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Contracting, subcontractors and AWR: when do the Agency Workers Regulations apply?

Are you a contractor who supplies other contractors to your clients, acting in a similar fashion to an agency by introducing fellow contractors to the client and taking a margin? If so, the Agency Workers Regulations which came into force on 1 October 2011 will apply to you, and presents your business with considerable risk.

Contractors who are subcontracting client work to other contractors should be aware that their limited companies are classified as temporary work agencies, which means that the Agency Workers Regulations (AWR) may apply to their businesses and the subcontractors they place.

Under certain circumstances the subcontractors being supplied could qualify for the equal treatment and employment rights granted under the legislation.

By supplying an individual, such as a subcontractor, to a third party, a contractor’s limited company may become a temporary work agency. If that individual does not satisfy the conditions of being out of scope, then the AWR will apply to the subcontractor, who will then qualify for the rights granted by the regulations.

When does a contractor’s business become a temporary work agency?

The definition of a temporary work agency contained in the guidance for agencies and hirers published by the Government is very wide and can easily encompass a contractor supplying other contractors on a subcontract basis.

The regulations state that a temporary work agency ‘is a person in business…involved in the supply of temporary agency workers.’ And an agency worker ‘is someone who has a contract with the temporary work agency but works temporarily under the direction and supervision of a hirer’, or contractor client.

By providing the contractor with instructions, the client qualifies as giving ‘direction, and by having the right to check what the contractor has done, and then to ask the contractor to make changes, this means the client is providing ‘supervision’. So unless the contractor qualifies as fulfilling the criteria of being out of scope of AWR, the regulations would apply to a subcontractor.

Putting it another way, relying on technical arguments that there is no direction and supervision would in most cases be a dangerous policy given that the potential claimant is the worker who would argue that, in practice, there was direction and supervision. Also this is a very different test from those applied under IR35.

Subcontractors who qualify as out of scope

The guidance and the source legislation are both very clear on who is out of scope. The exact wording in the regulations, from section 3, paragraph 2(a) and (b) says:

(a) the contract the individual has with the temporary work agency has the effect that the status of the agency is that of a client or customer of a profession or business undertaking carried on by the individual; or

(b) there is a contract, by virtue of which the individual is available to work for the hirer, having the effect that the status of the hirer is that of a client or customer of a profession or business undertaking carried on by the individual.

The Government guidance confirms that contractors in a profession or business undertaking will be out of scope, if they have the right contract. However, the guidance specifically states that contractors trading through an umbrella company are in scope.

That means that a contractor who is subcontracting out a fellow contractor who is trading through an umbrella solutions provider is automatically be covered by the AWR.

Enforcement for subcontractors and contractors who are in scope

Contractor-entrepreneurs who view ‘body-shopping’ out fellow contractors as a means to extra earnings need to find out if the AWR applies to their business, as under the AWR the ‘enforcer’ is the individual worker.

Contractors will be familiar with how IR35 works. They understand that it is enforced by HMRC and that, if challenged, each contractor is responsible for proving that they are not a disguised employee. AWR is very different: the worker is the one who decides to take a case to a tribunal and it’s the responsibility of the agency and hirer to prove that the letter of the law was followed.

Contractors hiring out other contractors should not get complacent and think that just because contractors are typically better paid than employees sat at the next desk, a contractor won’t try for a hefty cash settlement under the AWR.

Rights granted to subcontractors under the AWR

A contractor working on a subcontract basis for another contractor’s business, and who is covered by the AWR, is entitled to equal treatment of pay and basic working conditions after working on the same contract for 12 weeks. So, let’s say the subcontractor discovers that the client’s employee sitting next to them gets paid an extra hour for lunch and reckons they deserve equal treatment.

For a contractor on £50 an hour, that’s a lot of extra cash. There’s nothing to stop them taking their case to an employment tribunal and insisting that they should be paid the same. Any settlement for non-compliance with the legislation and subsequent pay differential will come out of the lead contractor’s pocket.

There are also provisions in the AWR to protect workers if the hirer or temporary work agency threatens to withhold new work if the worker states their intention to take action over AWR, or has a history of doing so.

Contractors providing fellow contractors on a subcontract basis to clients should assume the worst and ‘work backwards’: The safest course is for a contractor to assume their company is a temporary work agency, that their subcontractors are within scope and that AWR applies. Then they should seek expert help to determine exactly what action they should take as a result.

Updated: 18 July 2017

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