Employment Agency Regulations and the limited-company opt-out
In December we reported that The Conduct of Employment Agencies and Employment Businesses Regulations 2003 had finally been enacted after passing through three previous incarnations and consultancy stages. At that stage however the actual final legislation had not been published so certain late changes relating to limited companies were not clear. For the earlier article see here: UKTECH article
After some delay the legislation is now available from the HM stationers web site here:
Regulations
The legislation, which mainly comes into effect from 6 April 2004 has several developments that will be of interest to freelancers working through limited companies.
Limited companies
The definition of work seeker has been changed from that of a ‘worker’ to that of a ‘person’, “to whom an agency or employment business provides or holds itself out as being capable of providing work-finding services”. As previously reported this has the effect of extending the application of the legislation to the supply of employment agency and employment business services to workers who provide their services through limited companies.
This change has come about despite strenuous attempts by various representative organisations to have limited company contractors exempted entirely. A couple of years ago I had several meetings with DTI officials concerning this aspect of the regulations. Contractors were making the point strenuously that those contractors who were working through their own company were quite different from the typical temporary worker and did not need the same level of protection as a 20 year old temporary secretary or au pair.
However the DTI argued that many of the complaints they received from temporary workers about the employment agencies and employment businesses actually came from contractors who worked through their own service companies.
In the end the Government has compromised. It has extended the regulations to cover service companies but has then introduced an opt-out provision. In the House of Lords debate on the Act, the Parliamentary Under-Secretary of State, Department of Trade and Industry (Lord Sainsbury of Turville) referred to this as follows:
“We are extending the coverage of these regulations to work-seekers who operate through limited company contractors (LCCs). Many LCCs are highly paid and highly skilled and do not want to be covered by the regulations. In their view, they are operating under a business-to-business contract and do not, therefore, need protections that are designed to safeguard the interests of workers. However, these work-seekers will be able to opt out of coverage by the regulations, but the regulations include protections to prevent more vulnerable workers being forced to opt out.”
Limited company opt-out
This opt out is contained in section 32(9) of the Act which says:
“ Subject to paragraph (12), paragraphs (1) - (8) shall not apply where a work-seeker which is a company, and the person who is or would be supplied by that work-seeker to carry out the work, agree that they should not apply, and give notice of that agreement to an employment business or agency, provided that such notice is given before the introduction or supply of the work-seeker or the person who would be supplied by the work-seeker to do the work, to the hirer.”
There is already some debate as to whether this notice has to be given to both the employment business and the hirer or just the employment business. This is because the final comma in Regulation 32(9) is misplaced.
Logically the condition in Regulation 32(9) is meant to require the services company and the worker supplied by the company to give notice to the employment business or agency before the introduction or supply of the work seeker to the hirer.
Regulation 32(10) goes on to say that “The person who is or would be supplied to carry out the work by a work-seeker which is a company, may withdraw a notice which was given in accordance with paragraph (9) by giving notice to the employment business or agency in question of the withdrawal of the earlier notice of agreement…”
This option to withdraw the opt out makes it clear that it is only a matter between the work seeker, the person supplied and the employment agency or employment business. The client is not informed when the notice to opt out is withdrawn so logically there is no need to inform the client when the opt-out notice is given in the first place.
Clearly, however, it is intended that while the decision to opt out must be taken by both the person being supplied and their service company a decision to opt back into the regulations can only be taken by the worker and not by their service company and where the service company and the worker are not in effect one and the same (for example where it is an umbrella company) then the final say on exercising the opt out rests with the worker.
Regulation 32(11) makes it clear that a limited company contractor cannot decide to opt-out part way through an assignment. Finally Regulation 32(12) prevents the opt-out option being used where the work involves working with those under 18 or those who are infirm and need attention. This is to ensure that new safeguards that have been introduced to cover those working in those situations cannot be circumvented by the use of a personal service company.
Effect of opt-outs
The effect of the opt out is well summarised in guidance to the new regulations that has been produced by the DTI in conjunction with REC and Equity. This guidance can be found here:
DTI Guidance
Regarding the section 32 opt-out it says:
“Regulation 32 – Application of these Regulations to work-seekers, which are incorporated
Regulation 32(1)(a) provides that any reference to work-seeker in the Regulations includes a work-seeker that is a limited company.
Regulations 32(2) to (8) provide clarification on how the regulations listed below apply and are modified in respect of work-seekers, which are limited companies. They require that where there is reference to the term work-seeker in any of the following regulations, it includes a reference to a limited company contractor and where appropriate the person who is, or would be, supplied.
The particular regulations affected by this regulation are:
(a) Regulation 5 (Restriction on requiring work-seekers to use additional workers);
(b) Regulation 6(1)(a) (Restriction on detrimental action relating to work-seekers working elsewhere – the regulation specifies the grounds for that detriment);
(c) Regulation 15(f) (Content of terms with work-seekers:
Employment businesses – details of entitlement to paid annual holidays);
(d) Regulation 18(d) (Information to be obtained from a hirer – concerning the work-seeker’s experience, training, qualifications and any authorisation required by law or by any professional body);
(e) Regulation 19(a) and (b) (Confirmation to be obtained about a work-seeker – identity of the work-seeker and that s/he has the necessary experience, training, qualifications and any authorisation);
(f) Regulation 20 (Steps to be taken for the protection of the work-seeker and the hirer);
(g) Regulation 22 (Additional requirements where professional qualifications are required or where work-seekers are to work with vulnerable persons);
(h) Regulation 24(2), (3), (4), (5), (7), (8), (9) and (10) (Situations where work-seekers are provided with travel or required to live away from home);
(i) Regulation 28 (Confidentiality); and
(j) Schedule 4 (Particulars to be included in an Agency’s or Employment Business’s Records Relating to Hirers).
(Reference should be made to the notes for each of these provisions)
Regulation 32(9) provides that limited companies and those persons whose services they supply can choose not to be covered by the provisions of these Regulations. If they do exercise the choice not to be covered by the Regulations, then both the limited company and the worker to be supplied must give notice, to the employment agency or employment business that this is the case, before they are either introduced or supplied to a hirer.
Where the limited company contractor and the person supplied to do the work decide to exercise their right under regulation 32(9) to opt out of the scope of the Regulations and they give the requisite notice to the agency or employment business, the opt out operates so as to remove the limited company contractor and the worker to be supplied entirely from the scope of the Regulations. The opt out is not selective, none of the provisions of the Regulations will apply where the opt out has been exercised. Regulation 32(10) enables a person supplied to carry out the work by the work-seeker, which is a company, to be withdrawn by giving notice to the employment business or agency of the withdrawal.
Under regulation 32(11), a limited company contractor cannot give such notice part way through an assignment. Any notice given while working in a particular position will not be effective until after the limited company contractor/person working through the limited company contractor stops working in that position.
Under regulation 32(12), any person who is a limited company contractor, or is supplied by the limited company contractor to carry out work, and is attending any person either under 18 years of age or, by virtue of age, infirmity or any other circumstances, is in need of care/attention, may not opt out of these Regulations.
Regulation 32(13) provides that an employment agency or employment business may not make the provision of its work-finding services conditional upon either a limited company or the worker to be supplied giving notice to opt out of the Regulations.”
Should limited company contractors opt-out?
Now that the opt-out facility has been introduced should limited company freelancers take advantage of it or not? Those who lobbied for excluding limited companies from the Regulations because “real businesses” did so on the basis that, as real businesses engaging on a business to business basis with clients, they were well able to ensure their contracts had the necessary protections a business would need.
However this raises questions about any limited company freelancer who decides not to opt out for whatever reason.
There must be an argument which says that if you choose not to use the opt out then this may cast doubt on whether you are really in business on your own account.
The Revenue might well look at this issue and use it to challenge the IR35 status of a freelancer whose service company does not use the opt-out; perhaps they will claim this is a case of trying to have your cake and eat it!
There was also a strong lobby for a limited company exclusion on the grounds that this was necessary to allow limited companies to engage a third party to market their services in return for a fee.
Without such an exclusion the Regulations for employment agencies and employment businesses would also apply to any other such third party that found them work. This second concern has been separately met by Regulation 26(7), which provides that the prohibition on employment agencies charging work seekers for finding work does not apply to work seekers that are limited companies. This Regulation applies regardless of whether a limited company uses the limited company opt out in Regulation 32.
Temp to temp and temp to perm fees
Another change that affects limited company contractors is the new restrictions that have been placed on the ability of agencies and employment businesses to attempt to prevent a worker transferring to new agencies while working for the same client or to prevent them becoming permanent employees of the client.
Regulation 6 of the Regulations prevents the agency or employment business threatening any form of “detrimental action” against a worker who wants to transfer in this way.
In addition Regulation 10 addresses the issue of the fees that employment agencies and businesses can charge when a worker they have placed with a client wants to transfer to another agency while still working for the same client or when the client wants to recruit the worker permanently.
These “transfer” fees cannot be charged where the transfer takes place more than 8 weeks after the original engagement with the client has ended or 14 weeks after the start of the engagement if that is later. So, for example if a contractor works 10 weeks for a client via an agency and is then offered a permanent position the agency cannot claim a transfer fee if that permanent position offer comes 8 weeks after the engagement has ended. However if the original engagement was for only two weeks then the ‘free transfer period’ starts 12 weeks after the engagement ended – that is 14 weeks after the engagement started.
Hence another issue a limited company must consider when deciding whether to opt out of the Regulations is whether they want the additional protection the new regulations offer regarding agency restrictions on them working for a client via a new agency or on them obtaining work direct from a client that the agency had previously introduced them to.
Another concern regarding these provisions, that was raised in the House of Lords, is whether they are compatible with Article 6.2 of the Agency Workers Directive under which the agency is entitled to receive a “reasonable fee” for the loss by what is, in effect, the poaching of its agency worker. Time will tell.
Transitional Issues
The transitional arrangements are set out in Schedule 1 to the legislation. Regulation 2 of the section says that:
“Subject to the following provisions of this paragraph, these Regulations apply in respect of existing contracts with effect from the date these Regulations come into force.”
There is no mention in Schedule 1 of Regulation 32 regarding the limited company opt-out. Hence it is clear that the opt-out will not apply to contracts in force on 5 April 2004. This is logical as Regulation 32 already makes it clear that the opt-out cannot be utilised after the engagement has started. Clearly freelancers will only be able to take advantage of the opt out when they first change or renew contracts after 6 April.
Neither is Regulation 26(7) mentioned so it appears to become effective on 6 April 2004. The provisions relating to the application of Regulation 10 re transfer fees are far more complicated. The DTI guidance summarises the position as follows:
“After 5 July 2004, regulation 10 will apply to existing contracts in the same way as it applies to any contracts drawn up on or after 6 April 2004, the date on which these Regulations come into force. Similarly temp-to-third party fee clauses contained within existing contracts are enforceable until 5 July 2004. In respect of temp-to-third party transfer fee clauses within new contracts or existing contracts from 6 July 2004, these will only be permissible where charged within the
“relevant period”.”
As far as the other main provisions are concerned the following Regulations will not apply to contracts in force at 5 April 2004 during the transitional period from 6 April to 5 July 2004:
· Regulation 5 restriction on requiring work-seekers to use
· additional services
· Regulation 6(1) restriction on detrimental action
· Regulation 12 prohibitions on withholding payment to work seekers
· Regulation 26 charging fees to work-seekers
· Regulation 28(2) prohibition on disclosure of information to current
· employer,
Conclusion
Here is yet another complex set of Regulations, which will affect freelancers. Agencies and employment businesses are just beginning to get to grips with all the practical implications. While Regulation 32(13) makes it illegal for employment agents and businesses to require limited companies and their workers to take the limited company opt-out as a condition of finding them work I suspect that they will find ways of encouraging the use of the opt out.
Given the effect of the opt out on the agency or employment business obligations there is an argument that using an ‘opt-out’ limited company will save them some administration costs.
It is also clear that opting out of the regulations could be another pointer towards the service company being a ‘real business’ rather than a disguised or temporary employee. To see how significant a factor it is we will have to wait until we get a case before the Commissioners that addresses this issue.