10/6/15
In our inaugural HR newsletter we will focus on the various types of recruitment solutions available to HR professionals. This guide is intended to provide a brief overview and is not a substitute for legal advice. References to ‘client’ means an organisation, as represented by its HR function, which has instructed either an employment agency or employment business to provide an outsourced recruitment service. It is beyond the scope of this article to comment on Swedish derogation/regulation 10 models.
Recruiters fall into two main categories:
Employment agencies
An employment agency’s role is to source, select and introduce a candidate to its client. The client will employ the successful candidate directly (i.e. a contract of services) either on a fixed term or permanent basis and will be responsible for all duties as an employer including but not limited to pay, tax, etc. The employment business would be expected to check candidates’ identity and right to work therefore reducing the administrative burden for HR.
A common problem facing recruiters is what to do when the newly appointed candidate proves to be unsuitable. At this point it is worth checking the contract with the employment agency to ascertain if a refund of the introduction fee is possible and the timeframe involved. Normally contracts exclude refunds if the cause is redundancy so any decision to recruit must be taken carefully in line with the organisation’s strategy.
An employment agency usually charges a fee based on a percentage of the successful candidate’s annualised salary, often 25% or more. If an HR manager already knows the candidate socially or from previous employment it would be tempting to employ the candidate directly without recourse to the employment agency. This is a common problem in recruitment and the key is whether the introduction is the effective cause of the engagement. In the event of a dispute the court will examine whether the client would have been aware of the candidate without the efforts of the employment agency and the risk facing HR is payment of the introduction fee as damages plus the employment agency’s costs as assessed.
Employment businesses
An employment business’ role is to supply agency workers (as defined in regulation 3 of the Agency Worker Regulations 2010) to clients on a temporary basis. An agency worker is not employed by the client and is engaged on a contract for services with the employment business. In addition, an agency worker will, like an employee, remain under the supervision, direction and control of the client. The employment business will be responsible for paying the agency worker the minimum wage, ensuring there are no unlawful deductions from wages and the correct level of paid holiday entitlement. HR needs to ensure that the agency worker receives the minimum rest breaks, works no longer than 48 hours per week in the absence of an opt-out, is not subject to unlawful discrimination (race, religion, etc) and can make protected disclosures (whistleblowing) without suffering detriment.
At this point it is important to distinguish between an employee and a worker. From an HR perspective using an agency worker provides flexibility as agency workers cannot claim unfair dismissal (section 98 Employment Rights Act 1996 applies only to employees) if an assignment is terminated. Normally, contracts with employment businesses allow an assignment to be terminated immediately without the requirement to give paid notice. For more information about the definition of an employee and a worker please see the CIPD’s discussion here, but for convenience the second limb of the definition given by section 230 (3) Employment Rights Act 1996 is used for this article. There are potential risks of an agency worker challenging his/her employment status in order to claim employment rights but HR should seek advice to verify that the contract excludes any mutuality of obligation and provides an appropriate right of control, i.e. James v Greenwich. As mentioned above, an agency worker can bring a claim against a client for discrimination so HR must ensure that policies affecting discrimination are up to date.
The Agency Worker Regulations 2010 must be considered by HR when engaging agency workers. Agency workers are entitled to ‘day one’ rights such as access to a crèche facilities and information about permanent employment. After 12 weeks in the same assignment agency workers become automatically entitled to the same basic terms and conditions of employment as if employed directly by the client with reference to a comparable employee. The Regulations entitle the agency worker to bring a claim against the client in various circumstances so HR must take great care to ensure that processes are in place to monitor treatment of agency workers and look for comparative employees when an agency worker has completed 12 weeks of an assignment. The Regulations contain detailed anti-avoidance measures so re-engaging an agency worker to do substantively the same work does not stop the clock ticking.
The Regulations do not apply where a self-employed limited company contractor is supplied by the employment business. The ‘IR35’ legislation applies where an ‘intermediary’ (i.e. a company or partnership) is used in the supply chain and HR needs to carefully negotiate a contract for the supply of a limited company contractor to ensure that the contract with the employment business accurately reflects the anticipated working practices. Time and again HR staff and recruiters fall into the mistake of conflating a job title with the services provided by self-employed limited company contractors. It is recommended that legal advice is sought when amending contracts in any event to avoid costly mistakes and inevitable disputes. Although the IR35 legislation affects limited company contractors only (to the extent that extra employment tax may be payable by the limited company contractor), HR may be required to give evidence in the Tax Tribunal regarding the working practices of such an engagement. In addition, a client may become liable for employment tax if it gives fraudulent information concerning working practices so care must be taken when faced with requests to sign statements confirming working practices.
Using agency workers is very often costly and may only provide a short-term solution to a temporary requirement. As widely reported the NHS is currently reviewing its practices for engaging agency workers. Whereas an employment agency is paid only once for successfully introducing a candidate an employment business will submit a regular invoices per worker supplied. An invoice will include the minimum wage (or higher), holiday pay at 12.07% for each hour worked (not paid on a ‘rolled up’ basis), the margin and finally VAT (following Reed Employment Limited v HMRC) which can be applied to the margin only. When requested to reduce costs HR may seek to employ an agency worker directly but contracts for the supply of agency workers often include ‘temp to perm’ transfer fees so such a stratagem may prove to be a false economy. Nevertheless, contractual provisions which purportedly entitle an employment business to charge an introduction fee in the same manner as an employment agency in order to circumvent regulation 10 of the Conduct of Employment Agencies and Employment Businesses Regulations 2003 are likely to be unenforceable and unlawful.
In conclusion, if an organisation’s HR function is provided with specialist advice and training in recruitment law it can operate on a level playing field with recruiters and secure the best talent at minimum commercial risk. If you would like to discuss this article in more detail please contact Martyn Valentine, director of The Law Place Limited, for a no-obligation 15 minute consultation to find out about our employment relations services and contract templates.
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