How employers are coping with Agency Workers Regulations

Regulations affecting agency worker rights were introduced in October 2011. Anne Pritam finds out how employers are coping with the new legislation.

So you know the basic structure of the new agency workers’ rights. You have looked at the Agency Workers Regulations (AWR) and you have ploughed through the impenetrable thicket of the Government guidance. You are not feeling much the wiser, but you have a broad handle on week-one rights and week-12 rights, and if it all blows up, you can push the blame and the cost onto the agency that sent you the pesky workers in the first place – can’t you?

There is a lot of commentary out there about what the Regulations say and what they do not say. What is not so clear is how businesses are dealing with these new Regulations on the ground. Have they proved to be the headache that lobbying groups said they would be? Was former CBI chief Digby Jones right – is the sky about to fall in definitively on the competitiveness of the British labour market? Or have they actually made no difference at all to working practices?

It is worth bearing in mind that this is not a set of protections that, on the whole, was sought by the very group they aim to support. Employers were opposed to them from the start and the trade unions were cagey. Agency workers tend to fall into two broad categories: the low-paid often semi-skilled or unskilled workers carrying out manual functions (for example, in the agricultural and manufacturing sectors) who can be vulnerable to exploitation; and, at the other end of the scale, highly skilled consultants such as IT, medical or financial specialists who view themselves as freelancers and are very keen to remain aloof from the “common herd” of employed staff.

Some businesses have taken steps to ensure that individuals do not qualify for protection under the AWR at all by asking them to change their working models, or taking other preventative steps. Below are some examples of how employers are doing this.

Worked examples

Employers are insisting on individuals setting up personal service companies, through which to provide services. It is worth bearing in mind that this in itself does not prevent the person from being an agency worker since the arrangement might be caught by the specific provision at 3(5)(e) that “an individual is not prevented from being an agency worker because the individual is employed by or otherwise has a contract with one or more intermediaries”. That said, a canny end user who knows that an agency worker could seek to sever the connection with the agency and could hire the individual directly through his service company. Subject to any penalties that may be due to the agency under the contractual arrangements between the end user and the agency, this can be a cost-effective solution.

quotemarksSome businesses have taken steps to ensure that individuals do not qualify for protection under the AWR at all.”

Others are using only workers who are genuinely self-employed. Again, the hirer may seek to sidestep the agency by entering into a business relationship directly with the consultant.

Another option is the “Swedish derogation”, which gives some scope for end users to avoid the impact of the pay equality provisions where the hirer calls on agency staff from time to time and can keep them on a retainer between assignments.

With “upper-end” agency staff (the well-paid freelancers mentioned above), most hirers will have little concern about equality of salary at week 12, because on the whole these individuals are better paid than the employed workforce. However, where end users can be caught out is on the bonuses that they offer to employees. Unlike fixed-term employees, with whom employers are entitled to take a “holistic” approach to a package rather than matching each element of an employee’s package piecemeal, the generally prevailing view (although it is not 100% clear in the Regulations) is that the AWR impose an approach to equality of pay based on the elements that make up pay. This means that a week-12 agency worker who is not getting a bonus may pursue a claim for this, notwithstanding that, as a whole, his remuneration is considerably higher in value than that of his employed counterpart.

Bonus policies

Not all bonuses fall within the pay equality provisions, so employers/hirers should check carefully how their bonus policies are worded and how they have been applied to ascertain whether or not the bonus maybe within the grasp of agency workers. The vast majority of bonuses are hybrid schemes encompassing reward for past performance, future incentivisation, company performance and team effort. In most instances, it is difficult to delineate how much of a bonus is attributable to each of these factors.

Careful hirers may like to give consideration to changing their bonus policies so that they focus on company or division performance (which the Department for Business, Innovation and Skills guidelines tell us are not applicable to agency workers), rather than an award that is directly attributable to the amount/quality of work done by a worker (which week-12 workers are entitled to claim).

High-end freelancers may well be quite sensitive about their status under the IR35/IR56 tax provisions (designed to close the loophole that formerly allowed freelancers and contractors to avoid paying large amounts of tax by using a personal service company, composite company or business partnerships). Agencies can ask (and some are asking) that workers sign a declaration that they fall out of the scope of the AWR and that they are IR35 compliant. The argument is that an individual who is truly IR35 compliant could not fall within the AWR.

quotemarksEmployers/hirers should check carefully how their bonus policies are worded and how they have been applied to ascertain whether or not the bonus maybe within the grasp of agency workers.”

Some organisations are going even further: certain end users are requiring agencies that they use extensively to obtain that declaration from each worker, failing this, they will not have him or her on site.

Where the end user’s bargaining power allows, organisations are insisting on an agency providing an indemnity to the end user against claims that might be brought by the worker against the end user.

But some agencies are hitting back: one large national agency has sought to amend its terms with hirers to include an indemnity in the other direction, and/or has increased charges for agency workers on the basis that week-12 claims should be provided for within the week-one rate paid by the hirer. End users would do well to read the small print when renewing agency arrangements and consider whether or not such provisions can be negotiated.

Whole-package approach

Some end-users are hiring workers directly under fixed-term contracts that might be cut short before the year’s (shortly to be two years’) service requirements are met. By switching individuals to fixed-term employment, rather than agency-worker status, the whole-package approach can be applied to the provision of benefits, which will allow the maintenance of a high hourly rate without the trappings of extra entitlements. However, this approach will affect employee numbers and keeping these down may be one of the major drivers of using agency staff in the first place.

The AWR, like many other employment laws, have proved to be a law of unintended consequences. That is hardly surprising for legislation that was arguably a politically expedient measure rather than an economically or socially necessary one.

Anne Pritam is a partner specialising in employment law at Stephenson Harwood. She is interested to hear of any ways in which organisations or contractors have sought to mitigate the impact of the AWR.

XpertHR has more information on the Agency Workers Regulations 2010 and provides answers to some frequently asked questions regarding the legislation.

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