and employment rights to agency workers after 12 weeks working for the same client. And although not designed for the higher-paid contracting workforce, the regulations could harm contractors.

Clear guidance from BIS that reflects the law

Crossland fears that, unless future guidance from BIS is both clear and detailed, with specific examples of how the regulations should be implemented across multiple contexts, a ‘messy’ situation similar to that of the enforcement of the Managed Services Company (MSC) legislation could arise.

“With the MSC regulations, the law said one thing but the guidance issued by the Treasury and followed by HMRC was different,” explains Crossland. “This led to confusion and uncertainty for contractors and service providers.”

According to Crossland, the complexity and resulting ramifications of the AWR means that the guidance from BIS will need to cover scenarios that consider the entire supply chain. “Let’s take the example of an agency that supplies blue-collar logistics workers to a distributor, which ‘sells-on’ those workers to an end client such as a supermarket. The supermarket then starts directing the workers, as often happens.

“Who, then, in the eyes of the law, is the recruitment business, intermediary and end client? The guidance needs to clarify how the regulations should be applied in complex supply chains, and with which party’s permanent employees the temporary workers’ pay and conditions should be compared.”

One-size fits-none legislation

In Crossland’s view, the UK’s flexible workforce is complex and multi-tiered, both in terms of skills and earnings, and that’s what makes it such a powerful differentiator compared to workforces in other European nations that will be covered by the Agency Workers Directive.

“The directive is a piece of European legislation ultimately designed for labour markets lacking the freedoms we enjoy in the UK,” says Crossland. “It’s not possible to legislate for all the UK’s rich variety of flexible workers. After all, they range from the vulnerable, low paid and low skilled at one end of the scale, who certainly deserve much greater protection, right the way through to high skilled, highly paid and fiercely independent contractors, who don’t need protection and will resent the intrusion of an unwanted piece of legislation.”

Subject to the guidance from BIS, the legislation as it stands will include umbrella solutions providers within its scope, but suggests exclusion for those in business on their own account, such as the self-employed and limited company contractors. And Crossland warns that artificially distinguishing between these trading models is likely to distort and damage the UK’s flexible labour market.

Conflicting tax and employment law

“BIS may choose to use IR35 tests, and its successor, as the method of status to define whether a worker is in business on their own account and outside of scope,” he says. “If this is the case, based on the low success rate of HMRC finding contractors inside IR35, we may see an increase in contractors adopting a personal services limited company solution and taking the risk that they won’t get caught.

“As a result, unless the guidance from BIS suggests differently, it appears that the tax implications of implementing the AWR have not been properly thought through and could even be tax-revenue negative,” warns Crossland.

“In its current form, the legislation puts employment law and tax law at odds. Workers will be attracted to solutions with high net returns, while others in the supply chain may see limited companies as structures that can be used to get around the AWR.”

Adopting a ‘risk’ model to maintain umbrella solutions

Even though limited company contractors are likely to be out of scope of the AWR, they still employ workers (albeit only one) and so contractors would still have the right to make a claim for equal treatment.

Crossland believes the likelihood of contractor claims is low: “It is the worker who has to claim unfair treatment under the regulations. Yes, technically a limited company contractor paying a low salary and high dividends might be able to make a claim for unfair treatment, and it’s likely we will see some disgruntled contractors trying it on in that fashion to prove a point. But most contractors are getting a better overall package than their permanent counterparts and so would have no reason to bring a case.”

BIS may choose to use IR35 tests, and its successor, as the method of status to define whether a worker is in business on their own account and outside of scope

Rob Crossland, Parasol

Because it is the worker who must initiate the claim for equal treatments, and umbrella company contractors will already be on a better overall package than their permanent counterparts, the low likelihood of claims means no massive increases in the costs of employing contractors from umbrella solutions providers. This ‘risk’ model is likely to maintain umbrella companies as cost competitive suppliers of flexible workers.

And it’s not just because of better pay that Crossland’s believes umbrella solutions providers have a place in the post-AWR world. He explains: “The alternatives to umbrella companies, such as going on the agency payroll or running your own limited company, will actually result in lower employment. Umbrella companies provide their contractor workforces with full employment contracts, employment rights and benefits, plus are already eight-tenths of the way towards fulfilling the obligations of the AWR.”

A wish list for BIS

Contractors and their suppliers will remain in the dark about the full impact of the AWR until BIS publishes its guidance. Crossland’s wish list for that guidance includes:

  1. Comprehensive examples, from the common to the obscure, that cover complex scenarios with multiple stakeholders in the supply chain
  2. Clarity on what comprises the comparator, specifically what should be used to compare pay and conditions, with clarification of what the courts will use
  3. How the net pay situation will apply, where because of benefits, or applying different trading models, a worker’s net pay is higher than the comparator’s net pay
  4. Make sure the guidance is consistent with what the law says, to avoid the doubts and ambiguities surrounding HMRC’s implementation of the MSC laws.

Crossland remains hopeful: “With clear guidance from BIS and the consensus of all stakeholders involved in the flexible workforce, we may yet emerge with working models that deliver the benefits the AWR was designed to deliver to vulnerable workers, without compromising the UK’s competitiveness at a crucial stage of economic recovery.”

Published: 12 November 2010

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