Agencies: reaching a common standard?

In the 100 years that the recruitment industry has existed in the UK, it has
enhanced the flexibility of the UK labour market, particularly in relation to
the provision of temporary and contract staff. Now, says Frank Morton the
Government is planning to bring in new regulations covering the industry

The existing regulatory framework for the recruitment industry is
predominately set out in the Employment Agencies Act 1973 and the Conduct of
Employment Agencies and Employment Businesses Regulations 1976 (the Conduct

The Government considers that the existing legislation is out of date and
draft regulations are being introduced to modernise it to ensure proper conduct
of those in the industry, improve protection for both work-seekers and hirers,
and promote greater competition and flexibility in the labour market.

A final draft proposal known as "the Conduct of Employment Agencies and
Employment Businesses Regulations 2001" was released in January 2001. The
five main objectives of the draft legislation are transparency, accountability,
targeting, consistency and proportionality.

Simplification of existing provisions

The Conduct Regulations deal with employment agencies and employment
businesses separately. The recruitment industry is often unclear as to the
difference between the two types of enterprise. In some cases they have
operated partly as one and partly as another and so different regulations have
been applied at different times. A recruitment firm may have contracted with
the work-seeker on the basis that they will act as an employment agency in some
situations and as an employment business in others. The Government is seeking
to introduce common standards for both types of enterprise.

The Government is also concerned that the existing Conduct Regulations are
ambiguous, for example, regarding the extent to which an agency or employment
business should check a work-seeker’s credentials. Also, the existing
legislation allows the agencies and employment businesses to apply different standards
to foreign and domestic work-seekers and temporary and permanent staff.

Clarity of contractual terms

Confusion has also arisen regarding the extent to which the Conduct
Regulations requires agencies and employment businesses to take action before,
or upon, entering a contract. The Government recognises that it may be
difficult to determine when the contract comes into existence, so the draft
regulations will clarify the situation and should allow work-seekers and hirers
to approach different agencies and employment businesses to establish the best

More competitive labour market

In the past the industry has attempted to restrict work seekers from taking
up employment with the hirer, either by imposing transfer fees on the hirer or
restrictions on the work-seekers. This is of particular concern where it is
under no obligation to provide the work-seeker with work. Conduct Regulations
have always prohibited employment businesses from imposing conditions which
deter the work-seeker from taking up employment with the hirer. However, there
is no corresponding prohibition on employment agencies.

The new regulations will extend this prohibition to employment agencies and
broaden it to include any term designed to deter the work-seeker from terminating
the contract or taking up employment with any other person. It is not clear
whether this extends to indirect restrictions. Would a restriction on a
personal service company prohibiting its employee taking up employment with the
hirer be unlawful under the draft regulations? Little guidance has been issued
on this point, save that the DTI has indicated that such clauses would go
against the aim of the new regulations, that is, to improve labour market

Charges to work-seekers

In the past, the recruitment industry has found loopholes enabling it to
exploit both the hirer and work-seekers. Practices have arisen where the
work-seeker will only be paid in full on the condition that he buys services
from third parties connected to the agency or employment business. The draft
regulations seek to curb such practices.

Changes affecting temporary workers

The draft regulations suggest that the supply of temporary workers should
usually be provided through an employment business rather than an agency. Typically,
the recruitment industry has been reluctant to use the employment business for
temporary workers as there are tax advantages in acting as an agency. An agency
can also pass employment law obligations to the hirer.

The most debated part of the draft regulations has been in relation to the
payment of fees, when a temporary worker is offered a permanent position with
the hirer. To protect its commercial interests, the recruitment industry has
established the practice of charging transfer fees. The Government considers
that the transfer from temporary to permanent worker is attractive for both the
worker and the hirer, yet the effect of transfer fees is to deter hirers from
taking on temporary workers.

Transfer fees will only now be enforceable where the contract offers the
hirer the alternative of notifying the employment business of its intention to
hire the worker. The hirer could then elect whether to pay the transfer fee or
hire the work-seeker for a further period ("the specified hire period")
either on the original terms of the contract, or terms no less favourable for
the hirer. The employment business will then be guaranteed further income from
hire or the transfer fee, protecting its business interests but preserving the
flexibility of the labour market.

Another area of concern is where the hirer takes on the work-seeker within a
certain period following the hire, and the employment business insists that
further fees will be payable. This creates a quarantine period during which the
hirer is deterred from taking on the temp. Although this restricts the labour
market. If employment businesses were not afforded this protection, they would
be less inclined to pursue placements for temporary workers.

The regulations permit quarantine periods, but limit duration. Quarantine
period will be the longer of eight weeks from the day after the last day of
hire, or 14 weeks from the day on which the worker first worked for the hirer
during their latest supply by the employment business.

Where the hirer introduces the worker to another company or the worker
begins further work with the hirer pursuant to an introduction by another
employment business, the quarantine period will be four weeks.

The practical effect is as follows.

– The hirer gives notice to the employment business that he intends to take
on the work-seeker. He opts to take the specified hire period rather pay the
transfer fee. A transfer fee would still become payable if the work-seeker
becomes employed by the hirer before the end of the specified hire period.

– If the hirer does not give notice to the employment business and takes the
work-seeker on immediately, or if he gives notice but does not opt for the
extended notice period, then a transfer fee will be payable, unless the hirer
can show that the work-seeker has not been hired by it during the quarantine

If the hirer wants to take on a temporary worker and does not want to pay
either a transfer fee or opt for the specified hire period he would have to
show that the work-seeker had not been hired to him during the quarantine
period. The hirer could offer the work-seeker a permanent contract commencing
after the quarantine period. However, he may need to offer the work-seeker an
incentive to remain out of the labour market for that time.

This situation will inevitably give rise to disputes regarding a
work-seeker’s employment status. The hirer will argue that the work-seeker has
not been employed or trained during this period. If the work-seeker continues
to attend meetings at the hirer’s premise, or, say, retains his locker there,
then the employment business will argue that he has continued to be employed.

When the regulations come into force

The Government has invited further comments on the proposed draft
regulations by Friday 16 March 2001. Subject to parliamentary approval, it is
anticipated that the new regulations will be implemented in summer 2001.

Frank Morton is an associate at Osborne Clarke

Sectors of the private recruitment industry

The private recruitment industry can be divided into four sectors.

– Those who supply clients with permanent staff, such as head hunters or
outplacement consultants (employment agencies).

– Those who provide temporary staff or contract workers (employment

– Entertainment agents who represent actors or models.

– Those whose sole activity is the provision of job vacancy information in
newspapers or on Websites.

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