Is Everybody Caught? How the AWR may affect Limited Company and Umbrella Company Contractors
As a result of the unwieldy IR35 legislation brought into force in 2000, the recruitment industry has seen a rise in the number of contractors choosing to operate via an umbrella company. Now, with the Agency Workers Regulations (“AWR”) due to be implemented in October this year, Resource Solutions Group Plc (RSG) believes that the balance between limited company and umbrella company contractors is liable to shift again.
According to the AWR, agency workers contracted via an ‘umbrella company’ or other intermediary will fall within the boundaries of the AWR, but the genuinely self-employed, working through their own limited liability company may be excluded. The definition of “agency worker” for the purpose of the AWR is based on that used in the Working Time Regulations 1998 finding work through a “temporary work agency” (definition based on existing statutory concept of an “employment business”). This means that after 12 weeks continuous ‘employment’, agency workers will have equal treatment; equal treatment is defined as basic working and employment conditions that would apply to agency workers as if they had been recruited directly by the user undertaking “the hirer” to occupy the same job. The AWR does not change the agency worker’s contractual relationship, which remains with the employment business.
Under the AWR, a limited company contractor is a worker who is genuinely ‘in business on their own account’, i.e. self employed. However, the Government has not yet offered any indication of how it will judge whether a contractor is in business on their own account or not, for the purposes of the AWR.
Where employment status struggles to be clearly defined, AWR confuses the situation still further. According to www.direct.gov.uk, whether you are employed or self employed depends on the terms and conditions of your working arrangement, so where some contractors will now be entitled to ‘equal treatment’ under the AWR, surely this will significantly muddy the waters?
The definition of an independent contractor is ‘a person hired by another, not as an employee but, rather, pursuant to a contract for services where the engaging party does not supervise or control the detail of the work, and where the party engaged remains self-employed.’ However, until a contractor has started in a new project, how can they judge the level of direct supervision or the amount of control they will have over their work?
There is potential for a hirer to engage two individuals fulfilling identical roles; one of these individuals may be supplied via the employment business as being ‘in business on his/her own account’ but the other individual may be an agency worker via an umbrella company. The hirer may be clear that the roles to be fulfilled are project based, with defined acceptance criteria and deliverables but when looking at the definition of a contractor and an agency worker one will be in business on his own account and one will be under the direction, supervision and control of the hirer. Will the hirer be able to specify to the employment business that he only wants to engage the genuinely self-employed, or will anti-avoidance measures prevent him from doing so?
What happens when the individual supplied by the employment business wishes to change his supply vehicle; employment businesses often face requests from the individual to change from an umbrella company to their own personal service company, or vice versa; how will this now sit with the AWR?
Contractors are already concerned about whether to go down the limited or umbrella route; being in business on your own account can be daunting, as the contractor has to have an understanding of contract law, employment law and tax law in order to be able to judge whether he/she is ‘operating in business on his/her own account’ with such decision being taken prior to a contract being accepted. On the other side of the fence is the option of being employed by an umbrella company, but the contractor must undertake due diligence and understand how the chosen umbrella company operates in line with current legislation before signing up, as if the advertised scheme appears ‘too good to be true’, it probably is!
The Government advises contractors to review the details of their engagement on a contract-to-contract basis, but with many contractors regularly switching between limited companies and umbrella providers, how will this be regulated? I predict we will see a rise in the number of limited company contractors, as many working under umbrellas will be concerned that their work offers will decrease with the advent of the AWR.
The AWR was initially an EU directive aimed to protect the most vulnerable agency workers who were in receipt of low pay and were also at risk of being taken advantage of. However, as it stands many contractors who are actually high earners will fall within the scope of the legislation, which appears to class all workers as ‘vulnerable’.
Is the protection of vulnerable workers going to cause a reduction in the flexibility of the UK non permanent resource pool? This is built on a flexible resourcing model which benefits individuals and hirers – is this at risk?
Equally, what impact will this have on the hirer? Will hirers need to focus more on outcome based solutions in order to differentiate between those within the AWR and those not, or at least change their approach?
These issues are indicative of the Government’s failure to understand contracting in the 21st century labour market. Ultimately, should it be down to employment businesses to make it entirely clear to a contractor the nature of the contract they are being offered and its implications for their rights under the AWR, before it is entered into?
Clients, employment business and contractors alike now avidly await clear guidance and the development of simple procedures for implementation.
